More than five million people in the UK are registered as self-employed, living the dream of being their own boss; but it does come with its disadvantages.
Not only can it be difficult to afford a new car or make much-needed repairs, getting your hands on a loan can be challenging, too.
Since the most recent financial crisis, lenders can be understandably cautious – particularly with those considered to be more of a risk. But there are a number of excellent products available if you can demonstrate that you’re a responsible borrower.
The reality of self-employment
If you’re new to being your own boss, you’ll be used to the security of a monthly salary. Now you’ll have the same household and family outgoings, but without the regular pay cheque. You may also be facing a number of expenses while setting up the business that can vary dependent on your own personal circumstances - whether renting premises or buying a new home computer.
It’s difficult to sail into self-employment without any finance readily available – ideally enough to keep you, your family and any other dependents going for the first six months. Hopefully, you may have built up some savings before taking the leap into self-employment, but a loan can be a helpful financial cushion.
How to apply for a self-employed loan
If you’re looking for a helping hand, a specialised self-employed loan could be the answer to your financial problems. Many lenders offer this type of borrowing and will understand that being classed as self-employed can make getting a loan that little bit more difficult.
The process of applying for a self-employed loan is similar to a regular loan. They are usually offered as either:
- Secured – where payments are guaranteed against your assets, or
- Unsecured – usually higher interest loans but no collateral.
You can submit your loan application online for an instant decision on the likelihood of your application being accepted.
You may find that the application process varies between lenders, but you’ll always need robust evidence to show that you’re an acceptable risk. Most lenders will be looking for at least a six-month history of personal and business bank statements to get the ball rolling, as well as your personal details and information about your business.
In some cases, you will be able to borrow up to £500,000, which can be spread across a time period you are comfortable with.
What documents do I need?
After your initial application, a lender may get in touch to ask for more information around your business and its finances. At this point it’s helpful to have some key documents ready, such as:
- Tax return calculation (SA302)
- Bank statements
- Details of your company, partnership or sole trader business.
- Proof of rental income (if you are a landlord)
Types of self-employed loans
There are several types of self-employed loans available, depending on your personal circumstances and loan requirements.
Unsecured, or personal, loans are best suited to those who need a small lump sum to help with a specific financial worry. This isn’t secured against your assets, but to make repayments more affordable you may need a good credit score to prove you are a trustworthy borrower.
If you want to borrow more money or have a limited business history to prove you are a credible borrower, you may need to take out a secured loan. This type of borrowing is secured against your assets, typically your home or company property. As a lender has security that they will get their repayments, you can usually get more favourable interest rates than with an unsecured loan.
Being classed as self-employed can make getting a mortgage tricky, as your income isn’t always guaranteed to be the same each month, but that doesn’t mean it’s impossible.
Unlike other types of loans, there isn’t a specific mortgage product designed for the self-employed. Instead, you will need to apply for a standard mortgage. To get a mortgage for your business, you will need to show at least two years of accounts or tax returns that demonstrates a healthy track record of regular work.
Bounce Back Loans (BBL)
The COVID-19 pandemic has brought on an unprecedented number of challenges for business owners and the self-employed. As such, the government have introduced the Bounce Back Loan Scheme (BBL) to help SMEs get easier access to financial aid.
This loan allows self-employed people to borrow between £2,000 and £50,000, with no interest to pay for the first 12 months. You can use this money to support your business during the pandemic – it must not be used for personal reasons.
You can apply for a BBL loan up until the 31st of January 2021. For more information, visit the gov.uk website.
Can a self-employed person get a loan with poor credit history?
Yes, there are some lenders who will approve your application for a self-employed loan, even with a bad credit score.
In some cases, the loan offered to you may be less than you initially asked for or may have higher interest rates. Always make sure you can comfortably meet the monthly repayments before accepting your loan terms.
How to improve your chances of getting a self-employed loan
Whether you have a poor credit score or minimal financial history, there are ways you can improve your chances of being approved for a self-employed loan. This includes:
- Keeping records of your accounts – you should take the time to make sure your business’ finances are all accounted for and up to date before submitting your loan application. Some lenders can help where your accounts are not up to date.
- Opt for secured over unsecured borrowing – as secured loans are backed by your assets, lenders are more likely to approve your application, even with poor credit.
- Know your status – self-employment can take on many forms, from contractors to landlords. If you earn a day rate, lenders may calculate your monthly income based on the number of days you work per year. Applications from sole traders may be judged on whether your income has increased or decreased over the last 12 months.
- Speak to a broker – a broker, like Norton Finance, can assess your financial situation to recommend products that are best suited to you, improving your chances of being approved for a loan.
Self-employed loans are an essential financial tool for keeping afloat when times are temporarily tough. Just make sure, as always, that your planning is watertight – and take advice where you’re unsure.