How To Get Self-Employed Loans with Bad Credit
Who doesn’t want to be your own boss? You can work in your pajamas, set your own deadline, and work in the comfort of your own bedroom. There are no employers to bug you and workmates to gossip about you. You can also get the most out of your day by beating your last performance.
Being self-employed is a perfect way to reinvent yourself and maximise your productivity. But, being your own boss has its own downsides particularly in the areas of financing. It is difficult to get personal loans and business loans when you are self-employed. It gets ugly when lenders ask for proof of income, certificate of employment and tax returns. So, if you have not been getting as much money as the ones on a salary, in the past few months—then it is difficult to prove your repayment capacity.
Is it impossible to get a loan when self-employed? It is difficult, but not impossible. You just need to do some advanced planning and prepare yourself for unconventional financing.
Prepare yourself for tough lending standards
Don’t be surprised when many self-employed people get rejected every time they apply for loans. Despite the fact that many of these people earn a good living, they don’t have the financial documents that will qualify them for low interest loans.
Lenders expect borrowers to provide two years’ worth of income tax returns, which usually don’t accurately show the take-home pay of self-employed individuals.
Compare self-employed loans
Many lenders qualify self-employed with how the country’s internal revenue wants you to run your business legally. That means you have to show them all the business details, plus the income and losses. But if you have only been running your business for several months, getting these financial documents can be extremely difficult. That is why most self-employed people find it hard to get a loan unless they want to show more income to the revenue officers.
Here’s the truth: returns don’t reflect true income of self-employed individuals. People in your field take advantage of a swing of tax deductions related to your businesses, from office space, business meals, retirement plans and entertainment. The deductions are almost endless, as long as you know how to put them into writing. That’s why it reduces your taxable income, so when tax time comes, your income is lesser than what you actually got.
But when loan underwriters take a good look at your tax returns for proof of income, they do not see your gross income. They can only see the income left after you deduct all your business expenses. That means they only consider the much lower figure than what you actually took home. This could mean that you will only qualify for a reduced loan amount or it may even result in the rejection of your loan application.
So, that is the problem; even if you are making enough money to qualify you for business loans or self-employed loans, if your tax returns don’t show it, then lenders will not approve your loan.
We understand how self-employed people work…
Some lenders would consider your gross income in qualifying you for a loan. They usually add back the depreciation, income depletion and business losses in the calculation of your gross income. We at Business Loans have our own way of measuring your capacity to repay the loan. We have our own sets of standards that would determine whether you are a high-risk borrower or not.
How to prepare before borrowing
If you’re self-employed, plan ahead of time before borrowing money from any lender. You can write off some expenses to ensure that you have higher income in your tax returns. But that would mean additional taxes. You can also clean up your finances so that your personal funds don’t get mixed up with your business funds. Some lenders weigh your personal finances against your business finances when qualifying you for a loan. One of the easiest ways to do this is to get a copy of your credit report to ensure that you don’t miss any debt when gathering your financial records.
Show proof of your year to year increases
How much is your average income for the year? If you can skip the losses, or show proof that you are getting traction, lenders will look at your loan application favourably. For example, if your net profit increased by 10% within 2 years, the financing institution may expect you to sustain that rate or increase it.
Don’t be afraid to show proof of business growth, no matter how small the percentage is. If there is a decline in income, make sure that you have enough justification, and it must not be one of those business mismanagement consequences.
While businesses can be highly volatile, you must be able to show the lenders that income shows as much as your income in the previous year, and that there is no way for your business to get a lower profit which is below 50% of the last income. If you want to show them that your business is doing well, you need to show a yearly income in your net profit.
Do you want to avail of our self-employed loans? Call us today on 1300 886 996 for a free assessment today.