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.
Since the most recent financial crisis, lenders can be understandably cautious – particularly with those considered to be more of a risk. But there is light at the end of the tunnel for self-employed workers.
Can a self-employed person get a loan?
Simple answer – yes, a self-employed person can get a loan. It may be more of a challenge to secure it, but if you can demonstrate that you’re a responsible borrower with a positive credit history, there are a number of excellent products available to you.
Why might you need a personal loan?
If you’re new to being your own boss, you’ll be used to the security of a monthly salary. You may also be facing a number of expenses while setting up the business – like renting premises or buying a new home computer.
It’s difficult to sail into self-employment without any finance readily available. A loan can be a very welcome helpful financial cushion.
What self-employed loans are available?
There are several types of self-employed loans available, depending on your personal circumstances and loan requirements. The loans available to a self-employed borrower include:
- Unecured loans
- Secured loans
- Business loans
Unsecured loans
Unsecured, or personal, loans are best suited to those who need a small lump sum to help with a specific financial worry. This could be your ticket to getting a car loan as a self-employed borrower. An unsecured loan 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.
Secured loans
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. Your lender has security that they will get their repayments, so you can usually get more favourable interest rates than you would with an unsecured loan.
Business loans
One of the first loan considerations as a self-employed person may be the security of your business. You may be wondering how difficult it would be to secure a business loan and if there’s anything you need to do to make getting approved for a business loan a little easier. In order to be considered, your lender will carry out a thorough analysis of your business accounts to determine if you’ll be a good candidate to borrow.
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 has introduced the Bounce Back Loan Scheme (BBL) to help SMEs get easier access to financial aid.
This unsecured SME 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.
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. It will likely follow these steps:
- Make sure you have your financial documents ready
Most lenders will be looking for at least six months’ history of personal and business bank statements to get the ball rolling, as well as your personal details and information about your business. 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.
- Check you're eligible for a loan
You can submit your loan application online for an instant decision on the likelihood of your application being accepted. This should not affect your credit score.
- Compare your options
Compare the interest rates and payment terms between lenders, as well as how much you could borrow. In some cases, you may 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 to apply for a self-employed loan?
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:
- Proof of ID and address - such as passport or driving license and a utility bill.
- Tax return calculation (SA302) - you can find this by logging into HMRC. Download at least two years’ worth of SA302 calculations.
- Bank statements - your lender will want a sense of your financial background.
- Details of your company, partnership, or sole trader business - the lender will need to know how your business is doing, and if anyone else has financial interest in your company.
- Proof of rental income (if you are a landlord) - you could also be asked to supply lease or tenancy agreements.
Can you get a mortgage if you're self-employed?
Yes. Although being classed as self-employed can make getting a mortgage tricky, as your income isn’t always guaranteed to be the same each month, it is possible to get a mortgage when self-employed.
Unlike other types of loans, there are not specific mortgages for self-employed people. 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 demonstrate a healthy track record of regular work.
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.
- 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.
Does a self-employed loan cost more?
No. As long as you are able to prove a positive credit history and means to pay back your loan, it should not cost you more.
What can I use a self-employed loan for?
You can use your self-employed loan money on a number of different things. It can help with costs associated with getting car finance whilst self-employed, wedding costs, or major home improvements.
It’s important to tell your lender what you plan to use the money for, as some loans must be used for certain purchases. For example, a personal loan cannot often be approved for a business cost.
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.
Being your own boss can be tricky – especially when it comes to your finances. Norton Finance Know How can help make your money go further.
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