The U.S. Small Business Administration (SBA) administers loan programs for small businesses throughout the country, including self-employed workers such as sole proprietors and independent contractors.
The SBA may forgive certain business loans for self-employed individuals, including PPP loans, but there are many factors at play.
Learn how to apply for SBA PPP loan forgiveness as a self-employed worker and how to qualify.
During the COVID-19 pandemic, the U.S. government created the Paycheck Protection Program (PPP) as part of the CARES Act and distributed loans administered by the SBA. As the name implies, the loans were meant to help small businesses keep paying their employees during lockdowns. The loans were guaranteed by the federal government and small businesses could use them to cover costs associated with running a business, including:
Self-employed workers, including sole proprietors, freelancers and contractors, could also apply for these loans. The loan amount was determined based on tax returns from previous years. For self-employed individuals, this would often mean the amount of their own salary for the year.
Small businesses and self-employed individuals who took out SBA PPP loans were given forgiveness terms, meaning that if they met certain criteria on how they spent the loan in a certain time frame, the SBA would pay the lender back and the small business would not have to pay back the loan.
For the loans to be forgiven, borrowers had to:
The small business had to do this during the eight to 24-week period covered by the loan after its distribution. The small business or self-employed individual seeking forgiveness would have to provide proof of these activities through tax forms and other financial documentation.
To apply for loan forgiveness for a PPP loan, the borrower needed to wait until they had used all of the funds that were given to them. They could apply for forgiveness up until the loan reached maturity. Repayment would begin 10 months after the last day of the covered period if the borrower had not applied for forgiveness by then.
The borrower also needed to follow these steps to get their PPP loans forgiven:
As with most SBA loans, banks and credit unions managed the loans while the SBA administered them. Certain financial institutions participated in direct forgiveness, meaning that the borrower got forgiveness automatically through the SBA by applying through a portal and answering questions similar to those asked on SBA form 3508S.
Other loans required that the borrower apply for forgiveness through the lender, which would provide the borrower with one of the following SBA forms or their own equivalent:
After determining if the lender is participating in direct forgiveness or not, the self-employed borrower will need to gather their documentation to prove they had met the terms of forgiveness. These documents include:
Once the borrower has gathered the right documentation and filled out the form, they could either apply for forgiveness through the SBA portal (for direct forgiveness) or by submitting it directly to their lender.
Some loans might require a review to ensure they qualify for forgiveness. In this case, the SBA or the lender notifies the borrower, who can appeal decisions. From there the lender is responsible for telling the borrower how much of the loan was forgiven, how much they still owe and when payments will be due, if applicable.
Borrowers are required to submit documentation to prove they met the terms for forgiveness. Some of these documents include:
Each of these documents must show that you would have made this money or claimed a deduction in 2019, meaning before the pandemic. For the payroll expenses, a self-employed individual would need to provide their 2019 From 1040 Schedule C and 2019 IRS Form 1099-MISC.
If you didn’t qualify for loan forgiveness or for complete loan forgiveness, there were a few options available.
Repay the full outstanding balance. There is no prepayment penalty for PP loans or other fees, so if you have the money available, this is a good option.
Repay the loan at 1% interest for two to five years. Loans that came out before June 5, 2020 (the passage of the PPP Flexibility Act) were given two years to repay the loan at this rate. Other loans allowed for five year repayment plans.
Because the PPP loan forgiveness terms capped payment for any worker at $100,000, this is the maximum amount a self-employed worker could have forgiven.
The PPP ended May 31, 2021 and borrowers can still claim forgiveness. An alternative to the PPP loan is the employee retention credit (ERC), which is a tax relief credit under the CARES Act. Under the ERC, a qualifying business can claim up to $26,000 per W2 employee. However, as a self-employed individual who doesn’t issue W2s, this option is not available to most contractors or freelancers.
There are still options for funding available to sole proprietors and other self-employed individuals, although they generally won’t offer full loan forgiveness or 1% interest. Some options to explore include:
The SBA offers a variety of loan programs for small businesses, including self-employed individuals who are sole proprietors of an LLC. Because these loans are very popular with excellent rates and competitive terms, they can be more difficult to qualify for.
Traditional bank loans can be more difficult for self-employed borrowers. Online lenders may be a way for self-employed individuals to get money for their businesses. However, because these loans lend to more high-risk borrowers, they tend to have higher interest rates and shorter repayment periods.
If you have good credit and are willing to put it on the line for your business, you can use a personal loan to cover business expenses. However some lenders may not want to lend you money personally if you’re going to use it for your business, so you need to be upfront about your intentions.
Business credit cards are an easy way to cover business expenses and you may be able to build your credit while you do so. They’re easier to get than most loans, but they tend to have very high interest rates. They also can’t usually be used for things like business mortgages or certain other expenses. Make sure you can make any minimum monthly payments on time before you get a business credit card.
A business line of credit is similar to a credit card in that you usually get a revolving line of credit that opens back up as you pay it off. Many small businesses get a business line of credit in case of emergency. You can often use the credit to withdraw cash to pay for certain expenses. Again, they tend to have higher interest rates and it’s important to make sure you can pay monthly minimums.
Many startups and sole proprietors use crowdfunding to pay for business expenses early on. There are many different types of crowdfunding, ranging from personal donations from friends and family to capital injections from angel investors.
It’s important to understand the terms for any type of funding you apply for to make sure you can afford to make repayments. Also be aware that you may be putting your personal credit at stake.
There are many ways to find funding for your small business. One way is to use a service like Swoop which can match your needs and qualifications to the right funding for you. If you have an existing relationship with a bank or credit union, you may explore what options they have for business financing. An accountant or legal advisor may be able to help you find funding as well, although they may only do so for a fee.
Use Swoop to find out more info on which SBA loan program is best for your business. Just download the Swoop app, answer a few questions and get matched to the programs or funding you’re most likely to qualify for.
Written by
As a B2B finance content specialist, Kat Cox's goal is to distill complicated financial issues into useful information for small business owners, to save them time they could be using to build their companies. Her work has been featured in Forbes and on financial health platform Nav.com. When she's not writing blogs, web copy, or fiction, Kat can be found walking her dog or singing karaoke in Austin, Texas.
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