One of the most fundamental details that all banks will look for
in all loan applicants is a steady, dependable income. The
amount of this income will decide how much the applicant will be
granted. If there were no dependable income, then on the face of
it, it would appear to a lender's calculation, that the loan
amount should be zero. This is the traditional method of
calculating personal loans.
Self Employed Business Loans
Business loans are calculated on a different basis. They do not
need to show guaranteed income. In fact to do so would be
impossible for most business. So banks came up with an
alternative way of calculating business credit worthiness. This
involved assessing past earnings, assets, debt and liabilities.
A similar model is now in place for self-employed loan
applicants. Instead of showing them evidence of your salary, you
can instead show the bank what business you're in, how much
you've been earning and for how long, how the business is likely
to continue and current debts and liabilities. All of this
information will then go into assessing your income, your risk,
and how much you can afford to borrow.
Difficulties Being Self Employed
There are still some difficulties involved in borrowing for the
unemployed. For example, if you haven't been in business for
very long, it will again become difficult for lenders to assess
your level of risk. Usually they can get a pretty accurate
picture of what your earnings are going to be by looking at the
amounts of previous years. If the income has been steadily
increasing or decreasing, they may wish to take this trend into
account but basically, they will be assuming that you continue
on as you have been trading thus far. This becomes impossible if
your business is very new. There will be no trading record or
past earnings to rely on.
Another difficulty that you will face is that many lenders may
still treat the self-employed as a greater risk than
traditionally employed. It is a simple fact that new business
fail more often than more established businesses. They also fail
more often then lay-offs occur. So the risk may still be treated
as greater and this will be indicated in the terms and interest
rates you receive.
All this seems to be changing as employed people switch from job
to job more frequently than before. This makes them less
reliable, and the self employed are gaining a reputation as good
borrowers, the rates you receive should begin to get closer and
closer to those of salaried applicants.
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