Choosing the right loan - III:
Self-Employed Individuals

In the first two parts of this series on choosing the right loan for you, we have seen the kind of loans available to salaried employees and self-employed professionals. But there are huge number of self-employed individuals running a variety of businesses which do not necessarily fall under the category of professionals, and may therefore not be eligible for those types of loans. In this third part, we look at the type of loans available for a variety of self-employed individuals – from tourist taxi operators to trainers and consultants.

While a growing number of individuals aspire to be entrepreneurs, not everyone starts with a swanky office, large staff and brand new equipment. Many individual small businesses are home-based or run out of very small leased setups with just one working member – the proprietor or owner. Tuition classes, home tiffin services, insurance agents, small handicraft manufacturers and interior decorators are just some of the categories of self-employed individuals who are at the early stages of the business and require financing to grow. An increasing number of women entrepreneurs are starting out with home-based businesses, balancing the demands of both work and family. They deserve access to funds for setting up and growing their business just as much as their male counterparts. Many individuals are starting up businesses post-retirement, in order to leverage their experience and expertise in certain areas, as well as for financial reasons. All of these individuals can benefit from loans at the early stage of the business.

Unsecured Loans

For these categories,early stage loans through unsecured channels can be difficult to obtain. However, a number of loan categories do exist which can help self-employed individuals get access to funds for the growth of their business or for personal needs.

1. Business Loans: If you have been running your business for a period of three years or more, you can avail of business loans to help the expansion of your current business. The Criteria may vary from lender to lender, but these are fairly lenient, provided you have maintained a good credit history and can provide documentation to show that you have the capability to repay the amount borrowed. “For business loans, showing a consistent income and a good credit profile over a period of three years or more gives the borrower an advantage while negotiating terms for the loan” says Sharad Pareek, Policy Head for SME loans, HDB Financial Services.
2. Personal Loans: Based on your previous income and the creditworthiness of your profile, lenders are willing to extend personal loans for a variety of reasons – health issues, renovation, etc. The loans provided are likely to be of lesser tenure and/or of slightly higher interest than those offered to a salaried employee with a similar income level.

Secured Loans

For self-employed individuals, secured loans are a better option, as the tenure and interest rates are at par with those offered to other categories of borrowers. The main reason is that since secured loans are backed by an asset which is in possession of the lender until the loan is cleared, lenders have an asset from which the dues can be recovered in the event that the borrower is unable to repay the loan amount. Self-employed individuals can use these loans for a variety of reasons.

1. Equipment / Vehicle / Commercial Vehicle Loans: Since these equipment are mostly used in the conduct of business by the individual, the vehicles are funded based on the creditworthiness of the individual borrower. For example, a tour taxi operator or earth-moving equipment operator will get a loan for his vehicle/equipment.
2. Gold Loan: This is one of the safest and easiest ways to get a secured loan. Loan disbursal can happen immediately, and it offers the option of paying only the interest in monthly installments, or an EMI covering both interest and capital repayment. At the end of the loan, the gold jewellery is returned to the borrower.
3. Loan against Shares / Mutual Funds / Insurance / Bonds: Most of us have a variety of stocks, bonds and savings certificates which we have invested in, as well as insurance policies. Since these financial instruments possess value, lenders are willing to lend funds against such secured assets. However, the assets remain in the custody of the lender till the loan is repaid in full.

While these various categories of loans are available, setting up or expanding your business as a self-employed individual need not be a herculean task. “As the focus on entrepreneurship increases and better options for financing small businesses are created, access to finance will no longer be a challenge for small and early stage businesses”, says Sharad Pareek. “A number of NBFCs and lending aggregators/platforms are now offering a variety of lending options for secured and unsecured loans for small businesses, and these will continue to create opportunities for this segment”, he adds. If you have a good credit rating, reasonable income and proof of the business income you are generating, it is possible to borrow funds for business and personal reasons at very reasonable rates.

In the next section, we take a look at how businesses can choose from among the types of loans available.