One of the problems of being self-employed. Cash works pretty good in this regard. Been there. Done that. Suggest growing biz first, but what do I know... broke these daze (sic) while meeting payroll for the kiddies.
I know what you are going through. When I started with my business I asked for a small overdraft loan for my bank account. A small sum, only 2000 EUR. I did not get it.
My apprentice who got a monthly payment of only 700 EUR at that time had no problem getting an overdraft loan. They gave her the equivalent of three paychecks.
When some time later I did not need any loans anymore and had some money on the side the banks started calling, offering all kinds of loans and investment proposals. However if I can in any way help it I will never ever do any business with any bank apart from what is absolutely necessary to run my business.
My last car I paid in cash. Thats why I only drive a small Peugeot 107 but at least it's paid in full and I did not need to ask for a loan - although I now would have easily gotten one. They can stick their loans where the sun don't shine.
|Why Aren't Risk Takers Encouraged? |
because big business wants you to be a cog in their machine, to take out car loans, take out other loans for consumer goods, use reward cards at grocery shops, watch the same tv show as everybody else etc etc - this is best achieved by having a known monthly pay cheque. (obviously this is a simplification)
Reminds me of my days as a bank clerk in the 70s. We had strict financial probity rules which restricted the amount of debt we could take on. When the company instroduced credit scoring the staff, who were supposedly financially purer than driven snow, were classed as poor risks. Things have been going downhill ever since.
Anand84, as a fellow freelancer I would strongly advise you to avoid taking on new debts if you can possibly avoid it.
Do everything you can to reduce obligations on future income, rather than taking on new payments.
|Why Aren't Risk Takers Encouraged? |
It depends on the kind of risk. Banks prefer to bet on a sure thing, but their perception of a sure thing is not always well-informed. But considering that it's other people's money they'd be lending you, it is good and right that they err on the side of caution.
The way to break out of the mold that Topr8 refers to is to develop your own resources to the point that just about anything you want to do can be self-financed. Be willing to postpone consumer spending as you work towards that goal.
I'm another one who couldn't get help from the bank when I was getting started, and now pays cash for everything.
There's a reason for the old adage that banks only loan money to people who don't need it. You may be a risk taker, but banks are much more financially conservative, recent mortgage and stock meltdowns notwithstanding- although they DO show perfectly why banks should not be high risk takers).
I agree with the other postings- take on as little debt as possible. Not just now, but in the future as well. Cash flow may be okay now, but it only takes one lat (or non-) payment from a client to put you in a bind.
Similarly, avoid taking any investment money as long as possible. Building up a positive cash flow business without any outside investment is one of the most difficult things and a true indication of success. Getting a loan or investors is something that many people can do. Being successful without those 2 factors is something completely different.
|But considering that it's other people's money they'd be lending you, it is good and right that they err on the side of caution. |
Actually no. Banks don't lend other peoples money. At least only to a small percentage. If you go to a bank to get a loan, they create more than 80% of the loan out of thin air. They simply type it into the computer and create it.
Just for fun try lending $10 in a Peer-to-Peer social lending network - like Prosper in the USA or Zopa in the UK.
Have a look at who you, yourself, are willing to lend to and to whom you are not. I assure you, it's an eye-opener.
Once it's your money that's being lent out, you suddenly become WAY more conservative than you ever thought you were.
When you work for yourself, you must keep outgoings to a minimum - that means getting a few more years out of the car you drive, etc.
Some years ago, a friend set up a business, sold his 3-year old car, leased a £20,000 people-carrier and went bankrupt a couple of years later!
Any financial institution that sees that you are a) working for yourself and b) trying to take out a loan to buy something you don't need is going to get nervous - and rightly so. Entrepreneurs should enjoy making money first - the enjoyment of spending money can come later.
|Considering that Steve Jobs, Bill Gates and all those who could have been in lucrative 9-5 jobs might have been in a scenario like mine early in their lives (when there was not enough guarantee that the world wants), isn't the world unfair? |
You don't get to hear the stories of the people who failed, but they highly outweigh the people who succeeded. If banks gave everyone a loan who asked, we'd have big problems. Oh wait, that already happened...
My experience has been that lenders want to see two years of tax returns before loaning money to the self-employed. As others have said, the time you're first going self-employed is probably NOT the time to take on new debt. There will be plenty of time for those things once you've established a track record with your business.
