How to Get Approved For a Loan If You Are Self-Employed
In the working world and earning money, while they may get blended together, there are really only two (2) categories of employment:
* Working for someone or working for a company
It really is that simple and can be broken down into those two areas.
How do you know the difference between being self-employed and working as an employee, simple, if you receive a wage statement and are a PAYE/pay as you earn employee, then you are NOT self-employed.
If you are self-employed you are responsible for your own taxes and NI contributions.
There can be a few different forms of being self-employed:
* Sole Trader: The company is just you, you are the boss and the employee.
* Partnership: The company may be you and someone else and you have partnered together to create the company and also do the work.
* LLC/Limited Liability Company: This is where the company “incorporates” itself and sets up a third entity that is the company, the Company Name LLC. There is usually a Director or Directors assigned, and the company becomes its own self, leaving any liabilities to the company, and not the Directors or employees.
There are many industries and jobs where someone can be self-employed, it can be anything from a carpentry joiner work, to a cleaner, Solicitor, hair dresser, writer, estate agent, owning a restaurant, B&B, any job can have someone doing it in a self-employed capacity.
For many being the boss and being self-employed gives them a sense of freedom and a challenge to do things they way they want them done.
There are some hurdles to overcome being self-employed, and one is you must file your own taxes. Your taxes are no longer withheld and filed by your employer.
This means you must also allow for these tax payments from your earnings and hold out the appropriate amount of tax to pay the HMRC. Failure to do so can cost you dearly in the form of fines.
Many people who are self-employed have an accountant to aid in doing this, which is also another expense to be considered.
One other are those that are self-employed may experience difficulties is if they require a loan.
Getting a Loan If You Are Self-Employed
When someone applies for a loan there are some factors that are considered by the lender, however the two main factors are:
A borrower needs to be able to show they can afford to repay a loan, and that they have a credit score that is within what that lender requires.
Showing your credit score is easy, the lender simply reviews your credit history and your credit score.
Showing affordability is easy as well, you simply complete a detailed income and expense form showing all your income and all your expenses.
When you are an employee or a PAYE, showing your income is easy, you can show wage slips, bank statements that show your wages being pad in.
Being self-employed this can be more difficult. You do not have wage slips, and your deposits showing your earnings may be sporadic at best due to the work you are doing and when and how you are paid.
If your company is new, or only a year or more old, it may not have a proven track record of earnings, it may not even be operating earning a profit yet.
This is worry some to lenders who want to know you can afford to repay the loan. Most lenders are going to require in most instances a three (3) year history of being self-employed and showing earnings.
Many lenders in order to grant a loan to someone who is self-employed may request to see the following:
* Two years tax returns, preferably three (3) years tax returns
* Three (3) year address history
* Proof of any rental income if you are a landlord, such as tenancy agreements
* Bank statements
* Details on your company if you are a LLC or partnership
LLC’s: For some companies that are LLC’s, a lender may grant the loan, but on the condition that a Director or Directors, sign as a guarantor for the loan.
As you can see, if a business is new and has not established itself yet, getting a loan in the company name, or in the sole owner’s name may prove difficult.
There are exceptions to this, such as if the owner of the company, in the example of a sole trader, has excellent credit and substantial savings. A lender may approve the loan based on these factors.
So being self-employed and in need of a loan, and not being in business long, what can you do?
There are options depending on you full set of circumstances:
* Those that own property could look at borrowing against the property, and/or doing an equity release. However, you still need to be able to show you can afford to repay the majority of these loans.
* Depending on the type of business, the owner may look at a merchant cash advance, or borrowing against future receivables.
* Guarantor loan: A guarantor loan is a loan based on affordability, but also that the borrower has a guarantor that ill pay the loan should the borrower default.
Yes, the borrower needs to show affordability, but the lender may not require a full 3 years of tax returns, the strength of the loan is based on the guarantor.
So while getting a loan if you are self-employed does pose some hurdles, there are options available to overcome these.