25-Mar-2017 written by : FSI-Team
If one wants to have access to credit modern times they need to be creditworthy; lenders like to assess the creditworthiness of an applicant before they agree to lend to him or her. Whenever one applies for a loan the first thing the prospective lender does is check their Credit Report. Based on this and many other factors the loan would be sanctioned or rejected. Often self employed find it hard to build their credit worthiness as compared to those employed in regular jobs. Though bad credit personal loans are also available but these loans are often expensive, hence avoidable. Here we look at a few ways in which the self employed can build their credit worthiness.
Self-employed find it harder to access credit as compared to those employed and drawing a regular salary. This is due to various reasons like lack of proper documentation, uncertainty about income flow and so on. This means that they find it harder to access credit or get loans at higher rates as they are considered to be more risky to lend to. Obviously everyone cannot be painted with the same brush; somebody who is running a small business for years is as trustworthy as somebody who has been employed in an industry for few years. So what can the self employed do to build their creditworthiness?
Maintain Proper Business Records: Any lender will like to be sure about the safety of the amount they lend and they like to lend based on facts and figures. For the salaried people the salary slip, form 16A, appointment letter etc serve as a proof of income and employability. It will benefit the self-employed to have proper and adequate documentation when applying for a loan. Those running their own businesses or agencies/practices should ensure that they have the required financial statements like Profit and Loss Statement, Balance Sheet, Income Flow/Cash Flow Statement, proper records of sales, invoices, etc. This all will lend creditability to their business and will also provide assurance to the lender about the income flow. Lenders will find it easy to assess their credibility based on proper documents. These financial records must be prepared by a qualified CA and must be for a few years in a row. It is also useful if you file your income tax returns regularly and maintain a record of them. All this helps provide legitimacy to your enterprise and also lets the lender assess its profitability and viability.
Have Clean Bank Statements: Apart from having well maintained business records it also pays to have clean bank statements. The best place to get a loan is your banker, where you have your savings account and deposits etc. Obviously if you already have an account and relationship with a FI they are more likely to trust you and will be willing to lend you. However, a bank is less likely to trust a customer who has cheque bouncing charges; these cheques could be related to anything like utility payment or rent payment etc. If a person displays responsible behavior in paying others who he owes money (rent/bills) then he is likely to display same behavior elsewhere too. Similarly an account holder who does not maintain the required balance and has non-maintenance charges levied is not likely to invoke trust in a prospective lender. So if you are self employed then a clean ban statement is a good way to showcase your creditworthiness to a lender.
Consider Getting a Secured Credit Card: Another way that self employed could build their creditworthiness is by getting a secured credit card. If you find it tough to get a loan or a credit card then a secured credit card could help you. This card is like a normal credit except it is issued against a deposit which acts as collateral for the issuer. Thus the issuer is sure that if the card holder defaults they have a back up in place. You can get a card issued against the deposit you hold and then use it regularly and make sure that you pay the bills on time; this will help you generate a credit trail and maintain a healthy CIBIL score. You can credit card apply online just like a normal card. A good score also helps in establishing your credit worthiness.
So whether you are a professional or self employed you can establish your creditworthiness and get access to credit that can help you in fulfilling your aspirations.