Why do lenders fear entrepreneurs... or do they?

Taking a loan is never easy, and by that I do not refer to the process. What I refer to is the mind set of both you and the lender. And within that if you are a borrower who also happens to be an entrepreneur -- well that’s another story.So why do lenders approach an entrepreneur with caution? There are a multitude of reasons ranging from fear of the unknown, lenders’ risk appetite and past experiences with entrepreneurs. A recent Zillow study revealed that self-employed borrowers receive 40 percent fewer home purchase loan quotes, despite reporting that they make 81 percent more money than other potential borrowers.So let’s start first with the lender as that variable is not in your control. Let’s accept that as someone who is self-employed, lenders may not see you as the ideal borrower. You may have not liked what you read in the previous line, so let me elaborate further of the reason to such reluctance from lenders. Historically, borrower characteristics suggests that loans to self-employed borrowers, because of higher income volatility, are 50 percent more susceptible to default than those extended to salaried customers. Such a premise is accentuated during economic downturns.Are we saying that perceptions won’t change? Absolutely not. there are now a number of new players who are using innovate methodologies to arrive at holistic customer assessmentsTraditionally a lender loves to gravitate towards linear documentation. By that, I mean documentation that clearly reflects one’s ability to pay back and steady verifiable income streams in the case of the salaried employee. Both these caveats are met with ease and therefore offer superior levels of certainty. However in the case of the entrepreneur the documents typically are nonlinear. This coupled with business expenses which reduce taxable income may make lenders wonder if you make a steady income enabling you to pay back that EMIAlso remember that lenders are trying to get you onto their books as well, so reassurance is needed from both sides. If you have an established track record of self-employment, they will be more willing to lend. Here is what a lender looks at> Credit Bureau scores> History of self-employment> End use of the loan > Loan amount and tenure of loan to be given> Loan-to-value ratio> Total debt-to-income ratio> Future Potential/ Cash Flow projectionsPlease do keep in mind that this is not an exhaustive list and most lenders interlink all points to arrive at a decision, fall out being a direct adverse im-pact on the Turnaround Time for loan processingSo if I were you, my first question would be: how does one work around this? It’s quite simple. Here are your stepsBe precise about your funding needs, be very clear about the quantum of funds and the tenor you need it forBe Credit Conscious: Credit history is important and immensely reassuring to a lender, ensure that you are up to date on payments. In short demonstrate your financial responsibility!Be Aware about your accurate eligibility coupled with your business and financial strengths , for e.g. you can demonstrate to your lender how a retail customer base saves you form the dependencies of a single client!Be prepared: As an entrepreneur you are always battle ready and have ammunition ranging from the market place to the competitor nipping at the heels to the unit price ..so on and so forth. Bring this discipline to your borrowing needs as well.Be Willing to walk the extra mile for the lender, be willing to submit extra paperwork which can demonstrate your ability of pay back. This could range from vendor agreements, pipeline contracts ,invoices raised, bank statements etc. Lenders love documentation, understand that and present your profile to the lender in that mannerBe open to adding a co-borrower: Get your significant other in as well, this provides more assurance to your lender that there is a steady income to pay back the debt.Sumedha Salunkhe Naik is the CEO of Syntellect, which provides loan un-derwriting services through its proprietary RightProfile™ product and owns www.loanmagik.com.