Loans for the self-employed – when are they worth it?

Loans for the self-employed – when are they worth it?

Stricter criteria often apply to the self-employed because the banks see an increased risk. Entrepreneurs should therefore proceed strategically when it comes to a financing request goes. It is beneficial to prepare accordingly to show banks your creditworthiness. In the first instance, it is important for entrepreneurs to check to what extent a loan makes sense.

Reasons for taking out a loan

The self-employed can take out a loan that is not directly related to self-employment. Private purchases, such as a new vehicle or family vacation, can also be a legitimate reason. It is only important that the revenue generation is constant and the loan does not negatively affect the financial liquidity as an entrepreneur. If there are no problems in this regard, there is nothing to be said against borrowing for a private consumer loan.

Apart from that, a loan can expand the entrepreneurial ability to act. Loans can help expand with the business. This can be new machines, a new warehouse or an investment in the digitalization. Young entrepreneurs in particular can achieve new milestones with a loan. Nevertheless, it is important to exercise caution, because the business idea must be viable and economically viable. If there is a bad investment, there is a risk of over-indebtedness, which in the worst case can lead to insolvency.

Loan Approval: Eligibility and requirements of the bank

As mentioned at the beginning, stricter guidelines apply to entrepreneurs because it represents an increased risk for the banks. As a result, the self-employed have to provide significantly more evidence, regardless of whether it is a business or personal loan. Fundamental aspects also play a role, such as permanent residence in Germany and having reached the age of 18. As a rule, the self-employed must have been an entrepreneur for at least three years in order to get a loan from the bank. If there is three years of activity, entrepreneurs must also submit a balance sheet. While employees have to show a three-month proof of income, the self-employed are obliged to show an annual report.

There are areas that can result in disqualification, regardless of the level of sales. Certain industries are considered risky, which is why banks refuse to grant credit. This is, for example, the catering or automotive industry. The assessment is subject to market and political developments. It is therefore not possible to make definitive blanket statements because the markets are subject to constant change.

However, the self-employed can become proactive themselves and get in touch with a bank advisor they trust, even if the activity is part of a critical industry. After all, banks take the individual situation into account and decide on a case-by-case basis. For example, if you have sufficient collateral, such as stocks, savings or real estate, a loan can be approved. It is not individual points that are important, but the overall situation is decisive.

Reasons against taking out a loan as an entrepreneur

Ultimately, entrepreneurs should reflect for themselves whether a loan is effective or not. Young entrepreneurs in particular should be responsible. If the success of a business idea is still open or if a company is in the consolidation phase, it is advisable to manage with your own funds. A loan can provide a temporary high, such as investing in material goods. But it can also quickly lead to negative consequences when there are periods of economic weakness. Many liabilities are dependent and can jeopardize corporate liquidity.

Furthermore, it represents a significant risk if loans are taken out to bridge periods of weak sales. In such cases, business advice can be helpful to take more constructive action. Otherwise, the company’s own existence can be jeopardized if it becomes insolvent. If there is mismanagement in the company, it is more important to find out the background. In addition, it can be expedient to think about downsizing in order to achieve cost reductions.

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