Thanks to the dynamic shift in the business landscape, there has been a tremendous rise among self-employed business owners such as entrepreneurs and self-employed individuals offering their services such as doctors. And just as any business professional, self-employed individuals too, seek a bigger business and better careers. Be it for a mortgage of a new office or to expand operations, self-employed individuals apply for a loan for business for multiple reasons. Unfortunately, several lenders and financial institutions may not be accepting of a self-employed person when compared to an individual with a steady job and salary. The loan options for the self-employed get limited and often get their application disapproved.
In such situations, an individual applying for a loan may benefit from knowing their weak spots, the challenges imposed upon them by the lenders and figure out ways to qualify for a loan for business without any hindrance. Read on to find out the many challenged faced by the self-employed and how they can tackle these issues and emerge victorious.
Uncertainty of Income
When checking for business loan eligibility, every financial institution checks the applicant’s credit score, bank statements, pay slips from the last six months and so on. While a person working for a salary may have stability in his paycheck, there is no way of determining the correct income of a self-employed individual. Despite earning more than a salaried individual per annum, your monthly income may be perceived as unstable by a lender. Evolving market trends, new laws, festivals and occasions can have a huge impact on your average income.
As a result, financial companies may be hesitant to approve a business loan for a self-employed individual with unsteady income. To tackle this issue, always maintain a good business credit score. Work hard in your credit score and make sure you correct any errors that may be present in your business credit report. Keep your credit utilisation ratio at 25% to maximise your business credit score. The stability in your business credit score can assure them of your loan repaying capabilities and cover up for your unsteady income, thus qualifying you for a loan for business.
Lack of an Established Business
When self-employed individuals and small businesses try to get a loan in their initial set up phase, they may often be denied approval. The reason for this is that approximately 40% of small businesses do not survive past the two-year mark. They lack cash reserves and often run out of money by overspending and not handling finances correctly. However, building up cash reserves will reassure lenders that you will be able to repay the loan even if the business plan falls through. Avoid applying for a loan for two years. During that time, work on your credit score, maintain steady business, pay off other debts that you may have and save up cash to offer a down payment to assure financial institutions of your credibility to reimburse the entire loan amount.
Searching for financial institutions that offer business loans to self-employed individuals? Connect with Tata Capital to avail a wide range of customised business loans that cater to your every need. We offer flexible EMI, attractive interest rates and high loan eligibility to help self-employed individuals accomplish their career goals.