Why Freelancers And Self-employed People Find It Difficult To Get A Loan

When freelancers want to apply for a loan, they regularly face the same problem. If you don't have any collateral for the loan, you often don't have the slightest chance of getting the money you need. Why it is like that? The biggest problem is income. Freelancers don’t get a paycheck and don’t have a 100 percent secure income.

This means that the banks cannot be guaranteed that they will actually be able to repay the loan until the end. However, banks want to keep their risk of default on receivables as low as possible. Freelancers who don’t have additional security to offer have a hard time getting the money they need.

Credit institutions are contractual partners of Schufa Holding AG. Due to legal regulations (Section 18 of the Banking Act) and of course in their own interest, they are obliged to keep the risk of credit default as low as possible. That's why banks check their customers' creditworthiness with a credit reporting agency, the largest of which is Schufa. Based on the data requested there, banks create an individual offer for their customers. If the Schufa score is bad, the loan conditions are also worse or the loan application may even be rejected. Customers who are now looking for cheap loan offers and carry out a pre-contractual price comparison often trigger an entry with Schufa.

To ensure that this doesn't happen, Schufa has created a new tool: the loan conditions inquiry. But not all financial institutions work with it automatically. Freelancers who compare prices via the online credit portal smava only trigger a request for conditions, which does not affect the credit score. There, applicants can also complete their loan online with the bank of their choice.

What The Schufa Score Actually Means

In the business world, the Schufa score represents a point value that provides information about a person's expected payment behavior. Using past events, an algorithm uses an analysis process to calculate a percentage value that reflects the future risk of payment default.

For this purpose, the credit agency stores the following data that is important for the calculation:

• Personal data such as name, address and date of birth,
• payment behavior; Both irregularities and positive features are recorded here,
• Debt collection data, such as unpaid invoices or transactions that a debt collection company has processed,
• Court data, for example if there was an arrest warrant or the filing of an affidavit.
• Ongoing or recently completed insolvency proceedings.

The Federal Data Protection Act prohibits credit agencies from storing data on income, marital status or employers. They play no role in the creditworthiness values ​​to be calculated. The score can be between 0 and 100 percent. A high percentage means a good credit rating and therefore a low risk of default for the bank. If the value is above 97.5 percent, the risk for the bank is very low. At a value between 80 and 90 percent, the risk is significantly increased; less than 50 percent means a very high risk for the bank.

Sometimes Mistakes Creep In 

The information provided by Schufa is not always correct; sometimes the Schufa score query also produces an incorrect value. To ensure that the false negative value does not affect your creditworthiness, it is important to obtain a free self-assessment from Schufa from time to time. It makes sense to do such a query once a year. If there is outdated or even incorrect data, the freelancer must provide proof that there is an error.

Schufa is then obliged to correct the error or delete the incorrect entry completely.Schufa entries usually remain stored for three years after a claim has been paid in full. For example, anyone who paid the last installment of a liability in autumn 2016 will be clean again as of December 31, 2019.

What Collateral Banks Accept

If you want to apply for a loan as a freelancer, you need a little more than a good idea, technical expertise and a sophisticated business plan. The bank requires collateral as a basic requirement for the loan to be approved. Banks protect themselves, especially in economically difficult times. If payment difficulties actually arise, the bank can claim the collateral. There are two types of collateral: personal and property collateral. Personal securities include: guarantees, letters of comfort and written declarations of joint assumption of debts. Items that represent the equivalent value, such as real estate or vehicles, are considered material collateral.

The guarantee involves a third party who pays for the loan should the borrower default. This can be a private guarantee from a family member, acquaintance or friend. The prerequisite is always that you have sufficient assets or material assets. However, freelancers or self-employed people should think very carefully about whether they actually have a guarantor co-sign. They often feel called upon to interfere in business decisions.

For The Conversation With The Bank 

Once it is clear how much financing is needed, the next logical step follows: the request to the bank. Self-employed people in particular should prepare very well for this important conversation. The collateral for the loan is actually a secondary condition. Missing or insufficient collateral very often leads to bank discussions failing. Sometimes it is also the case that the bank inadequately evaluates security. With an appropriate report, freelancers can influence this assessment by the bank.