Things to Watch Out for While Taking a Personal Loan as Self-Employed

Often when it comes to taking a personal loan as self-employed, individuals get deluded and cannot differentiate between a business loan and a personal loan for the self-employed. There is a thing line of differences between them even though both are similar in some aspects such as both can be extended and can be taken without collateral. Both have target customers such as companies that run in proprietorship or are limited or the ones that run in partnership. However, the situations in which they are opted for differ significantly.

While a personal loan is one that is taken by an individual when he wants to put it into personal use, a business financing is one that is taken by big as well as SME’s and MSME’s. Business loans are often lent to individuals if he is the only run running and owning the company. Thus when you are a single individual running a company, then you need to opt for a business loan. But in case you need a personal loan, it must be for your private need.

However, there are instances where the lenders don’t make such rigid distinctions and look for other specification before offering a personal loan for self-employed such as the amount that you want to borrow and also the purpose for it. The categorization of loans is not really that generic and thus one can opt for a personal loan in case he/she is self-employed.

Having said this, there are few things to remember while opting personal loan for self employed.

1.ITR/ Income Tax Returns: Often individuals who have taken personal loans for self-employed business take the income tax process too lightly and fail to adhere to the paperwork that is required in the process. It is really advisable to individuals that they take the ITR seriously as no bank or NFBC is going to provide those loans unless their Income Tax Returns record is clean. Almost every lender will look for and scrutinize ITR records for the past three years before they sanction the loan. And by ITR we don’t mean the taxable income that comes out of the revenue of the self-employed business, but the return that comes to your pocket as owner. You must file your name while you clear your income tax returns.

2. The gross revenue: The word revenue means the amount of money that is generated by selling of products from your self-employed business. Most financial institutions take into account the amount of revenue that is generated from your business while they are lending a personal loan for self employed. NFBC’s look for revenue as high as 50 lakhs when they are lending money to self-employed businessmen. However, there are other financial institutions that are considerate and are willing to lend money to individuals whose businesses have gross revenues of Rs. 12 lakh per year.
3. Annual profit and income: A lender is most likely to give you the money as per your ability to pay back. Thus comes the scrutiny on their part and thus you have to be precise about the amount of profit you are making per year. The most important thing that they check when they are lending money for self-employed individuals is the amount of profit you make and then your income from the revenue. While some individuals take only the income from the business others choose to take the entirety of the profit they make. However, no matter what you do, the income that comes out of your income tax returns will be considered by the bank. Financial institutions allow a range of 2 lakhs to 5 lakhs in creating a mandate, and in each case, the amount of your disposable income is extremely important.
4. Time period: Lenders are sure to provide the personal loans easily in case your venture has been there for some time. A minimum of years is considered by them while they give out loans. A minimal amount of vintage makes your company more reliable when it comes to sanctioning a loan.
5. The type of business: You need to convince your lender that your business is neither seasonal nor volatile in order to get the loan. You need to make the financial institution believe in the stability of your self-employed business and also make them aware of the income you make through the business.