Self-employment is on the rise. By 2020, AARP and cloud accounting software company Freshbooks estimate that self-employment could triple to over 42 million people. With so many more people aiming to be their own boss and follow through making their hobbies into income streams online and offline, one of the decisions they have to contend with is financing the start (and sometimes the intermittent periods) of their own business. Yet as a self-employed person, the chances of accessing financing is somewhat diminished, thanks to the increase in perceived risks and other roadblocks facing entrepreneurs.
The Complications Of Applying For Financing As A Self Employed Person
The difficulties in securing finance for the self-employed revolves around the predictability that comes with it. As a lender, banks and other financing institutions want to be assured that not only will their principal be repaid, but also the cost of them lending you that money, otherwise known as the interest. As a result, they often request supporting documents, such as payslips, business statements and projections. As a self-employed entrepreneur, the chances are that you won’t have payslips to show or the guarantee of a job to assure of continuing income. In the eyes of lenders, this improves your risk exponentially, and can mean a much higher APR rate or in some cases, ineligibility.
This is particularly noticeable in the initial periods for those starting a business from home, remote workers or small business owners just launching their products. Yet, without financing, many business owners find themselves at a very difficult crossroads on deciding how to not only sustain their business, but also grow it to become a more credible and finance-friendly choice in the eyes of lenders. However, the situation is not completely lost. As an entrepreneur, there are options and steps you can take to improve those chances.
Utilize Personal Consumer Credit
If you have a formidable credit score and history, you can successfully leverage the use of personal consumer credit, such as credit cards, to get your business off the ground. It is not uncommon to find business owners financing their business using their credit cards, or with the use of personal lease agreements (such as a personal car agreement). There are also credit cards and online loans that are more relaxed with credit scores, and offer unsecured lending or credit for the self-employed. They take into account the lack of security of a regular income that comes with the situation. However, this option can also come with a hefty price tag. With average credit interest rates hovering at 17 percent, usage of your credit should be well thought out and purchases repaid each month. Additionally, keep in mind habits such as making repayments on time and keeping your credit utilization under 30 percent are important in keeping the usage of credit cards in your business from affecting your personal financial standing, including your credit scores and history.
Is A Personal Loan Right For You (And Your Business)?
Alternatively, you can opt to apply for a personal loan to finance your business. Many people use personal loans for a myriad of reasons, from home renovations to new car purchases, and generally, they are granted based on a person’s favorable history. Keep in mind that most lenders offer smaller amounts for personal loans (up to $5,000). If you do own your own home, you can also consider applying for a home equity line of credit or even accessing built up home equity for older homeowners.
Take A Look At Your Credit History
Sometimes the reason you are being turned down for financing has nothing to do with your business and everything to do with the risk you present as an individual borrower. It is well known that those with poor credit histories find it much more difficult to borrow or even find employment. If you have had a few hiccups in your credit past, then its time to work on improving your appearance as a borrower. Too often personal finances can become mixed in with your business accounts, and lenders anticipate that if your business defaulted, personal assets may substitute to continue those regular payments.
However, with delinquencies such as missed or late payments, they may not necessarily be assured that you will keep up to the credit agreement. Taking time to establish a few months of good credit patterns shows them you can be trusted. Don't forget to include your personal credit cards in this. Someone with almost maxed out credit cards struggling to make payments does not evoke great credit judgment.
The lack of finance shouldn’t hinder your dream of being your own boss. While there are some barriers to securing financial help as a self employed person, there are also equally feasible ways around it, and some great options out there for you.