Choosing the right loan - II:

Self-Employed Professionals

In the first part of the series on choosing the right loans, we covered the kind of loans that an employee can avail. While the employed individual has a lower risk profile on account of his steady income, many of the same loans are also available to self-employed professionals. There also exist specific categories of loans created for self-employed professionals and individuals. We will take a look at all of these in this second part of the series.

First of all, who is a self-employed professional? Typically, anyone who holds a professional qualification and is engaged in using this professional skill(s) for commercial gain is considered a self-employed professional. This definition applies most readily to doctors, chartered accountants, lawyers and architects. Others such as management consultants from various disciplines such as finance, supply chain, manufacturing, marketing, etc. as well as professionals from other business and commercial areas such as HR consultants, teachers/tutors, fashion designers, commission sales agents for a variety of sectors, etc. are usually treated as self-employed individuals. We will cover that aspect separately in the next section.

Specific professions are clearly listed with banks and financial institutions for ready availability of loans. For example, doctors looking for loans to set up their own practice are treated favorably by most lenders due to their steady income and relatively low risk profile. Also, secured loans to these professionals are treated at par with salaried employees.

The loans are divided into two categories, secured and unsecured:

Secured Loans

1. Home Loan / Loan Against Property: As a self-employed professional, you require an office space to operate out of. These can be bought or leased based on your financial condition. If you have been in practice for a few years and have established yourself, it makes sense to purchase an office of your own to establish a permanent presence. This is especially true for professionals such as doctors, architects, lawyers, etc. who have to interact with clients at the place of business. Here, loans are available for the purchase of commercial property for the purpose of setting up office. Alternatively, you may want to purchase a residence using a home loan, or use your existing residence as security against which you can borrow funds for the running/expansion of your business. In the latter case, a LAP (Loan Against Property) or mortgage can help.
2. Gold Loan: Using assets such as jewellery / gold ornaments to finance your business or practice is a normal route for early stage businesses. Since this is a secured loan where the amount borrowed is usually 70-80% of the value, the prevailing rates of interest are on par with those offered to a salaried professional. “In India, using gold assets as collateral for starting a business is a common practice. With banks, you have a guarantee that your ornaments will not be tampered with, and you can get loans at reasonable interest rates”, says Sandeep Rajpurohit, Head of Gold Loans at HDB Financial Services.
3. Car / Equipment / Consumer Durables Loan: For self-employed professionals, the use of a vehicle for transport is a necessary business expense which can be amortized in the period of use. Similarly, professionals such as doctors require specialized equipment which are part of their examination room. These are usually offered on reasonable terms by banks and Non-Banking Financial Companies (NBFCs), though the terms and interest rates, etc. may vary. These can also be refinanced at the end of the loan tenure for short term financial liquidity. Similarly, consumer durables can also be financed up to 100% of the value.
4. Loan against Shares / Mutual Funds / ESOPs / Insurance / Bonds: Since financial instruments like insurance policies, savings bonds, shares, etc. represent an intrinsic value, lenders are also willing to provide funds against such secured assets.
5. Loan against Lease Rentals: If you own a commercial property and part of it is subleased to other tenants, you can also borrow funds against the lease receipts. For example, a doctor may have a building of three stories and run a clinic on only one, leasing out the other floors to other offices. The income from these rentals is what the doctor can borrow against, using the cash flow as a form of security to guarantee repayment.

Unsecured Loans

For a self-employed professional, the risk profile as a borrower is slightly higher than that of a salaried person. Therefore, the lenders determine the eligibility of the borrower on the basis of previous years’ earnings. “Typically, at least 3 years Income Tax returns, balance sheet and Profit & Loss statements certified, by a Chartered Accountant, are required to establish borrowing ability, along with bank statements of the last 3-6 months to show creditworthiness of the individual” says Manoj Nampoothiry, National Portfolio Manager at HDB Financial Services. Since the income of a self-employed professional can vary from month to month, the interest rate is higher, these borrowers are seen as a slightly higher risk than salaried professionals. Usually, the amount depends on the earnings of the individual and the consistency of the balance sheet, profit & loss and income tax returns filed.

1. Business Loans: If you are a self-employed professional running your business/practice for a period of three years or more, unsecured business loans can be availed of, on the basis of your previous years’ business performance and IT returns. These are effectively a form of personal loan to the business.
2. Personal loans: This is the most common form of unsecured loan availed of by self-employed professionals, and is usually available for a tenure of 1-5 years. Amount of the loan, tenure and interest are subject to the profile evaluation of the borrower.
3. Credit Card Balance Transfer: This is another form of personal loan in which the outstanding balance on the borrower’s credit card is converted into a personal loan for a fixed duration, in order to improve credit rating.

Based on the profile of the borrower and the credit history, it is possible to get very good terms for loans for working professionals. In the third part of the series, we will look at similar options available for self-employed individuals.