Getting a loan when self-employed can be challenging but is certainly possible. Lenders prefer those in salaried employment rather than self-employed individuals. Through the lens of the lender, those who run a business present more risk.
A salaried employee is seen as a stable, reliable investment. They have a predictable monthly income from a trusted employer who has traditionally always paid their employees. Income generated by those who are self-employed, however, can be more volatile and less guaranteed. In running a business there is an inherent risk and being the owner of a said business means you’re liable to this risk.
From this perspective, it’s understandable that a self-employed individual is seen as more likely to default on a loan than a salaried employee. Given the added perceived risk of a self-employed borrower, there is usually a more stringent criteria to fulfill when being accepted for funding. If you’re self-employed your income may go up and down, varying month to month. Lenders in this case may ask you to provide an average monthly income backed by documentation. Despite this, if the criteria is met, there is no reason you’d be charged a higher rate due to being self-employed.
Types of loans available to the self-employed
The types of loans available to self-employed individuals include; personal, secured, guarantor and business loans.
Personal Loans: this type of funding is unsecured (not backed by any collateral) and requires you have good credit. Your ability to repay the capital will be assessed based on your income, repayment capacity and credit history. Funds are usually available in sums of anywhere from £100 to £25,000.
Business Loans: this type of funding is used exclusively for funding your business. This could include paying staff, marketing budget, renting office space, investing in new technology etc. The lender will carry out an assessment of your business accounts to judge whether they feel you meet the criteria to service the capital. Typically anywhere from £1,000 to £500,000 can be borrowed.
Secured Loans: this type of funding involves putting up an asset of value as collateral against the capital. This is most typically a self-employed individual’s home. If you have limited employment history, documented income and business accounts you may want to consider a secured financing. Typically secured financing offer better rates than personal loans given they are seen as less risky by lenders. This is because in the event that you cannot service the funding, the asset you put up as collateral may be repossessed and sold to meet finance repayments. Secured loans are paid in full up front. As well as asset repossession other risks include early repayment penalties and taking out too much money meaning you’re paying unnecessarily high fees on the full upfront amount.
Guarantor Loans: this type of funding involves getting someone to act as a ‘guarantor’. Often this will be a good friend or family member who has a good credit history. The person will be liable for the capital if you are unable to meet the finance obligations. Rates are generally higher on guarantor loans but can be slightly easier to get approval for than personal loans.
How to apply for a self-employed loan?
The first thing you’ll need to do is get your financial records in order. Ensure you have all your proof of income, bank statements, and business account statements at hand ready to show the lender. Next, check your eligibility for funding via providers. From here compare loans online and find the best deals (loan comparison sites).
Before applying for a self-employed funding be aware of the documentation that will be required. Proof of ID usually in the form of your passport or driving license is needed. As is proof of address typically via a utility or council tax bill. Tax returns which can be accessed via your HMRC account will be requested, this is called an SA302. Typically two years statements are needed as a minimum, some lenders may even require three. Naturally, the state of your business will be under the microscope and bank statements will be scrutinised. This allows the lender to get a better understanding of how your company generates money, its current financial stability and earnings. Lastly, it’ll be mandatory to provide any other income-generating activity such as rental or predictable dividend income.
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