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Can Self-Employment Make It Harder to Get Credit?

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There are plenty of benefits to self-employment. Flexible hours, the ability to work remotely and the chance to choose projects you’re truly passionate about can make going solo an appealing decision.

More Americans are making that decision than ever. According to a 2018 study by the cloud-based accounting company FreshBooks, there were 15 million self-employed Americans in 2018, a number that could grow to as much as 42 million by 2020.

But how does self-employment affect your finances? Can Arkali, the principal scientist of analytics and scores development for FICO, said your employment status has no effect on your FICO credit score whatsoever.

That’s the good news. The bad news is that lenders don’t just look at credit scores when deciding whether to give credit. Income, expenses, debts and credit history — many of which could be affected by self-employment — can all factor into whether a bank decides to grant you a loan.

So, how do you navigate professional independence while also getting the money you need? Here’s a quick guide to what lenders are looking for, how self-employed people might be at risk and what you can do to improve your chances of getting credit.

What do lenders want to see in a potential borrower?

Every borrower is different, but there are some factors that lenders always seem to value. For many, these factors can be simplified into the “five Cs” of good credit:

  • Credit history. Your credit report is a big factor because it tells lenders how often — and for how long — you’ve been making payments on time. Your FICO Score, which is the score most often used by lenders, is the most important thing to watch here. As long as you pay your bills on time, and you do so consistently, that credit management behavior will be picked up by your FICO Score, and you’ll be rewarded for that,” Arkali said.
  • Capacity. This one comes down to your ability to make payments: namely, how much money you have and how accessible it is. As a result, the source and stability of your income could play a key role.
  • Collateral. This “C” applies to secured loans, which involve putting up something you own — such as your home or car — as collateral. In making their decision, lenders will look at the value of that collateral, as well as any related debt.
  • Capital. How else could you pay back the loan? This “C” looks at assets beyond your income, including savings and investments.
  • Conditions. Lenders also want to know what you plan to use their money for, so they may ask questions about the purpose of the loan.

How does self-employment make you less attractive to lenders?

What does this all mean for self-employed people? Here are a few things that might make you seem like a less-reliable borrower:

  • Your income is unstable. Your income can fluctuate widely when you’re self-employed, which might scare off lenders. Consistency is key in securing credit: Without a set salary, it can be hard to show banks you have a stable, reliable cash flow.
  • Your employment history is rocky. An inconsistent job history is another red flag. Lenders look for a long-term presence — something like two years or more with the same company — in your employment record. If you’ve just quit your job to go it alone, lenders may get nervous.
  • You have a lot of debt. Launching your own business takes investment, but if you’ve already taken out some loans to get started, then getting more money becomes even trickier. Your debt-to-income ratio — which compares how much you owe to your monthly earnings — could be a factor here.
  • Your assets are illiquid. Above all, lenders want to know you can pay back their money — even if your regular income stalls out. If you’ve invested capital in your business that you can’t quickly convert into a payment, then a lender might have concerns about granting your loan.

What are some alternatives self-employed people should know about?

You can overcome these challenges, though. There are plenty of helpful tools out there for self-employed people, many of which make getting credit a lot easier. Here are some options to consider:

  • Apply with a cosigner. If you’re having trouble proving you have a steady income, using a stable, financially secure cosigner can be a big help. Cosigners take equal responsibility for the loan, meaning their income status will play a major role in the lender’s decision. There are many companies that still grant loans with a cosigner, including online lenders such as LightStream and LendingClub or banks such as Wells Fargo and Citizens Bank.
  • Get a business credit card. This will help keep your personal and professional finances separate. If you get a business card, Arkali suggested making sure to report it to the main credit agencies — he said they’re sometimes missed during credit score calculations — so you can increase your credit score as you make work-related payments. Some options include the SimplyCash Plus business credit card from American Express, which offers 5% cash back on work expenses like office supplies and phone services, and the Chase Ink card, which can help build your business credit.
  • Apply for a secured loan. Again, secured loans are based on collateral, meaning the bank values something you own against what you’re borrowing. If your income is inconsistent, this could be a good way to show lenders you can still meet your payments.

Borrowing can be trickier when you’re self-employed, but that doesn’t mean it’s impossible. With some careful decision-making and enough financial awareness, you can succeed as your own boss — and get all the credit you need to pull it off.


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