Getting a Personal Loan When You Work for Yourself

Which income figure a lender reads

When you work for an employer, a pay stub shows your income in one line. When you work for yourself, the lender rebuilds that line from your tax return. Sole proprietors and independent contractors report business income and expenses on Schedule C, and the IRS says you generally use that schedule to figure your net earnings from self-employment. Schedule SE then computes the self-employment tax on those earnings.

Under federal law a lender may weigh the amount of your income and how likely it is to continue. That is why one strong year after a weak one can count for less than two even years: the lender is looking for a pattern it can expect to repeat.

The papers you will be asked for

Each lender sets its own list and its own look-back period, so ask before you apply. These are the documents that come up most often for a business owner or freelancer.

• Federal tax returns with all schedules, including Schedule C and Schedule SE. If you run an S corporation or a partnership, the lender may also want the business return and your K-1.
• IRS transcripts, which the lender may order itself with your signed Form 4506-C through the IRS Income Verification Express Service.
• Business and personal bank statements covering recent months, so deposits can be matched to the income on your return.
• 1099 forms from clients or payment processors, which back up the receipts you reported.
• A year-to-date profit and loss statement if your last return is many months old, sometimes prepared or reviewed by your tax preparer.
• Proof of the business, such as a state license, a registration or a business website.

Worked example: how write-offs change the ratio

Debt-to-income (DTI) is your monthly debt payments divided by your monthly income. Each lender sets its own limit. Suppose you already pay $1,100 a month toward a car loan, a student loan and card minimums, and you apply for $8,000 at 18% for 36 months. The figures below are worked examples, not offers.

The business is the same in both columns. In the second, more expenses were deducted, so the taxable profit fell and the ratio jumped by more than 18 points. Over 36 months the loan costs $2,411.92 in interest either way; what changes is whether a lender agrees to make it, and at what rate. Funditia's debt-to-income calculator runs the same arithmetic with your own numbers.

What can raise the rate or lead to a denial

• Less than two years in business, or a gap in returns, leaves the lender with little pattern to judge.
• Falling profit from one year to the next can make the lender count the lower year, or neither.
• A high ratio once the new payment is added, especially when the counted income is a lean net profit.
• Unfiled returns or an unpaid IRS balance, which transcripts reveal.
• Mixing business and personal money in one account, which makes deposits hard to match to the return.
• A thin or damaged credit file, which matters as much for you as for any salaried applicant.

If you are turned down, the lender has 30 days from the day your application is complete to tell you, and the notice must state the principal reasons or explain how you can request them. What to do if you are denied walks through the next steps.

Options to weigh beside an unsecured loan

• A credit union where you are a member. It may consider your history with it, such as years of business deposits, alongside the return.
• A secured loan against savings or a certificate at the same institution, which puts less weight on how your income is documented.
• A cosigner with steady income, who becomes fully responsible for the debt if you do not pay.
• A business loan instead, if the money is for the business; it keeps the debt tied to the business and may be judged on business cash flow.

Whatever you choose, compare offers on APR for the same term, and read the finance charge and the deposit amount on each Truth in Lending disclosure. The documents you need has a checklist for any application.

Questions people ask