When Jerad Shealey opened his own shop in 2011, it was the next logical stage of his career as a Seattle tattoo artist. For over 10 years, he’d honed his skills around the city. Like many tattooers, he rented studio space and charged clients an hourly rate. Tax time was simple: he reported earnings on a 1099 and claimed deductibles where possible.
Jerad opened Rabid Hands in the Ballard neighborhood where he’d long resided. Seattle’s tech boom kept a steady stream of hip, affluent customers streaming into the shop. Business was good, but reporting on it was complicated. Like other new entrepreneurs, he was smart to hire a professional to help him navigate the ever-changing tax codes.
In the 2020s, “The Great Reorganizing” hit Seattle’s tech market. The stream of well-heeled customers started to recede, and it felt like a good time to sell the business. Jerad would continue to work at the shop he started, but a new owner would now manage the business side so Jerad could — as they say in all the artist biopics — “get back to his roots” and focus on the ink.
In those same years, Jerad and his wife bought a house — a first for both of them. They had some apprehensions going into the application process. They earned sufficient income to secure the loan they needed, but their lender needed to know that too. Fortunately, they maintained solid tax records and kept their credit scores above 800, so the process went relatively smoothly. Today they reside in a comfortable craftsman home with a big backyard for their dog-kids. As the market continues to normalize in the years following this decade’s early tumult, Jerad is considering opening a new shop, closer to where they now live in Tacoma.
Though they were ultimately successful in securing a home loan, the path to securing a loan is often complicated for self-employed people like Jerad. Even with high credit scores, their loan officer still needed copies of detailed tax returns for an in-depth cash flow analysis. This can take more time and require higher processing costs, which can be a disincentive for a lender as well as home sellers — in the red-hot real estate market of 2021, sellers had little patience for delayed loan closings.
This is problematic for loan applicants who are self-employed. I’ve written in depth about this inequity. It impacts not only business owners but also freelancers, second- and third-job holders, and so on. They are essential workers, but they stand to encounter more hurdles in securing loans than their peers in the same tax bracket.
From a business perspective, this is also a problem for lending institutions. They leave cash on the table by denying loans to these potential customers, or by failing to calculate their maximum potential loan amount. For example, Jerad was content with the loan they received. It was enough to buy their house. But he feels they might have received a higher loan amount, or perhaps better terms, had they both been traditional wage-earning W2-reporting applicants. If the loan officer had the time to more closely analyze the customers’ cash flows, or possessed the tools to facilitate such an analysis, Jerad and his wife may have received a more advantageous loan package.
In 2022, McKinsey reported that 58 million, or more than one-third of working Americans earn non-salaried income. Economists estimate that by 2027, the majority of workers will be freelancers. This presents tremendous business opportunities for lenders, yet even “prime” self-employed customers face a more complicated application process than those who earn a W2 salary.
While lending to self-employed individuals can be riskier due to income variability and continuity, these risks can be mitigated with an appropriate, standardized assessment. Lender processing costs can be further reduced by automating the process.
Baleen helps lending institutions make that happen by leveling the playing field for this vast population of potential borrowers. At the end of the day, reducing income bias is a win-win for both lenders and borrowers.
Sam Campeau blogs about all things pertaining to finance and technology for Baleen Solutions. In his free time, he watches the whales swim from his tiny fishing town in the Pacific Northwest.
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