Loans for Freelancers: To Borrow or Not to Borrow

By Bethany Johnson, Contributor, on December 11, 2017

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I used to buy into the popular saying, “debt is dumb.” Of course, we’ve all heard those horror stories where a promising new freelancer was crushed by consumer debt. But this occurrence may not be as widespread as you think.

Years ago, I was following a financial guru, and I loved his hard-nosed approach against borrowing money. He said if you wanted something, the best way to get it was to save pennies, take on another job and pause your endeavors until you could pay cash for the thing you needed.

Today, I know better. Loans for freelancers can be the difference between a successful venture and a non-starter. The capital (known as “leverage”) can also turn a start-up into a scale-up business. The trick is knowing when new debt will help you grow — or sink your ship.

Making the Right Call: A Step-by-Step Guide

Are you currently deciding whether to borrow capital for your freelance business? Try going through the following process:

1. Get Some Professional Advice

The first way to know whether a small business loan may be right for you is by talking with your fiduciary adviser. Starting a side hustle is one thing, but when you’re ready to take your gig to the next level, you’ll want sound, unbiased, personalized advice on next steps.

2. Test the Waters

Next, establish yourself as a reliable freelancer. Some solopreneurs are so convinced they’ll make money right out of the gate, they can’t even imagine a future where their skills don’t pay the bills. Sure, we all want cash in our pockets ASAP, but if you move too quickly, you may get in over your head with loans. So slow down. Take your time, work on your skills and wait a few years so you know your business is profitable. Bonus: You’ll have proof to show lenders that you’re less of a risk for default.

3. Start Planning

After that, decide how you’d use the capital. Since lenders require documentation of this step, it can be the most clarifying way to figure out your business path. A detailed business plan is the answer here, so if you haven’t already, download a template from the SCORE association and get to work. As you fill in each field, you’ll get a clearer picture of whether or not you should bring on more debt for your operation.

4. Explore Your Options

Now, get to know your options. Once you’ve talked with your financial adviser and put some miles under your own tires to build credibility, it’s time to explore which loan products are available to you. Start by contacting your local brick-and-mortar bank or credit union. Check out the Small Business Administration’s microloan program and 7(a) loan program, two of the most popular options among freelancers. Lastly, look into nonprofit microfinancers like Kiva that crowdfund loans for small businesses globally. This is the route I went, and I’m so glad I did. I’ve since repaid my loan — and I’ve even become a lender to other freelancers and artisans around the world.

5. Make Your Decision

Finally, decide and move on. Who knows: You may not like the terms you qualify for, which may eventually work in your favor by forcing you to bootstrap it for what you need. Or, perhaps you chose one of the options above and want to move forward. If all the above measures have checked out and you’re still optimistic, a loan is likely the best way to go.

When Not to Borrow

Now, I may sound very pro-debt, but there are many instances where borrowing can hurt your business and even endanger your personal assets. According to legal editor Beth Laurence at Nolo, these situations are a few of the many where borrowing can spell disaster for your business:

  • When you’re still operating as a sole proprietor: Don’t make the mistake of incurring debt for your business when you haven’t yet registered your business with your state. Forming an LLC or other business entity can ensure you’re ready to take on new debt without putting your personal assets on the line.

  • When your business is losing money and you’re tempted to max out your credit cards or borrow against your home: By this point, you’ve probably already exhausted every other option. High-interest credit cards and another mortgage may sound attractive, but take a second and put your emotions on the back burner. Every entrepreneur knows the psychological struggle of getting up and running, but only some are smart enough to separate feelings from logic when the outlook is bleak. Talk with your financial adviser before you consider these particularly risky options.

  • When what you want to buy won’t really help you earn more: For example, I really want some beautiful landscaping for the exterior of my home office, but my freelance clients usually video chat or email to collaborate. The few visitors I do have won’t pay me more because of the premium mulch I’ve put down in the flower beds. Do you see where I’m going? It may be wise for me to buy an ergonomic desk chair for lifestyle disease prevention, but outdoor perennials aren’t a very good reason to take on more debt. Loans for freelancers seeking to self-publish a book for greater influence may be wise, but upgrading a rarely-used vehicle may damage your business.

If you could borrow a few thousand bucks for your freelance business, how would you use it? Do you feel you’re truly ready? Business loans for freelancers could be just the boost you need, but a deal gone bad can be disastrous. When you’re unsure, try the exercises above and you’ll gain invaluable clarity.

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