A self-employment loan can be a life-saver when a professional decides to start working for himself. The criteria for approval, however, might be difficult to meet. Especially with the economic downturn, banks and credit unions are shying away from risky loans that might result in default. Unless you can provide substantial evidence that you will be able to repay it, a self-employment loan might not be in the cards.
The good news, however, is that qualified individuals can enjoy a significant personal loan for self-employment enterprises. Whether you’ve just started your own business or are working as a freelancer, it couldn’t hurt to explore this possibility.
Types of Self-Employment Loans
There are several different types of self-employment loans, and it is easy to get confused. Traditionally, a self-employment loan is a sum of money borrowed for the purpose of starting or growing a self-run business venture. For example, if you work as a freelance writer and you’ve decided to increase your client base with advertising, you might want to take out a business loan to fund that project. The same goes for self-employed individuals who want to buy new equipment or lease office space, or take on any task that requires more money than that individual has in his possession.
However, a self-employment loan can also be any loan for which a self-employed professional applies. Mortgages, car financing and other types of loans are more difficult to get when you have no weekly paycheck. Especially now, in the middle of the economic crisis, banks and credit unions are shying away from self-employment loans because they don’t want to assume the risk.
How to Qualify for a Self-Employment Loan
If you are self-employed, you might have to take greater care in preparing your application that someone who is gainfully employed because you will not be as well-received by the loan officer. You might even be required to fill out a different application or submit several different documents to help prove your ability to repay the loan in full, and the process might take longer.
First, your tax returns from at least the last two years will be of great assistance. These show how much money you have actually made as a self-employed professional, and are nearly as effective as pay stubs from an employer. The more tax returns you have going back as far as possible, the more likely you will be approved for the self-employment loan.
Of course, your tax returns should show that you make sufficient income to handle the payments you’ll need to make on the loan. The loan officer will consider the other debts you currently owe to credit card companies and other lenders in his decision, and if you’re sitting in too much debt, you probably won’t be approved. To determine your chances, write out a budget that includes all of your monthly expenses plus the payments you’ll need to make on the loan. The total should not be more than 65 percent of your entire income.
You might want to obtain a self-employment loan in the form of a mortgage, which is also difficult. As a self-employed individual, mortgage lenders will be less likely to trust your ability to make good on your housing payments, so further evidence is necessary.
According to eHow.com, it is important to prove that you have easily taken care of your housing payments in the past. Two solid years of good rental or mortgage payments should accompany your application. If you rent, an affidavit from your current landlord or mortgage lender should suffice.
Obtaining a self-employment loan might not be easy, but there are ways to get what you need. The most important thing is to come prepared. Meet with the loan officer and bring as much evidence as you can of your financial health, including tax returns, bank statements, income reports and anything else that might help your case.
eHow.com, How to Get a Self Employed Mortgage Loan