How Freelancers Prove Income for Personal Loans

Being a freelancer can include flexibility with schedules and work locations, but this work status can prove stressful when proving your suitability for a personal or business loan. From accurate tax returns to consistent bank deposits, here are a few ways you can make yourself a good candidate for loan funding.

Consider Pre-Qualification

As you explore flexible personal loan options, give yourself a running start with pre-qualification, a soft credit check that estimates your loan terms. Doing so won't harm your credit score and can provide you with the information needed to make any necessary adjustments to improve your official application.
Try to raise your credit score if you can. It can affect how much interest you end up paying on an approved loan.

Hold on to Your 1099s

As a freelancer, you don't have W-2s, but you have 1099 forms and contracts that serve as financial proof of your business flow. Go down your list of contractors and make sure you have a 1099 for each one of them during tax season.

A good thing to remember is that it is your net income, not your gross, that your business loan lenders will use to calculate how much funding you can afford if you're approved.

Your net income is what’s left after deducting all your legitimate business expenses, including:

● Home office or studio leasing

● Supplies

● Related travel

● Electronics and software

File and Show Your Tax Forms

There's also a difference between being an LLC and a sole proprietor. Your personal income tax returns are fine for a sole proprietorship or a single-member LLC. However, LLCs classified as Multi-member or S corporations require other forms.

Calculate Average Monthly Income

When coming up with this number, you'll need all your financial documents, such as your:

● Tax returns

● 1099's

● Profit and loss statement

● Bank statements

After calculating whatever your net earnings were, compute what your monthly average is by dividing by 12 (for one year's earnings) or 24 (for two years of income).

Stabilize Cash Flow

A good way to ensure you have a stable income is invoicing partial upfront payments for new clients. Invoicing platforms allow clients to directly pay you instead of waiting for a paper check.

Take a large contract and break it into smaller phases to invoice appropriately. It also looks good if you can build up a cushion in your business account to cover 3 to 6 months of expenses in case of downtime.

Handle Your Debt

Be mindful of how many business deductions you take, as it will lower your tax burden and make your income look very low on paper. Start paying down your revolving debt, like high-interest credit cards, to reduce how many other monthly payments count against your debt-to-income ratio.

Be careful about applying for new lines of credit or other loans at least 120 days prior to applying for your big personal or business loan.

If your debt-to-income ratio is still too low, you may be able to boost it with a co-signer. Usually, it would have to be someone with a high W-2 income and minimal debt.
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