How to get a Business Loan While Self-Employed

loans for self employed

There are many reasons to get a loan while self employed. Maybe you are applying for a mortgage, looking to pay business expenses, or something else. Regardless of the type of loan, one thing most lenders look for when determining loan eligibility is your current monthly income. Unfortunately, self-employment income may not look as good to lenders as consistent income or paychecks from an employer. 

The good news is, you do have a few loan options available to you. In order to get approved for a loan, you will need to plan ahead and prepare for the application process. These tips on how to get a loan if you’re self employed can be used both for personal loans (such as a mortgage) or business loans, but the process will vary.

Tips for Getting a Loan While Self-Employed

1. Work on your credit score.

During the application process, lenders will typically run a credit report to assess your credit history. If you are working on qualifying to get a personal loan, you will need to keep your personal credit score high. If you are applying for a business loan, work on your business credit score. Both scores are affected by different factors, so be sure to focus on the correct one based on the loan you are trying to get. You might want to consider looking at your credit score a few months prior to applying for a loan, in case there are errors you need to dispute. You also will want to give yourself the most time possible to ensure good credit.

2. Pay off other debt that you may have.

It’s as simple as this: get your business or personal finances in order. If you are looking for a business-related loan, pay off business debt. If you’re seeking a personal loan, pay off your personal debt (such as credit cards, student loans, or medical bills). In other words, free up as much money as possible for monthly payments on the new loan. 

Having a lot of outstanding debt is a bad indicator to lenders and can affect loan amounts, loan terms, and interest rates, let alone approval in general. If you cannot pay off all of your debts, then you will want to pay them down as much as possible. This is another reason why it’s a good idea to start this planning process months in advance.

3. Try not to apply for a loan until you have been in business for two years.

Many small businesses fail during their first two years. The statistics are actually quite staggering, with 40% of small businesses not surviving past the two-year mark. Because of this, some lenders will not approve loans for small business owners unless they have been in business at least two years and show a proven track record of success. You may be able to get past this if you can show strong success from the business income on a regular basis by providing bank statements.In most cases, business owners will want to wait two years unless there is no other option.

4. Start and build up cash reserves.

If you have been in business for less than two years or are an independent contractor, having significant cash reserves in your bank account will allow lenders to see that you will be able to make payments on the loan even if the business starts to fall off. This is more of a security blanket than anything else. In general, it’s a good idea to have cash reserves as backup in case of any issues down the road.

5. Save up to offer a large down payment.

Saving money will not only show that you are worthy of a credit offer, but it will also show that you are serious about the purchase (if it is not a general business loan) and will have enough income to pay it off.

Learn more about Credibly’s small business loan options.

Other Considerations for Self-Employed Business Loans

Now that you have an idea of what loan options are available, you may want to begin the loan application process. However, there are just a few more things to consider before making your financial endeavor. 

Consider your tax write-offs & talk to your tax professional.

Unfortunately, even if you do everything listed above, some lenders may still be reluctant to offer a loan to you. This is generally due to the appearance of low income associated with self employed people. Your business, if it is like the majority of others, appears low income because of write-offs on tax forms. This reduces the taxable income shown on tax returns from the IRS. While it is good for your business, it is not good if you are shopping for loans. 

Business deductions count against the borrower because net income is considered, not gross income. With this information in mind, you may want to temporarily limit business tax write-offs for a few years. If you are unable to wait a few years to apply for a loan, you may also want to consider amending old tax returns. However, this can open a whole new can of worms and cause you to pay more in taxes through the business, so you will want to weigh this option carefully with your tax professional.

Choose the right lender. 

The last thing to consider when applying for a loan is the lender. When it comes to being self employed, smaller banks and lending institutions are a better option. Remember, the planning process and preparing for the loan application will make all the difference.

See which small business loan is right for you!

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