Here's how to get a loan when you're self-employed

Wednesday, 12 September 2018

If you work for yourself, the bank will probably want to see two years' worth of financial statements.

OPINION: There comes a point in some people's careers where they get an urge to strike out on their own, tired of working for The Man.

Others are forced to take a leap as the nature of work changes.

Scratching the entrepreneurial itch, working for yourself or trying your hand at freelancing or contract work can be a fulfilling way to work.

However, there are implications when it comes to borrowing money.

* Financial independence is something to aspire to

* Big decisions on where to spend your golden years**

Some small business owners' employees are considered a better prospect for a loan than they are.

When you apply for a mortgage, the banks do their due diligence in order to ascertain that you are likely to be able to service that debt.

If you're salaried, that's quite straightforward – you simply provide evidence of your income via a payslip or confirmation from your employer. Once you're past any applicable 90-day trial period, you're considered to have a stable income.

However, if you are self-employed, a contractor, freelancer or small business owner, the standard bank will want to see one to two years of financial statements, but usually two.

If they're willing to accept one year of financial trading, they'll want to see excellent results.

If you're in the start-up phase this usually isn't realistic as in the first year of trading you aren't necessarily making a profit, or even paying yourself a market salary, and set-up costs are higher.

The position that leaves some small business owners in is their employees are considered a better prospect for a loan than they are.

Our mortgage team comes across this quite often and it can prove difficult to circumvent, which is why it's often better to buy a property before you strike out on your own. The cost of servicing your mortgage would obviously then need to be part of your calculations for how quickly you need your business to be able to support you.

If you're already self-employed and don't have a long enough track record to satisfy the bank, you could go to a non-bank lender or asset lender. Such lenders are usually more concerned with the value of the asset than your income, but they lend money at a higher interest rate and will require a bigger deposit. That cost means you'd only use this method if it was imperative you buy now, and it would be an interim measure.

You would aim to refinance at lower rates as soon as you became a candidate for a bank loan.

If it's your profit level that's the issue, your next move is to focus on maximising that profit – even though it will increase your tax bill. The cost of paying slightly more tax now due to higher profits would be offset by being able to borrow at a cheaper rate through the bank.

As the nature of work changes and increasing numbers of people become employed on a short-term basis in the 'gig economy', this will become a challenge for more of us, so it pays to know your options.

Hannah McQueen is an author, authorised financial adviser, accountant and founder of enableMe.