The answer to your question may be in the thread title itself. Lenders know that a loan is a risk in the first place - and at least doubly so when the borrower is a risk-taker themselves. Most small businesses do not succeed; the Bill Gates and Steve Jobs are few and far between. Most entrepreneurs I know had several businesses before they finally started one that made money. I personally was owner or part-owner of over 20 small start-ups before one finally took off.
And, as much as everyone would agree that intelligent risk-taking entrepreneurs should be encouraged, the bank doesn't really consider that part of their job. ;)
Thanks for your replies. Firstly, yes, you are right in that this may not be the right time to pile on debt. Point taken, though I believe taking a loan (when you are comfortably able to pay it) is just a way to simplify your risks.
Secondly, I agree it would be safer for the banks to make money off a 9-5er over me since he/she has a better guarantee over regular payments.
I was not actually blaming the banks but the entire system which seems skewed towards employees and not would-be employers. As Jecasc puts it, if you run your business, chances are that your employees are able to secure loans easier than you do. I would disagree that all banks and institutions operate this way. If it were so, a lot of businesses today wouldn't have existed.
You don't seem to understand that there is a world of difference between lending money to the business which may yield an increase in profits and lending money on a car which is guaranteed to loose money. If I was your banker, I would be very worried about lending you money for anything with that kind of attitude.
|You don't seem to understand that there is a world of difference between lending money to the business which may yield an increase in profits and lending money on a car which is guaranteed to loose money. |
Actually you are quite wrong since if a bank lends someone money for a car the bank at least has the car as security.
The problem is a different one: If you want only a relatively small amount of money banks simple don't want to go through the trouble of checking past financial statements, prospects of the market you are in and so on. Because they do not make enough profit to justify the paperwork for this loan. Actually if you are self employed you are more likely to get a loan of 200,000 than of 2000.
If you are employed you can simply fill out a web form with your monthly wages and get an instant loan because the whole process can be automated. Your boss won't get a loan because that would require some actual work.
Problem is this is short sighted: If you have rejected someone when he just started his business a small overdraft loan of 2000 EUR because you did not want to waste time on some paperwork, don't expect the same guy to buy your financial investments when he has made some money a few years later. I do not have a problem when a bank turns down a loan application AFTER they have checked the finances but when they do it just because it's too much work for them I take a grudge.
|quite wrong since if a bank lends someone money for a car the bank at least has the car as security |
A car is a depreciating asset. Not that great for security!
|A car is a depreciating asset. Not that great for security! |
Of course. But usually the size of the loan declines when you make your monthly payments. Along with the value of the car.
|But usually the size of the loan declines when you make your monthly payments. |
If you default after only 6 months, the car has already lost half its value and the bank only got 6 months in payments.
|Actually if you are self employed you are more likely to get a loan of 200,000 than of 2000. |
Whilst there may be a grain of truth in this, my friend who went bankrupt used to say exactly the same thing. However, he enjoyed spending money, even if he had to borrow it and he wasn't any good at making it.
I absolutely guarantee that any successful business man (working outside any of the BS/PR industries such as entertainment or advertising) would consider taking out a loan for a new car less than a year after starting a new business to be totally crazy. If the business is doing that well, there should be no need to borrow the money!
If a businessperson is really good, he/she will most likely be able to find the right bank/person(s) from which to secure a needed loan. Bank A may not be a good match, nor may bank B, but bank Q may specialize in similar businesses, so may be more willing to go beyond the normal procedures.
Stoutfiles gets the prize:
|You don't get to hear the stories of the people who failed, but they highly outweigh the people who succeeded. If banks gave everyone a loan who asked, we'd have big problems. Oh wait, that already happened... |
I would only add, get used to it. No one with any money is going to be taking many risks.
What would be the payback in higher risk? Typically, it's higher reward. Most leader can get more for their money, at less risk, that from lending to you.
It really does take money to make money.
Risk takers are just that, risky. The entire banking system got burned taking risks recently.
Many people are shy away from risk. I know this guy that makes more money on his website (part-time) than his 9 to 5 job but refuses to quit. He doesn't quit for two reasons:
1 - He's more than doubled his household income.
2 - He's worried that his website's income stream is too risky.