Why it’s harder to get credit when you’re self-employed
KEY TAKEAWAYS:
✔ Being self-employed in Canada is a rewarding way to make a living and be your own boss.
✔ Understand how the Five Cs (collateral, character, capital, conditions, capacity) affect your ability to borrow for your business.
✔ If you’re looking to grow and expand, after six months in business, you could qualify for up to $500,000 in small business financing.
Self-employed Canadians are a distinctive and diverse group. They currently represent over 2.6 million people, making up 13.2% of the employed population.[i] They may be self-employed as a contract worker or run a business that hires other people and may need to borrow money for inventory, supplies, or equipment. But whatever their business, they are an important part of the fabric of Canada.
If you choose to be your own boss, the rewards are worth the time and energy it takes to be successful on your terms. They thrive on autonomy, love being in charge of their time, and have the opportunity to make more money.
But being the boss of your future is not always easy, especially if you need to borrow money or get access to a business line of credit.
Why is it harder for self-employed people to borrow money?
Lenders, like big banks, approve applications for personal loans, business lines of credit, and business credit cards on a short list of factors, called the Five Cs. They are:
Collateral: This is something you offer to put up as security in case you can’t pay back the loan. It reduces the risk of default so the lender can offer a lower interest rate.
Character: This is a somewhat subjective condition because it relates to reputation. Many lenders will rely on your credit score as a fair assessment of your reputation for managing debt.
Capital: Capital means money. When you want to borrow money for business reasons, it helps to show you are putting some of your capital into the idea.
Conditions: It works in your favour if you are self-employed or running a small business in a growth industry, where business and economic conditions may help you succeed.
Capacity: People with regular paycheques might score higher on the capacity scale because they have access to regular income. But times are changing. The resilience of entrepreneurs is considered a valuable asset by some lenders.
The Five Cs typically favour people who are working in full-time jobs with reliable and predictable income. This is why it can be harder for self-employed people to borrow money, especially in the early days.
How to overcome the obstacles to borrowing
Knowing that lenders rely on the Five Cs to approve or deny your credit or loan application, you can present yourself in a positive light and increase your odds of success.
If you’re short of collateral or capital, you can still make a good case that your determination, combined with the type of work you do, creates the ideal set of conditions for a steady income that provides you with the capacity to pay. If you haven’t started your business, you can also take steps to improve your credit score before you apply for a loan. We’ll show you how.
Getting a loan in the early days of running your business
A business loan is a common way to finance your business expenses because you can pay it back over time and know what the monthly payments will be. Making all the payments on time will also help you build a better credit rating which could lead to getting a lower interest rate on your loan.
If banks say no, don’t give up. Over time, your business will establish a track record. If it shows that you are making money, banks and other lenders will be more willing to give you a loan.
Finding credit when you’re up and running
Once your business idea has taken off and you’ve got more than six months of results that prove you are making money, it can be easier to get a business loan. For example, if your business operates in Canada, and you’ve been making at least $10,000 for more than six months, you could qualify for small business financing through the easyfinancial partnership with Merchant Growth. Your early success in running your own business could help you get between $5,000 and $500,000 to grow your business.
Apply online and Merchant Growth will produce an instant no-obligation quote showing how much you can borrow. If you qualify and accept the offer, the funds can be in your account within 24 hours.
Get the advice you need
Starting or growing a business is not easy but it becomes one of the most rewarding things you do. You’re going to need help along the way from all kinds of people like accountants, tax specialists, and money experts who know how to help you find the money you need.
Your easyfinancial team is here to answer questions about borrowing money to either get your business off the ground or build it into something bigger. Connect with an easyfinancial representative at one of our 400 branches, or call 1-888-502-3279.
Disclaimer: This content is intended for informational purposes only and does not constitute financial advice on any subject matter.
[1] StatsCanada website. Study: Experiences of self-employed workers in Canada, 2023. Released: 2024-06-03. Viewed July 2024. Source.