Considering loans to fund your gig business?

Young woman in her studio thinking about getting a gig small business loan Image:

In a Nutshell

If you need some cash to get a new side gig off the ground, or are hoping to grow your current side gig into your main job, you might be considering a small-business loan. If your credit is in good shape, you may have some great options, including personal loans.

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If you’re a gig worker, you’re part of one of the fastest-growing segments of the American workforce.

The IRS considers you to be part of the gig economy if you use an online platform for goods or services, like room rentals for a weekend away or a ride-share to the airport. A gig worker is someone that uses an online platform to connect with customers seeking goods or services. The gig economy is also sometimes referred to as the sharing economy.

In fact, 57 million-plus people freelanced in 2017, according to a report by Edelman Intelligence, Upwork and Freelancers Union. And at the current growth rate, the report projects that the majority of U.S. workers will freelance in less than a decade.

Funding can be a significant hurdle for people looking to launch a side gig or create a full-time gig business. Your new business may have no track record. And your cash flow might not be steady or predictable. These factors could make lenders hesitant to extend a loan.

That doesn’t mean you have no options. Various small-business loans and personal loans can help you get the capital you need.

Why your new gig might need financing

Not every side business requires an up-front investment. But depending on what you plan to do with your new gig, you might need some help covering the costs.

For example, if you need equipment and materials to create a product, you might not have the extra cash on hand to buy those things, and you certainly don’t want to drain your personal emergency fund. You may also want to cut back on hours at your day job or decide to quit your job altogether to grow your gig business, so you might need a loan to cover basic cash flow needs until you get up and running.

Whatever your business plans are, take time to consider how much it would cost to get your new gig off the ground and make it sustainable.

Should you get financing for your new gig?

Just because financing options are available for your small-business, doesn’t mean you should borrow. While a loan could make it easier to get your gig off the ground, the lender may want you to personally guarantee the loan. That means you may be on the hook to pay off the debt if your business doesn’t generate enough revenue to repay the loan.

Also, if you have no assets to put up as collateral for secured small-business loans or you don’t want to use collateral, you may decide on an unsecured loan and could end up paying higher interest rates. And if your credit scores are low, you may have a hard time getting approved for a loan at all.

So before you start shopping around for small-business loans, vet your business idea to make sure it’s sustainable. Do your research, run the numbers and be honest with yourself. If the business seems viable, go for it. But if you’re having doubts — especially knowing you could be taking on the risk of the loans personally — it might not be the best idea to move forward.

Factors that can affect your chances of getting approved

Whether you’re using small-business loans, personal loans or credit cards to fund your gig business, it’s important to know your chances of getting approved before you apply. Lenders will consider certain factors about your financial situation when considering you for a loan or credit card. Here are a few.

Credit scores

When you apply for a loan, the lender wants to know how likely you are to repay it. Checking your credit scores is one way lenders help make that determination. Your credit scores are based on the data on your credit reports and helps the lender determine whether you’re a risky borrower.

If your business is established, you may have business credit scores a lender could consider in addition to your personal credit scores during the application process.

Credit Karma Guide to Business Credit Scores

If you have good credit scores, you may have a better chance of getting approved.

Credit history

Your credit scores aren’t the only measure of your creditworthiness. Lenders can also consider your overall credit history, including how long and how well you’ve used credit in the past. When you apply for credit, the lender will typically review your credit reports to get an idea of your credit history.

In fact, credit history is so important that the Federal Reserve Bank of New York found that insufficient credit history was the most common reason start-up borrowers said they didn’t receive the full amount of financing they requested.

Income

Since your new small business may have little or even no revenue, lenders might consider your personal income, and other assets, to help determine how likely you are to repay the loan.

Collateral

Depending on the type of loan you want, you may be required to put up collateral (like your car or house) to secure the loan. That way, the lender is better protected if you default on the loan because they can typically take the collateral if you can’t pay back the loan.

Business plan

If you’re applying for small-business loans, you may need to present a business plan to show the lender that you have a plan to grow the business and repay the loan. You may need to provide such information as a detailed plan for your small business, how you plan to use the money from the loan, your anticipated annual revenue and how you will manage cash flow.

Options for funding your gig business

Once you’ve decided that your small business is viable, it’s important to compare all of your financing options. Here are some choices to consider.

Income and savings

According to the Federal Reserve Bank of New York’s 2017 survey more than a third of startups with employees relied on personal funds as the primary way to fund their business. If you’re confident in your business plan and have enough cash to fund it yourself, you can avoid the drawbacks of borrowing, including having to get approved and paying interest.

That said, make sure you don’t need the cash for other things, and try to avoid tapping into your emergency fund.

SBA microloans

The U.S. Small Business Administration Microloan Program provides loans of up to $50,000 to small business owners. You can have up to six years to repay the government loan and can common interest rates are between 8% and 13%, though it varies.

Personal loans

Personal loans offer borrowers a lot of flexibility, because you can use them for just about anything, including funding a new business. They can be secured loans, which require you to put up some form of collateral, or unsecured loans. Additionally, interest rates on personal loans can vary by lender, your credit history and other financial factors.

With a personal loan, you might not have to prove your business idea as you likely have to do with small-business loans, so it could be easier to get one. But at the same time, it won’t help you build your business credit.

How to build business credit

A number of banks, credit unions and online lenders offer personal loans, so there are plenty of options. On Credit Karma you can compare personal loan offers from leading lenders and find one that fits your needs.


Bottom line

Starting a new small business — including a gig business — can be stressful if you’re not sure how you’re going to finance your venture. Getting a loan can help you buy the equipment or inventory you may need or resolve possible cash flow problems.

But before you start applying, make sure your business idea is feasible. Then consider all your financing options, including small-business loans and personal loans, along with their benefits and drawbacks. The right one for you will be the one that fits your needs and preferences the best.


Ben Luthi is a personal finance freelance writer and credit cards expert. You can find his work on sites like USA Today, Money, NerdWallet, SuperMoney and Credit Karma. You can find him on Twitter at @benluthi.