A steady, reliable income is one of the most important things that all banks look for in people who want to borrow money. How much the applicant will get will depend on how much this income is. If there was no reliable income, it would seem to a lender that the loan amount should be zero. This is the traditional way to figure out how much a personal loan will cost.
Business loans for people who are self-employed
How business loans are worked out is different. They don't have to show proof of a certain income. In fact, most businesses would not be able to do that. So, banks came up with a different way to figure out if a business was creditworthy. This meant looking at past income, assets, debts, and obligations. Self-employed people who want to get a loan now follow a similar process. Instead of showing proof of your salary, you can show the bank what kind of business you have, how much you've been making and for how long, how likely it is that the business will continue, and what your current debts and liabilities are. All of this information will then be used to figure out how much you can afford to borrow based on your income, how risky you are, and how much you make.
There are problems with being self-employed.
There are still some problems for unemployed people who want to borrow money. For instance, if you haven't had your business for very long, it will be hard for lenders to figure out how risky you are. Most of the time, they can get a pretty good idea of how much you will make by looking at how much you made in the past. If the income has been steadily going up or down, they may want to take that into account, but for the most part, they will assume that you will keep trading as you have been. If your business is very new, you can't do this. There will be no trading history or earnings from the past to look at.
You may also find it hard to get a loan because many lenders still see people who work for themselves as a bigger risk than people who work for a company. It is a simple fact that new businesses fail more often than businesses that have been around for a long time. Also, they fail more often than people get fired. So the risk may still be seen as higher, and the terms and interest rates you get will reflect that.
"The Future" (b)
All of this seems to be changing because people are changing jobs more often than they used to. Since this makes them less reliable and self-employed people are getting a reputation for being good borrowers, your rates should start to get closer and closer to those of salaried applicants.
