Self-employed individuals and freelancers can obtain loans; understanding the procedure
Nabbing a loan from a bank is tough for many freelancers and self-published workers. Here's how they can boost their odds.
Frequently, they have excellent earnings and an exceptional credit score, yet banks find it challenging to offer loans to freelancers and self-employed individuals. One reason is the inconsistent income flow. Here are five strategies to navigate this obstacle.
1. Start by approaching your main bank
Jörg Buschan, a credit law expert at the German Banks Association in Berlin, advocates for contacting your principal bank first. They have the most insight into your financial standing and can offer valuable advice.
If your main bank extends an offer, consider comparing it with proposals from other banks, suggests Buschan. And the good news is, this comparison can be done online.
For specific purposes, consider KfW bank's promotional loans. For instance, there's the ERP promotional loan for SMEs and independent contractors. To secure this loan, funds must be used to finance your self-employed or freelance ventures.
2. Demonstrate consistent income and creditworthiness
"Banks need to see consistent income of a substantial amount," says Andreas Lutz, chairman of the German Association of Entrepreneurs and Self-Employed (VGSD) in Munich. This income can come from non-self-employed activities, rental income, or capital gains.
Creditworthiness is also critical - that is, timely repayment of previous loans. When you apply for a loan, banks will ask for your consent to check your creditworthiness with SCHUFA. Hint: You can request a free self-disclosure from them - and similar services - once a year to gauge your own creditworthiness, advises Lutz.
3. Showcase any assets you possess
Freelancers and independent contractors can boost their chances of securing a loan if they have certain assets. "These can include a property without a mortgage, a life insurance policy, or a securities account," says Lutz.
It's also possible that your spouse, partner, or family member may be willing to co-sign the loan.
4. Prepare essential documents
The bank's primary concern is whether you can repay the loan. To get a comprehensive understanding, they'll ask self-employed individuals and freelancers for the past three years' annual financial statements. From these, they can analyze and contrast turnover, profits, and profit margins, explains Lutz from VGSD.
Crucial documents include the past three years' income tax assessments, along with bank and securities account statements, advises credit law expert Buschan. Don't forget to bring your ID for verification purposes.
5. Key considerations before finalizing the loan
You've succeeded - the bank is willing to lend to a freelancer or self-employed individual. Here are additional aspects to ponder.
Monetary commitments: "Monthly repayment commitments for interest and principal should not be too burdensome in comparison to your income," says Lutz. This helps avoid financial strain during potential income fluctuations.
Credit Insurance: "It might be worth considering investment in credit insurance," suggests Buschan. This coverage shields borrowers from risks when the debtor fails to pay.
Flexibility: Freelancers and independent contractors should strive for some flexibility in repaying their loan installments - for example, the ability to make a lump-sum repayment during prosperous times. "This will help pay off the loan sooner," says Buschan.
Additional Counseling: First-time self-employed individuals may seek guidance from a small business and startup consultant. This advice can offer valuable insights for their business - "and perhaps even the advice not to take out a loan if the proposed investment might not be worthwhile," says Lutz.
Private Loan: Instead of serving as a guarantor, family members may be open to lending directly to self-employed individuals or freelancers. "Such a loan usually features lower interest rates and more flexibility," says Lutz.
After demonstrating consistent income and creditworthiness, it's crucial to showcase any assets you possess to boost your chances of securing a loan. These could include a property without a mortgage, a life insurance policy, or a securities account. (Lutz)
In some cases, private debt like loans from family members can be an option. These loans often feature lower interest rates and more flexibility compared to bank loans. (Lutz)
