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Improve your creditworthiness: so you get loans easier as a self-employed person

Improving Your Creditworthiness as a Self-Employed Entrepreneur: Tips for Securing Loans

Self-employed individuals often face significant challenges when applying for loans, especially with startups. Banks perform rigorous credit checks, focusing heavily on solvency, which can become a major barrier for entrepreneurs. Due to the irregular income and lack of guarantees, self-employed applicants tend to face higher interest rates, making loans more difficult to obtain and more expensive.

Understanding Bank Scoring and Creditworthiness

Solvency is key when it comes to loan approval and the terms of the loan. Self-employed individuals and founders often face higher interest rates, which means not only are loans harder to secure, but they are also costlier.

Banks assess your creditworthiness through your score, which considers personal assets, liabilities, income, and collateral. A higher score means lower default risk, improving your chances of obtaining favorable loan conditions.

Challenges for Self-Employed Individuals and Founders

One of the significant challenges for self-employed borrowers is the absence of fixed income as collateral. Lenders will assess other forms of collateral, which can take time and complicate the loan process.

It is also possible to apply for loans without a credit bureau report, but this route often involves higher interest rates and more complex processing. Nevertheless, there are strategies that can help improve credit ratings and increase the chances of obtaining affordable loans.

How to Improve Your Credit Rating

1. Regularly Monitor Your Creditworthiness

Prepare for your bank meeting by obtaining an up-to-date credit report. Self-employed individuals have the right to request a detailed creditworthiness report annually. Free services such as CRIFBÜRGEL and Credit Reform provide this service. If there are any discrepancies or outdated information, credit bureaus are legally obligated to correct them free of charge.

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2. Ensure Sales and Revenue Planning Accuracy

Banks only work with businesses that demonstrate economic viability. Therefore, self-employed individuals should maintain realistic sales and revenue projections. Consistency between actual and projected figures helps improve creditworthiness.

3. Boost Your Equity Ratio

The equity ratio is crucial for creditworthiness. It represents the proportion of equity in the overall balance sheet. A higher equity ratio indicates better financial stability and can positively impact loan approval. Aim for an equity ratio of at least 30% to improve your chances of securing a loan.

4. Minimize the Credit Period on Liabilities

A short credit period for liabilities can improve creditworthiness. This includes maximizing any available discounts on invoices and reducing the overall liabilities to signal financial stability to banks.

5. Plan Long-Term Investments Carefully

Self-employed entrepreneurs often face the need to invest. If pre-financing is required, it can improve solvency if the need for investment is clearly justified from a commercial standpoint. Demonstrating that a portion of the investment can be covered by reserves will strengthen your application.

6. Request Loan Conditions Instead of Loans

A loan request impacts your credit rating, so it’s better to request loan conditions (KK) instead of applying for a loan directly. This is a credit-neutral request and does not affect your credit score.

7. Wait for Clearances Before Applying for Loans

If you have any negative entries, it’s wise to wait until they are cleared before applying for a loan. Loan requests during this time can hinder your approval chances.

8. Avoid Frequent Moves

Changing your place of residence frequently can negatively affect your credit score. Stability is an important factor for creditworthiness, so consistency in your personal information is recommended.

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9. Limit the Number of Checking Accounts and Credit Cards

Multiple checking accounts and credit cards may signal unreliability to credit bureaus. It’s important to maintain only essential accounts and avoid frequent changes.

10. High Credit Limits Improve Your Rating

Having a higher overdraft limit on your checking account may improve your creditworthiness. A high limit shows that you are trusted by your bank, positively influencing your credit score.

Consider Offering a Guarantee or Second Borrower

If banks remain cautious after reviewing your creditworthiness, consider involving a second borrower with a strong credit rating. This can reduce the perceived risk and improve the likelihood of securing a loan.

Conclusion: Getting Loans as a Self-Employed Entrepreneur

While it’s harder for the self-employed to secure a loan, it is certainly possible with the right strategy. By focusing on improving creditworthiness from the beginning and making informed business decisions, self-employed individuals can minimize the hurdles in the loan process and increase their chances of approval.

 

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