How to Support Entrepreneurial Incomes on a Loan Application

Self-employed income is by far the most difficult kind to prove, because of the way in which small businesses go bankrupt every single day. Their sheer size makes them fragile, while the inconsistency of their sales levels makes it difficult to predict whether or not the cash flows we are seeing today will still be around tomorrow.

However, because of the cash-intensive nature of businesses in general, many financial institutions will concede that there is a business case from their own end to support entrepreneurial ventures, even when they are still being run as personal liabilities. For a lender to justify providing a loan to an entrepreneur, a bank will usually treat the debt as a mortgage. Specifically, they want to see a form of security to collateralize the loan.

The most common way for small business owners to circumvent the negative aspects of their income from a lender’s perspective is to provide personal property as security against the loan. However, because of the way in which this may put the borrower at a great deal more risk than they initially intended, they might turn to alternative forms of collateral. Specifically, many banks are willing to accept formal purchase orders as a means of assurance that the incomes for the business will be stable for a given period of time.

For example, if a business owner walks into the bank with a document proving that they need the debt to service a signed purchase order, the bank can justify that the funds will be reasonably secure, so long as the business owner proves that they are capable of fulfilling the order with the funds provided.

Another popular strategy used by entrepreneurs is to scale the growth of their business in a way that allows them to claim their income as having been stable for a period of time. For example, if a small business has been in operations for more than two years, many lenders will give the operator the benefit of the doubt regarding the stability of their incomes, so long as they can prove their claims with valid financial statements.

A small business owner can use this to their advantage by building their business up slowly over time, and deferring their incomes in a way that make for a steady growth of the business. Regardless of the rate at which the business is growing, proper accounting can sometimes be enough to show the stability of the business in a way that a lender is better able to appreciate. If a business chooses to incur all of their revenues in the first six months of operations, they will be sacrificing their revenues for the next two years while they spend all of their time servicing those few orders.

However, by spreading out the incomes over time, the small business owner is better able to justify the stability of the incomes that they pull from the company, and therefore improve their ability to take out a personal loan.