The Born Freelancer Applies for a Line of Credit, Part 2
This series of posts by the Born Freelancer shares personal experiences and thoughts on issues relevant to freelancers. Have something to add to the conversation? Your input is welcome in the comments. Read Part 1 of this 2-part series on freelancers and credit here.
Spoiler Alert: I didn’t get it. 
To recap:
I had applied for a line of credit at my bank, a bank to which I had given my business for over 30 years. (Little did I know that they were about to give me the business.)
In my favour I had:
* Lots of stuff
* An RRSP
* Paid off credit cards
* An excellent credit score
* A history of no debts
* A previously preauthorized offer for an LOC
* A modest but healthy bank balance
What could go wrong?
Oh yes. I was also The Born Freelancer.
And so in the end they turned me down.
Why?
Because I was a freelancer and my annual income is never going to be guaranteed.
And banks just hate that.
The Great Wall of Credit
I had hit, in the words of former CMG staffer Keith Maskell, “The Great Wall of Credit”. To quote him once more:
“You’re running into what I think of as the single greatest hurdle for the modern freelancer: the Great Wall of Credit.
Financial institutions tend to look at not just income, but income that’s stable over time. Anything else just represents a bad credit risk for them.”
It seems to me that as more and more individuals become self-employed the banks really need to step out of their 19th century paradigm and wake up to the fact that a growing number of their clients in the 21st century are going to be freelancers.
I’ve read some stats online that in a few years we will become something like 40% or more of the work force.
And we aren’t going to be happy when they continue to treat us like abject financial rogues. In fact, unless they ship up many of of will take our business to any other type of financial institution which will respect us and offer us the appropriate financial services.
If enough of us get organized and convince a credit union or some such financial institution to be more appreciative of freelancers then the main banks will be forced to follow. (Although credit unions currently aren’t much better than banks, according to Maskell.)
OK, so that’s in the future.
But, meanwhile, what’s a freelancer to do?
Possibilities
Let’s begin with Keith Maskell again, who offered some sage advice (as always):
“One option that you might want to explore with the institution(s) of your choice … Buy a GIC that you would then use as collateral for a line of credit. I’ve seen instances where the institution will offer a 1.5:1 or 2:1 ratio, so you could get a $30K LOC by putting up a $20K certificate. You lose some liquidity for the sake of some flexibility.
This is an interesting idea. I hadn’t thought of it when I applied for my LOC. It would be an option worth investigating should I be foolhardy enough to attempt a second LOC application.
Insiders club
I decided to discuss my situation with a number of individuals working within banking, including the empathetic rep at my local branch of the bank that had turned down my LOC application.
They would only agree to speak to me if I guaranteed them anonymity. And so I will only confirm that what follows came from individuals working within the banking system who expressed a sympathy for the plight of freelancers. It’s offered in the spirit of enlightening freelancers as to how banks think and does not necessarily represent the best legal or ethical advice of the writer nor of the CMG.
It is also my hope that this post may help you avoid the same pitfalls that befell me.
If I were doing my LOC application all over again what could I have done differently?
* Take that preauthorized LOC!!!
I had mistakenly ignored previous mailings from my bank offering me a preauthorized LOC. I had thought they were nothing more than another unwanted marketing scheme.
Wrong!
It would appear (in retrospect) that they had been offered during a period of time when my freelance income was consistently high enough for long enough that even the bank would tolerate a freelancer.
So they can make exceptions from time to time. At their own capricious whim. For them it’s all about risk management.
I should have taken them up on one during those better “flush” years when I never even thought about it. (They do eventually expire.) Then it would have been in place for use later, like now, when an LOC could be useful. But – of course- when you actually might need a loan is exactly when the banks do not want to give you one.
The great thing about a preauthorized LOC is that it seems they rarely (if ever) do any further background checking on your finances. Some underwriter, lurking in the dark dankness of the financial underground, had already approved it and so no further cross checking would be necessary. If your financial circumstances had suddenly changed (for the worst) the only way they would know is if you told them.
* A regular part time job is better than a full time proven freelance career.
Another way to increase your chances of having a LOC application approved would be to get a part time job. Even slinging hash at a fast food joint (a perfectly honorable occupation) would be viewed most favourably by the banks as a regular job with regular income and therefore less risk to them.
Related to this theme, if your life partner has a regular 9 to 5 or part time job, they could cosign your application, again increasing the chances of your LOC being approved. In fact, if they applied for it themselves, they would almost certainly get it. Which might be the way to go.
But again, to me, this is just another example of the bank’s out of date thinking.
* Banks love pay stubs.
If you can get a legit part time job working for a friend or family member doing anything and can get them to make you out pay stubs (hand written or computer generated) that demonstrate a regular income over a period of time it may help your application get approved.
Wow. This comment really shook me up. Pay stubs? That really feels 19th century.
But it seems banks just love documentation.
In fact, for your LOC, what they will require at the very least from you is the last two or three years of your Federal Tax Assessments showing your reported income.
(When I pointed out that – as a self-employed freelancer – my actual income was higher than my final reported income because of all my legitimate business deductions it only seemed to confuse them and so they ignored it).
If you’ve had a good couple years it may help you.
On the other hand, if, like me, your last couple years have seen reduced income, it completely obscures any of your other good points in their eyes. It doesn’t matter that 5 or 10 or 15 years ago I was doing exceptionally fine. Nor that I’m working hard on following up new leads and plan to do much better again during the next tax year. Nope, all they will look at is the immediate documentation in their sweaty little palms. And if those Tax Assessments show your income in the last few years has even inched below their subjective sweet spot (usually in the $20-30K a year territory) you will be SOL.
The takeaway
But what about The Big Picture?
How can we freelancers force banks to think of freelancers as legitimate financial clients and not just as some strolling ne’er-do-well rogues to tolerate at their subjective whim and/or voluntary discretion?
Solution: Banks hate negative PR.
We must bring out into the open their reluctance to treat us as equals with their 9 to 5 clients.
* Complain to your bank.
* Write to your MP and MPP.
* Write to your your newspaper.
* Blog about it.
* Tweet about it.
* Facebook your friends about it.
* Tell a 9 to 5 friend and get THEM to complain too.
A paradigm shift takes time to instigate and even more to achieve.
The time is ripe for change when it comes to their systemic approach to our profession.
There are signs of tiny shafts of light being shed on the matter from inside the financial monoliths (that is, if the attitudes of those helpful low level banks reps I spoke to mean anything). But it is not enough to rely on the kind whims and subjective discretion of our chosen financial institutions. We freelancers deserve better treatment!
IMHO, there’s no time like the present to begin this particular paradigm shift.
What do you think?
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If you have had any dealings with your bank – positive or negative – that would help inform this conversation, please share your experiences with in the comments.
