Factors to Know Before Applying for a Loan for Self-Employed and Business Owners

A Personal loan is an easy loan that can help you in a variety of situations, like the need for funds in a medical emergency or a business emergency. It could also allow you to sail through many other requirements like payment of school/college fees, help you pay off other high-interest debt like credit cards, etc.

Although the availability of personal loans has got easier in recent days because of various customer-friendly measures undertaken by the banks and NBFCs and the advent of fintech lenders, lenders do take into account certain factors before approving loans for any of their applicants.

The criteria adopted for the screening of loan applications may differ between lenders and again is also dependent on the profile of the applicants.

We have earlier come out with the factors that salaried applicants should be aware of while applying to a personal loan, this page is aimed at factors that self-employed individuals should be aware of before applying for a personal loan.

The factors that lenders take into account while approving of a loan for self-employed or business owners are

  1. Credit Score
  2. Business Financials
  3. Current Economic Conditions
  4. Years in Business
  5. Right Documentation
  6. Collateral

1. Credit Score

A credit score is an indicator of your creditworthiness which is demonstrated by the 3 digit score. This score could be assigned by any of the 4 credit bureaus in India. This score is based on your past and present behavior in handling credit. Your credit score takes into account many of your credit actions like

  • Number of loans and credit cards handled by you
  • Prompt repayment of loan EMIs and credit card bills
  • Number of applications to loans or credit cards
  • The proportion of unsecured and secured loans in your portfolio
  • Your overall experience in handling credit
  • Credit Utilization Ratio of your credit cards

2. Business Financials

Unlike a salaried employee who has his/her salary statement to show as a proof of income, the income of a self-employed individual depends upon the business income. Depending upon the kind of self-employment you are in, a current account statement of your bank or savings account statement would be required to prove the financial strength of your business or your earnings through your self-employment.

For a well-developed business, lenders may also ask for other financial documents related to business like balance sheet, profit and loss statements, income tax returns, etc to see how good your business is doing.

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3. Current Economic Conditions

We live in a connected world now. So economic effects of any event are felt across the globe and the impact is felt on the businesses operating in any country.

For Example: The effects of the spread of the Corona Virus are felt all across the globe and are affecting small and big businesses alike.

In such scenarios, banks and other lenders may not look forward to lending to business or self-employed individuals as the earnings may be lowered.

4. Age of the Business

The amount of experience you have in running the business is also a factor that matters in determining the approval of a loan. Lenders look for experienced businesses as the risk is lesser in lending to such businesses.

On the other hand, a newly established business may find it hard to avail of loans from banks or NBFCs. However, fintech lenders may be ready to lend to start-ups as well depending upon the strength of the idea and its viability of turning into a sustainable business.

5. Right Documentation

Submitting the right documents for availing any loan is extremely important. For a personal loan, the generally required documents are identity and address proof and proof for income.

The documents required for income proof for business owners or self-employed individuals differ between lenders. While some may ask for the entire set of financial documents of the business, some lenders like Money View ask for your last 3 months’ bank statements in PDF format or your last 2 years' Income Tax Returns with important details, including tax paid details being legible.

6. Collateral

Asking borrowers to furnish collateral for getting loans is a common practice in business loans. However, the recently established fintech lenders are no more asking for collateral, unlike banks and NBFCs.

You can easily avail of loans for business purposes easily from online fintech lenders like Money View on their loan app or website without submission of any collateral.