Why It’s Harder to Get Credit When You’re Self-Employed

Between the gig economy, entrepreneurship and other forms of self-employment, more and more Canadians are becoming their own boss. And why not, really? This type of career comes with plenty of benefits, from scheduling flexibility and professional autonomy to greater creative fulfilment and more. However, there are some unique challenges to self-employment that should be acknowledged along with the perks. As a contract worker, freelancer or other self-employed individual, your income may be inconsistent or occasionally unstable. This can make it difficult to plan for everyday expenses, let alone unforeseen financial challenges. Furthermore, it can create a barrier to accessing credit such as a mortgage or personal loan.

We all need a safety net and peace of mind, and sometimes, that means having access to emergency funds in the form of credit. A credit card can be fairly easy to get, but they often come with high interest fees and low limits. A personal loan is typically a far better option, but if you’re self-employed, there may be a few hurdles.  Here’s why it can be difficult to get personal loans or other credit when you’re self-employed, and how easyfinancial can help.

Why can’t I access a personal loan as easily as someone with a salaried job?

To an individual, a loan is about accessing money that you need now or anticipate needing in the future. From the standpoint of a bank or other financial institution, loans are all about risk mitigation. A self-employed individual is typically perceived to be in a less secure financial position than an employee of a corporation. This is why your employment status and income matter when applying for credit— if a lender isn’t confident that you’ll have the ability to pay back a loan within a given time frame, offering you access to credit is less appealing to them. A loan application allows the lender to assess the financial risk to their institution and make an informed decision.

Your income is a significant part of this assessment, but so is the source of that income. Generally speaking, a salaried position or a full-time hourly position and viewed as more reliable than being self-employed. However, the longer you’ve been self-employed with steady income, the less of an issue this is. If you can demonstrate that you’re a low risk candidate with solid income potential and a reasonable amount of debt, you’re off to a good start.

A lender will typically look at your average self-reported income over the span of several years as well as several other financial risk factors before making a decision. They may also ask to see qualifying paperwork, such as income tax returns, instead of an employment agreement or single pay slip. This may seem daunting, but it’s all fairly standard and simple to navigate. Think of it as an extra step in the personal loan process, not a wall you can’t climb over. There are even bad credit loans available for those who don’t meet the ideal criteria.

Good news— getting approved for credit isn't just about income

Money matters but fortunately, your income isn’t the only thing a lender cares about. Other factors include your credit score (660 or higher is ideal), your current debt-to-income ratio (DTI) and the value of your assets, if you have any. This may include property, vehicles and registered investments, among other things. If you’re encountering serious challenges in your loan approval process, consider asking a trusted individual to act as your co-signer - a business partner or your spouse, for example - as this may enable you to gain access to the full amount of credit you want and need.

The longer you’ve worked to build your business, secure stable income and improve your DTI ratio, the better your chances are of gaining access to credit. Take the time to check your credit report before applying, if you’re able— you’ll want to make sure it’s accurate, flag any issues and be aware of your credit score.

The bottom line is this: if you’re self-employed, a business or personal loan isn’t out of the question— you just need to work with the right lender. As credit specialists who work with many new businesses and self-employed individuals, we understand your needs and have solutions that fit your life.

If you need a personal loan or access to credit for your small business, we are here to help.

Credit doesn’t need to be complicated, regardless of your chosen career path. Whether you’re a self-employed individual, in a salaried position or between jobs, we understand the need for access to credit and peace of mind. If you’d like to speak to a member of the easyfinancial team about a personal loan or business loan, please reach out to your local easyfinancial branch or easyhome store. You can also give us a call at 1-888-502-3279. We are committed to working with you to help find solutions that best fit your needs and life.