Can UK freelancers apply for business loans without collateral?
At a certain point in life, you wish your business could be generating higher revenues in order to meet certain expenses. There are some direct lenders who would furnish you with the money you need to keep the ball rolling, but getting approval for a business loan is not as easy as getting approval for a personal loan. You will have to meet a lot of formalities in order to qualify for these loans, but things become complicated when you are a freelancer.
Freelancing is not the same as being self-employed or running an established company. This month, you might be earning a lot of money, but next month, you will be broke. If you are looking to borrow money, income stability is the most common factor that every lender looks at. Your stable income sources determine your financial commitment.
No lender would be willing to lend you money if they find that your income sources are not stable. There is no doubt that it would be challenging to get approved for a loan as a freelancer. Some lenders would be asking for collateral, but putting down the collateral will make the loan secured. What if you do not have to take out a larger personal loan?
How freelancers can apply for business loans without collateral
If you are a freelancer, you would certainly find it a bit complicated to get the nod for a loan without collateral. Thankfully, there are some ways to improve your chances of receiving approval for a loan despite being a freelancer. Here is how you can do it:
- A good credit score
A stellar credit rating is a must in order to apply for a business loan. No lender would approbate your business loan application unless you have a good credit score. Your personal credit score will be treated as your business credit score, as you are a freelancer.
- Make sure that you have been paying off all dues on time. It is vital to discharge all your debts on time.
- Your credit card balance should be very low. Pay it off in one fell swoop.
- Check your credit report to see if it does not have any unidentified accounts. You might be the victim of identity theft. If that is the case, you will have to dispute. Credit reference agencies take at least a month to get your credit score fixed.
You should check your credit file in advance, so you have sufficient time to fight identity theft.
- A low debt-to-income ratio
How much debt you owe against your income might not influence your credit score, but be that as it may, it is an effective factor that helps a lender decide whether or not to approve your application. A debt-to-income ratio suggests how much debt you owe against your income.
Of course, when you owe too much debt, your lender will be reluctant to approve your application. You should always try to minimise your debt-to-income ratio. It must not be more than 30%. The lower the better.
- Financial stability
As a freelancer, it can be hard to prove your financial stability because your income depends on your projects. If you get work this month, you will certainly have some income to show, but if you do not get work from clients, you will be called unemployed.
But you can increase your chances of getting the nod from a direct lender when you are able to prove consistency in your income. For instance, if you are able to show that you are able to earn a fixed amount of money every month and your total income never falls below that, your lender will approve your application.
However, lenders generally look over your whole financial condition. If you have to take out unsecured business loans for freelancers in the UK, you should ensure that you have an additional repayment alternative.
There are always chances that you will stop receiving work from your clients. In case your financial conditions are turned upside down, you should have a backup plan to ensure that you will not fall behind on payments.
- Give a personal guarantee
When you are borrowing a large amount of money, you will have to secure your loan against collateral. When an asset is secured against a loan, it becomes a secured loan. If you fail to discharge your loan obligation, you will end up losing your collateral. Putting down collateral is not necessary when you are borrowing a small amount of money.
In fact, most of the lenders do not seek collateral when you need a small business loan. You have two choices then.
You should arrange a guarantor with a good credit rating.
- You should give a personal guarantee.
When you arrange a guarantor, the third party will be responsible for discharging the debt when you default. This reduces the risk on the part of the lender. Your guarantor could be called on by your lender when they fail to cover their money back by using all means.
It can be difficult to arrange a guarantor because most of the time, nobody will ever be ready to act as a guarantor. If you make a default, this will affect their credit score too.
If you are unable to arrange a guarantor, you should try to give a personal guarantee. It means if your business fails to have enough money to repay the debt, you should try to pay it off from your own income. A personal guarantee also gives your lender the right to use your personal assets.
- Time spent in business
The next thing a lender would probably like to check is the time spent in business. Most lenders prefer to lend money to those who are at least two years old. If you do not want to put down collateral and give a personal guarantee, you should focus on the time length. When your business is old, your lender can count on your experience and ability to run your business. This clearly shows that you generate enough revenue to be able to meet your day-to-day expenses.
Make sure that you have all documents that reflect your strong financial record. It can help with getting the nod for a loan faster.
The bottom line
Freelancers can apply for business loans without collateral, provided they are able to prove their repayment capacity. You must have a good credit history. Apart from that, you should show stability in your finances. In some circumstances, lenders can expect you to arrange a guarantor or give a personal guarantee. Do not forget that your chances are high when your business is at least two years old.