Entrepreneurs often face the task of trying to secure a loan for a new business venture but how do you get a loan if you are self-employed?
Banks typically grant loans to people who have a steady job that pays them monthly as these people pose a lower credit risk, compared to a self-employed person, to the bank.
The reasoning is that self-employed people are presumed to have an unstable source of income.
Whilst gaining a loan is not totally impossible, you will be asked to supply a vast amount of documentation to prove you can repay the loan.
Where you can get a business loan
There are many ways to fund your business start-up as a self-employed person.
You could work for someone, running your business as a sideline until you have the required amount of capital and investment.
You can join forces with other business partners and form a corporation, but this may require losing some control over your business.
You can gain a business partner to invest, either having to repay the amount or pay a percentage of profits to them.
But how do you go about funding if you want to run your business as a sole proprietor and are self-employed?
I recently came across an American solution in the form of self-employed loans and wondered if we have similar options open to South African entrepreneurs.
What I discovered was that the majority of our banking facilities do not offer any types of loans to self-employed individuals.
There are numerous loan options available through small loan companies for mini loans and Rainfin, which is a peer to peer loan service connecting people needing to loan finances with those willing to loan.
In all of these options, you need to prove that you have the ability to pay back your loan.
Your credit score will be assessed via a credit check and many of these options can be quite lengthy.
You can also assess your own credit scores before a financial institution does with TransUnion.
Your credit scores may look confusing but they contain your :
- personal details
- contact information
- Payment profile, which shows your payment behaviour over the last 24 months. Keeping data for up to 5 years.
- Credit listings
- Any defaults
- If you have judgements against you
- Notices of sequestration, rehabilitation or administration
- Notarial bonds
- Trace alerts
- And enquiries
In most cases, you need to supply the following documents to apply for a loan
- Bank statements for the past 6 months
- Proof of earnings for the past 6 months
- A copy of your ID book
- Proof of residency for example utility bills for the past 3 months
So to sum up, yes, you can get a loan as a self-employed person in South Africa. In most capacities, it will be a personal loan should you wish to run your business as a sole proprietor.
There are several options available from banks to other financial institutes. Choosing the right one for your business depends on the amount of money you need. As well as your credit score and the interest you can pay back. ( Note, a financial institute not asking for a credit check may charge a much higher interest rate)
As a self-employed person you are a higher credit risk, so a bank may take longer to investigate if you can pay back a loan. This could result in a much longer assessment period at your bank.
The best option for any self-employed individual is to consult with your chosen financial institute. Then look at all your options before applying for a loan to build your startup.