How to Prove Credit Worthiness When You’re Self Employed

By QuickBooks Canada Team

4 min read

Getting approved for a mortgage or other traditional loan becomes a lot more complicated when you’re self-employed versus when you work for an employer. You’ll often face more scrutiny and have to meet tougher requirements to qualify.

Even though you likely have more hoops to jump through as a self-employed business owner, there are alternative ways you can prove your creditworthiness.

Keep Organized Financial Records

Nothing will validate your income more than keeping accurate records. The most efficient way to do this is to set up regular reporting and monthly check-ins with your bookkeeper. Then you can be sure that your tax return reflects the most accurate information at the end of the year.

The first thing a landlord or lender will likely ask to see is copies of your tax returns. Since you don’t receive regular paycheck stubs, this is the next best way to prove how much money you bring in each month.

Combine the income you’ve earned for the past two years and average it out to get the total net revenue to use as an earning track record. If you know you’ll be applying for a mortgage or personal loan in the near future, work towards increasing your bottom line in expectation of using this averaged revenue figure as leverage. The more money you make in the most recent months leading up to your application, the better chance of success you’ll have.

Verify Self-Employment Income

Since it’s more difficult to prove your track record of earnings, you must have at least two years of past earnings available to show as proof of income, as well as a reasonable projection of what you plan to earn in the next three years.

Some financial institutions will request additional reports—like a balance sheet or income statement —which is another reason why it’s so important that your financial records are organized and accurate.

A few reports to produce and collect include:

Earnings or revenue statement. This report includes all of the gross revenue you’ve brought in as a self-employed business owner for the past 12 to 24 months. This won’t include inventory, refunds or any expenses. It’s just a projection of gross income that your business has made.

Expense report and receipts: Add up all of your outgoing expenses for the past several years, including any big purchases for equipment, and create an expense report. Attach any receipts or proofs of purchase as needed.

Profit and loss statement: A P&L statement summarizes all of the revenue and expenses you’ve incurred during a specific time. It’s essentially a combination of your earnings statement and expense reports.

Balance sheet: This report lists out all of your assets, liabilities and capital investments into the business. Collectively, this information offers a detailed look at your income and expenses for a certain period that helps financial institutions understand your total net worth.

Have an Excellent Credit History

Working with traditional financial institutions means you’ll still have to provide traditional information (e.g. a decent credit score) and have a large amount of money saved in a separate savings account. Both of these criteria are used to prove that you can overcome any financial inconsistencies.

Your credit score is made up of five key components:

  • Payment history
  • Amounts owed
  • Length of credit history
  • New credit
  • Good mix of credit accounts

In order to build a high credit score, you’ll need to keep your credit history up-to-date by checking your report regularly, making sure it’s free of errors and verifying that your information is all correct. You also need to adhere to smart credit strategies like keeping your debt utilization less than 30% of your overall credit limits.

Create a List of Referrals

When you’re having a tough time proving your own creditworthiness to a landlord or lender, it may be a sign that it’s time to bring in reinforcements through qualified referrals.

Can you call a former employer and ask for a recommendation? Do you know an influential contact who can vouch for your financial background? Work towards creating a list of contacts who can help build up your reputation and vouch for your character.

Pay Your Bills On Time

Do you pay your bills consistently on time each month? Tracking these payments could be a great way to prove your creditworthiness. By using an alternative credit reporting service, you can use those tracked bill payments as a way of proving your credit and repayment history and demonstrating sound financial habits.

By law, a lender or landlord must consider ALL of your financial data as part of the application process. So don’t be afraid to include your past bill payment history. Something like having a good history of paying your bills on time could go a long way to proving your creditworthiness.

As a self-employed individual, you’ll have to overcome additional obstacles that make proving your creditworthiness—to a financial institution or individual—a tough process. By applying these tips, however, you can give yourself a better chance of getting approved.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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