Self-employed people have many reasons for needing a loan. Unfortunately, self-employment does not look as good to lenders as having a steady job. In order to get approved for self employed loans, you will need to plan ahead and prepare for the approval process. The good news is, there are a few options available to you.
5 Tips to Help to Secure a Loan for Entrepreneurs
1. Raise your credit score
If you are trying to get any kind of loan when you are self employed, you will need to keep your personal credit score high. If you are wanting to apply for a business loan, then you need to work on your business credit score. Both scores are affected by different factors, so be sure to focus on the one based on the loan you are trying to get. You want to start monitoring your credit score a few months prior to applying for a loan. This will allow you to keep track for any errors you might need to dispute. This also gives you the most time possible to maximize your credit score.
2. Pay off other debt that you may have
Having a lot of outstanding debt is a bad indicator to lenders. Like above, depending which loan you are seeking, such as if you are applying for a business-related loan, pay off business debt. If you’re seeking a personal loan, pay off your personal debt. Freeing up as much money as possible for payments will look good for paying on the new loan. If paying off all your debts is not possible, then at least try to pay them down as much as possible.
3. Don’t apply for a loan until you have been in business for two years
Why would you want to wait two years before applying for a loan? The reason is that many small businesses fail during their first two years. Studies have shown that 40% of small businesses do not survive past the two-year mark. This is a big reason why many lenders will not approve loans for small businesses until they reach that two year mark. You will also have show a proven track record of success.
4. Build up cash reserve
When you have been in business for a long enough time, you should have a significant cash reserve. This will allow lenders to see that you will be able to make payments on the loan even if your business sales goes down temporarily. This shows the lenders that you have more of a security blanket than anything else. Bonus tip: Even if you aren’t applying for a loan, you should build up a cash reserve as backup in case of any issues down the road with your business.
5. Save up a large down payment
Having a down payment will help you get approved for any loan. When you contribute your own money, it shows that you are not only showing that you are worthy of a credit offer, but also show that you are serious about the purchase.