10/ 24/ 2005
by Jeffrey Moses
Micro-businesses and self-employed contractors often struggle to secure loans and lines of credit because most lenders equate small with risky. There is an element of truth to this, of course, because many small businesses deal with uneven and uncertain cash flows. To banks, this translates into potential missed or late payments.
To counter this, the self-employed should take these steps when attempting to line up credit:
- Include business and financial history on loan applications when possible. When lenders see that cash flow has been steady, or that adequate funding is (and likely will be) available to make payments, they can overcome the self-employment stigma.
- When an adequate financial history is not available––the case for most start-up companies––collateral becomes important. Be prepared to show that cash reserves can meet loan payments, at least to a certain extent. Lenders don’t like to rely on items that can be sold to raise cash (real estate, vehicles, merchandise, etc.) for business loans because values are uncertain, and selling real and personal property takes time.
- A well-written business plan can sway lenders. Revenue estimates should be extremely conservative. Pie-in-the-sky estimates will raise a red flag.
- When filling out loan applications, try not to categorize yourself as “self-employed.” Instead, list yourself as a company officer or owner. Write down your company’s name and contact number when asked for employer information. You do not have to be incorporated to do this.
- A list of suppliers and customers (always have written approval to include customer names) provides a powerful tool for the self-employed when trying to secure credit. Always include the number of employees your company has, if any. Individuals who are technically self-employed run many successful, established businesses. Consider yourself in this category.
- Your business card should include the name of your company with your name and title (president, chairman, chairperson, etc.). Also, use your company’s name when answering the phone. If a lender should call, this will sound much more professional.
