Millions of Americans now consider themselves self-employed. They may work short-term gigs or have an artistic career that is based on individual commissions or articles. These jobs often make it difficult for a man or woman to secure a loan. But self-employed individuals are not barred from the loan approval process. They simply have to learn what a company is looking for and concerned about when they are deciding who receives self-employed loans.
Show a steady income stream
One of the biggest fears that many groups have when considering giving self-employed loans is the steadiness of their income. Many people who are self-employed are freelancers. They jump from job to job and are often unable to secure how much money they will make in a month or year. This amount of uncertainty worries many banks and credit unions.
Banks and credit unions often base their loan decisions almost entirely on the chances that a person will pay back their loan. The bank loses money whenever an individual defaults or forecloses. A credit score is basically a mathematical formula that tells a bank the likelihood that such a foreclosure might occur with a loan. Some institutions believe that there is a likelihood that a self-employed person’s income stream will dry up and that they will be unable to pay off their debts. This uncertainty makes them a prime credit risk. It is often difficult for people who are self-employed to raise their credit score and secure favorable rates for credit cards.
Therefore, self-employed individuals need to show that they have reliable sources of revenue. They need to find a way to bring in a basic amount of money each month that is supplemented with other sources of income. This certainty will greatly mollify the concerns of loan officers. Many potential jobs may be structured to where they pay a steady stream of income. A self-employed individual with a significant amount of talent and clout can sometimes get their payments spread out over a long period of time. They can report that extended payment to a bank or credit union in order to stabilize the income reports that they show.
List both acquired and potential sources of revenue
Self-employed individuals also need to focus on both acquired and potential sources of revenue. They need to show that they have the potential to perhaps make even more than they can display on tax returns or pay stubs. This income will be essential to show that they may make enough to pay off a debt in full or even early. At the same time, self-employed individuals need to show that these sources of revenue are reliable and may be repeated in the future. A one-time job for a flighty company or a business that has gone out of business will not help a person’s loan prospects. Instead, the loan proposal must emphasize every factor of a person’s income that shows they will be likely to pay off their debts.
Plan your pitch
A self-employed person going in for a loan will be at a considerable disadvantage to people who have more reliable sources of income. The individual will not be able to ease into the loan or acquire the loan without any effort. Instead, they will have to work much harder than many of their peers. These men and women will have to cover every potential pitfall that may surround their loan. A self-employed man or woman may have to accept a lower loan amount or less generous terms for their loan. They may also have to acquire a part-time job that provides a steady income stream along with their self-employed work. All of these factors will help determine whether or not they will be able to secure a loan as a self-employed individual.
It is harder for a self-employed person to secure a loan than many other groups. But it is by no means impossible. A self-employed person simply has to work harder and be more careful than other people. They have to be tuned to the concerns of banks and have a plan for every potential question that a banker or other loan officers might ask them. If they are careful and prudent, a self-employed person may be able to secure even more money than they originally thought they were eligible for from a loan.