When you are self-employed and applying for a loan, there are some extra matters for you to attend to. You will likely have to approve a three-year income average, and possibly provide year end financial statements for your limited company, if you have a name that is registered with a local state government or federal entity. Usually a credit rating on the company is not considered as part of your application, but if you are a sole owner your personal credit rating is the same as your company because all of your personal and business debts are in your personal name already.

If your loan is for a limited company or partnership, have the business apply on its own strengths. The companies accounts prepared financial statement is the necessary tool a lender requires to review any “add-back” items to help increase the amount of cash the company has available to service debt after all it’s commitments are met. If the business can support the debt, be cautious that the loan or mortgage your applying for is the right decision for you and how it affects you personally. At the end of the day whether the business can repay the loan or not, you are totally responsible to repay it if you’re personally guaranteeing that debt, or taking it out in your name to invest in the company.

Outside of this, the borrowing process isn’t much different for self-employed people (borrower’s) as it is for anybody else. You complete the same application, only your income is more difficult to substantiate.

Catch-22 for Small Business Owners When Getting a Personal Loan

The real Catch-22 for small business owners when they are trying to get financing for their business or for personal use, is how much they show their personal income is for the previous tax seasons. When you are paying tax to the IRS you in your accountant or always strategizing on the best way to show his little personal income as possible so that you don’t have to pay much in the way of tax every year. (You can see where this is going can’t you)

So if your accountant has been a very gifted positioner of your expense sheet and your income, he or she will have you paying very little tax to the IRS, but then we’d go to a bank asking for a loan they will ask to see the same financial statements. The bank may even ask for a IRS tax assessment document for further clarification of your income.

So if your accountant shows that you and your spouse are only making about $8000 each every year from your business, this doesn’t give you much leverage at all with the bank when it comes to borrowing money. The reality may be that you have tied in your personal expenses with your business expenses in some kind of creative fashion, and the reality is that you are living a very much serious lifestyle, and you would certainly have the money to service that debt you are asking to take on.

Unfortunately for the bank, they are all about the numbers, and they don’t much care about the reality of your tax return in many instances. It all depends on where you are doing all of your banking for your mortgage, your car payments, and whatever other credit lines you are caring on your business or your personal accounts. If you have a long-standing relationship with your bank and they have senior business succeeding and growing for over a decade they are likely to give you the extra credit you are asking for, regardless of any tax assessment on record in your accountant’s office and with the IRS. The problem is that there is no fool proof guaranteed way of knowing that this will be the outcome.

Usually for small business owners, the bank will ask you to put up your house or any kind of real estate equity you have to secure your businesses line of credit and any personal lines of credit you have. Basically, they mitigate their risk by having you sign your house on the deal. They are not taking any risk at all if they see you have enough equity to pay off their debt is something negative was to happen to your bottom line.

This all changes if you are the owner of a larger corporation, but in this case I’m assuming you have a small business with no employees (or just a couple of employees) or you have a sole proprietorship.

In my experience getting a loan from a bank has been very simple because they are just looking at the equity my wife and I hold. Your situation may be the same, better, or worse.