Getting a Loan when Self-Employed

Updated on: by Miranda Grimm

Being self-employed has many benefits. Ease of securing a loan with your bank is not always one of them. When turning to your bank for a loan it is important to be aware of the effect your self-employment status may have on your chances of being approved or denied. Walking into the bank prepared could be all it takes to walk out with a check or approval letter.

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What is your bank looking for?

When a bank evaluates your situation, they commonly look for the 6 C’s of Credit: character, capital, capacity, collateral & guarantees, coverage and conditions. 

Character: A loan officer may look at your history to be sure you are trustworthy. Your credit report and score can often be part of this evaluation. Knowing your credit score before contacting the bank will allow you to know where you stand and allow you to explain anything that may hurt the appearance of your character. I have recently began taking advantage of  Credit Sesame to know my credit score absolutely free. They don’t ask for your credit card number, so no fear of forgetting to cancel anything.

Capital: A bank obviously wants to know how much money you make. But many of us being self-employed do not have a guarunteed paycheck. So, how can you prove to the bank you can afford to pay them back? Most likely, the bank will request the previous year’s tax information. Depending on the amount and type of loan request, the bank may ask for more than one year.

Capacity: Do you have the ability to pay the loan back? If you have a spouse signing for the loan as well, it can help show stability of income. If not, your bank may ask for documents such as cash flow statements to see if you have the means coming in to show a profit that will afford the loan.

Collateral and Guarantees: Some loans will allow you to place something of current value up as collateral. If you fail to pay the loan back, the bank can take your collateral and use the money earned from the sale of your item(s) toward your bank debt, should it occur.

Coverage: Insurance on your loan is becoming a popular demand of banks. The risk of loans failing has drastically increased over the last decade. Therefore most banks are asking for you to pay extra in your monthly payment to pay for an additional insurance. The insurance would ensure the bank receives their money even if you cannot pay it back.

Conditions: Your bank will be interested in understanding if the amount of money you are asking for, what you are needing the money for and how long you will take to pay it back  is reasonable. If what you are borrowing the money for, such as a vehicle, has value in itself, then the bank will consider the value in giving you the money. If you ask the bank for more money than the vehicle is worth, then they are less likely to loan you your requested amount.


Understanding what your bank is looking at can improve your chances of receiving a loan when you are self-employed. When you walk into the bank without a standard job, you are viewed as an immediate risk. Unfortunately, you will need to be prepared to prove yourself and your ability to stand behind your word to pay them back. Being as prepared as possible will show your bank you are responsible and fully aware of your situation. Know your credit score, bring your tax documents, income proof and be prepared to discuss what you may be able to provide as collateral and the cost of loan insurance.

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Leisa Good

March 15, 2012 at 8:34 am

Your first two sentences said it all. LOL

Good article though.


March 15, 2012 at 8:03 pm

Isn’t that what husbands are for? 🙂

Leisa Good

March 15, 2012 at 9:48 pm

Well, sometimes. And for everything else there is Visa. 😉

Katie Jones

March 19, 2012 at 5:26 pm

Miranda, this is a great post! A lot of people do not realize all the differences there are once there is a steady flow of income being made at home. I went through my own personal difficulties when trying to obtain a mortgage loan. I don’t like how it seems that since I am self-employed, I am more of a risk because in today’s economy, anyone and everyone can lose their job at any second, lol! Again, great post – it answered a lot of questions I had!


July 20, 2012 at 11:01 am

I didn’t know the details on application requirements for the self-employed. It’s very useful for me, because I want to take a loan, however was confused about paychecks as surely I don’t have any, being self-employed. Thanks to your post, now I’m aware of many aspects regarding the process of loan application.