Salaried individuals are always liked by financial institutions. Because when they offer any credit to this category of individuals the repayment is expected to be done – fully and on time and risks involved are less.
However there is another category of individuals – self employed who have equal rights to get credit but are most often denied. Even if their earnings are higher than salaried individuals, getting loan approval is difficult because of following reasons:
Risk: Not all businesses will continue to remain in profit all the time. There would be times when business may drop impacting the revenue. In such cases, repayment of loans often becomes difficult for the borrower. So basically, risk is a crucial factor which banks assesses before approving any loan application. Although banks take into consideration long duration financials for tracking business performance, a frequent loss creates doubt to the bank. Afterall if such an individual or business turns out to be a non-performing entity then losses would be high, impacting the profitability of the bank.
Income: Since ups and downs are part of business cycle, the current account held by the owner may not have sufficient balance all the time. Also there is a possibility that transaction history of such account may not be at its best. Also many customers still prefer paying in cash rather than online transfer/cheque/demand draft. So such transactions do not make entry into the account as mentioning the source of income cannot be considered as a valid proof.
Read more on personal loan for self employed.
Multiple business owners: In case of a partnership firm, the chances of loan approval are further grim. This mostly happens when one of the partner has poor credit score impacting the credibility of the other partner.
Business address: It is quite common that in the initial phase of the business, individual starts working from home and mentions his/her personal address as business address. This is disliked by the creditors as they generally offer loans to well established or with location operating from a commercial space. Although this ideally is the last factor taken into consideration.
Check out details on getting credit card for self employed.
Income tax: Typically banks asks for last two years income tax to judge the risks. However if the business is newly started then providing the income tax related documents is impossible. In such cases, banks will scrutinize the application more minutely. If business is running into losses, then banks will review IT returns of couple of more years.
Documentation: For self employed individuals documents required for loan application is little different and includes business continuity proof, last 6 months bank statement, income tax return of last 2 years, certified financials. All these documents may not be available with everyone especially when the business is newly started. So it takes personal visit to the bank to support your loan application.
CIBIL score: The most important decisive factor taken into consideration by financial institution is the CIBIL score. A poor score has higher chances of credit denial whether the applicant is self employed or salaried. However in case of self employed especially those who freshly start a business and has no CIBIL score the possibility of getting a loan is low. This is because, lenders have no way to judge the credit worthiness of the applicant.
Other options for self employed to get loan:
Even if banks reject personal loan application, it’s not the end of the world. There are other options available in the market to get loan which includes:
- Co-operative banks: Compared to commercial banks, co-operative banks do not have strict guidelines and have easier terms and conditions. Although the quantum of money granted is less. But on the other hand the interest rates are better. Another benefit is that processing fees or prepayment penalty is NIL or very less.
- Peer to peer lenders: Short termed as P2PL, this is a fairly new concept in India. Read more on P2PL here. The benefits offered are attractive rates, faster processing, speedy disbursal and easy application process.
- Local financiers: Borrowing money from these private financiers should be your last option as the interest rates are very high. Although they do not check CIBIL score and have very simple eligibility criteria.