If you are short of funds, it is acceptable to explore the possibility of raising a personal loan to meet your needs. The purpose of fundraising can range from organizing a wedding to going on vacation or purchasing an expensive item, among others. Whatever the reason, a personal loan comes in handy to provide the comfort you need when you need it most.

Generally, before banks disburse a personal loan, they examine the salary slips of the last months and CIBIL Score. However, not many people know that even self-employed people can also apply for a personal loan for any of the above-mentioned needs.

Here are some of the challenges they face:

1. Irregular income: Banks tend to worry about inconsistent cash flow and their ability to repay during slower months.

2. Higher interest rates: Some lenders may charge higher amounts interest rate on self-employed workers because they are perceived as high-risk borrowers.

3. More documents needed: In order to convince banks to grant loans, self-employed people are expected to present more documents than their salaried counterparts.

4. Shorter term: Banks can generally offer shorter loan repayment terms to self-employed borrowers, resulting in higher monthly payments.

5. Reconciliation of actual income with declared income: A number of self-employed people underreport their income for tax purposes, which can affect their loan eligibility.

7 key tips to follow to overcome these challenges:

1. High credit score: It is imperative to maintain a high credit score. A CIBIL score above 700 increases the chances of approval.

2. Financial documents: Banks often require more complete documentation from self-employed workers. These documents include at least 2 to 3 years of tax returns (ITR) and 6-12 months of bank statements to show consistent cash flow. In addition to this, banks may require profit and loss accounts and accounts receivable to show future income.

3. Revenue growth: Stable or increasing income over recent years is generally preferred. In the event of a fluctuation, it should be explained with supporting documents. Additionally, a business that has been operating successfully for at least 2 to 3 years reassures lenders.

4. Co-signatories or collaterals: A cosigner with a stable income or good credit can improve your application. Guaranteed loans (backed by assets such as real estate or investments) often have lower interest rates and easier approval.

5. Choose the lender wisely: Traditional banks generally require stricter documentation but may offer better rates. On the contrary, fintech lenders generally have flexible criteria but higher interest rates.

6. Less debt: A high debt-to-income ratio can hurt your chances. You should therefore aim for a loan-to-income ratio of less than 40 percent.

7. Relationship with the bank: Banks you already have a bank account with may be more than willing to lend to you.