According to 2023 statistics, approximately 2,652,600 individuals are self-employed in Canada, making up about 13.2% of the employed population. Many of these individuals are freelancers. In Canada, freelancers are considered small businesses because the Canada Revenue Agency (CRA) treats anyone who earns business profits as a small business. Even though they are considered small businesses, it can be harder for a freelancer to secure a loan in Canada.
Unfortunately, given the current market, many lenders are hesitant to offer business loans in Canada to those who are not identifiable as having a steady, predictable income. Additionally, business loans for freelancers can vary and come with important eligibility caveats.
That’s why it’s essential to learn more about how to secure freelancer financing if you’re a Canadian who is self-employed and looking for more business funds. Today’s blog dives into everything you need to know, including application tips and insights into how to manage loan repayments.
Loan Options
There are a few self-employed loan options available to freelancers. Below, we’ve shared a look at the different types you may qualify for if you’re a self-employed Canadian:
- Personal Loans: Many financial institutions in Canada offer personal loans to freelancers. In most instances, these loans are considered unsecured, and you could use them for many different purposes, including to fund business activities. For example, these loans can be used to consolidate debt, cover business expenses, and make a large purchase.
- Business Loans: Since Canadian freelancers are considered small businesses, select business loans are available to them. If you manage to secure a business loan as a self-employed individual, you can use it to purchase equipment, manage cash flow, or expand your business’s operations. If you apply for this type of loan, you’ll likely need to provide financial statements and detailed business plans.
- Secured Loans: You might be able to get a secured loan if you have assets like vehicles or savings that can act as collateral. These loans also often have lower interest rates since you’re seen as less risky. They are also excellent startup loans.
- Home Equity Loans: Freelancers who own their homes could apply for home equity loans. With this type of business loan, you can access a larger sum of money at a more favorable interest rate. Just know that your home will be used as collateral.
- Line of Credit: Those who need flexible financing can consider a line of credit. Although technically not a loan, freelancers can use a line of credit to draw funds when they need them most, and interest is only payable on the amount used.
If one of these loan types appeals, the next step would be to assess eligibility and affordability. You don’t want to choose the wrong loan type that you might not be able to afford in the future.
Eligibility Criteria
Every business loan type has its own eligibility criteria, and these requirements can be stricter for freelancers because self-employed individuals are viewed as carrying a higher risk.
However, there are standard documentation requirements that most lenders follow when providing business loans to freelancers in Canada. We’ve listed below what you need to know about this to be successful with your loan application:
- Bank Statements: Many alternative financial business loan lenders will need copies of recent bank statements. They will use these to verify your financial status. If you don’t have financial statements, tax returns might suffice.
- Proof of Income: Typically, you’ll need to show two years of tax returns. A lender will use these to calculate your average income and determine how much you can borrow. However, some lenders may also require detailed business records demonstrating your profitability and revenue streams.
- Government Issued ID: To confirm your identity and age for a business loan, you’ll need to provide a lender with your government identification. Most lenders will allow you to scan the front and back and email it.
- Proof of Address: You’ll need to provide lenders with proof of address to confirm you’re a Canadian citizen or resident. Often, recent utility bills, a lease agreement, or an account statement can serve as proof of address when applying for a business loan.
Application Tips
Applying for business loans in Canada can be a daunting experience. Which is why it’s always an excellent idea to learn tips that can help you be successful with your loan application. Below are a few of the best tips to follow to improve your chances of securing a self-employed loan:
Choose The Right Lender
Perhaps the most important tip we can give is to ensure you choose the right lender when applying for a business loan. If you choose the wrong lender, you risk incurring higher interest rates, wasting time, and causing yourself unnecessary stress. In addition, selecting the wrong lender can also limit what you can do financially.
If you want to choose the right lender, we recommend looking into a company like Bizfund, which doesn’t follow traditional bank lending models. At Bizfund, you could apply for merchant cash advance (MCA) financing, which could give you access to $10,000 to $300,000 in 24 to 48 hours. This alternative form of funding offers flexibility since repayments are based on your future sales or credit card transactions.
You should also do your due diligence when it comes to researching business loan lenders. This means you should look at the interest rates, repayment terms, and applicable fees.
Maintain Financial Stability and Have a Business Plan
Lenders view those with a strong business plan as being more reliable and lower risk. That’s why it’s important to have a well-structured business plan on hand when applying for freelancer financing in Canada. When you present your business plan, it demonstrates to lenders that your business has potential, and it reassures them that you have the future ability to repay the loan.
Additionally, maintaining financial stability shows lenders that you can manage your finances responsibly. Part of maintaining financial stability is ensuring you have a consistent income and paying your monthly installments on time and routinely.
Look After Your Credit Score
If you’re a freelancer looking to get a business loan, your personal and business credit profiles will be evaluated. Because of this, it’s incredibly important to look after your credit scores. You can do this by paying bills on time, avoiding spending too much of your available credit, and avoiding taking out more credit in too short a timeframe.
Managing Loan Repayment
Once you’ve successfully secured a business loan, you need to manage your loan repayments. For some, this can be challenging, which is why we’ve shared a few tips to help you avoid ever being late with a business loan repayment.
Make Repaying Your Loan a Priority
One of the easiest ways to manage your business loan is to make repaying it a priority. This could mean automating minimum payments, while for others, it could mean calling creditors to ensure all repayments are made on the same day.
It might also be a good idea to, when cash flow allows, pay off a third of your gross income towards your business loan repayment. This will help you pay it off faster. It will also put you in a better position if your income decreases or you need to explore self-employment loans in the future.
Create a Buffer Account
For most freelancers, income will ebb and flow no matter the industry, so it is often an excellent idea to create a buffer account to help during slower months when income decreases.
Usually, creating a separate savings account for rainy months is the easiest way to create a buffer. So, whenever you have excess income, add it to your savings account and use it when there are slower periods in the year, when necessary, like when you are on vacation, are sick, or have fewer jobs coming in and need to cover expenses.
Thinking ahead in this way will help you face moments of financial uncertainty.
Consider Income Protection Insurance
In Canada, about 22 million people have life insurance, and as part of that insurance, they have income protection insurance. This type of insurance covers your bills if you ever fall ill and cannot work. For freelancers, this could be an invaluable asset, especially when repaying business loans.
The Key Takeaway
There are many ways to secure a business loan as a freelancer in Canada. It’s important to choose the correct loan type. It’s also important to find out if you’re eligible for a business loan before you apply.
We hope that the information we shared has helped you feel confident in your decision to apply for freelancer financing. If you’re ready to explore your funding options, you can have a look at Bizfund’s Merchant Cash Advance option here or our Business Financing page here. We can help you secure a business loan faster than with traditional financing alternatives.
