How to Borrow Money if I’m Self-Employed?
The Coronavirus pandemic wreaked havoc in the global economy, so much so that nations are still struggling to cope with the downward spiral after over a year. Not only has the pandemic affected the employed populations, but it has also engulfed the livelihood of many big and small business owners. Due to lockdown restrictions, some businesses had to shut down because of increasingly low consumer demand.
While people struggle to cope with this abrupt economic downturn, the UK government urges banks to increase credit availability for business owners. However, lending institutions have restricted their lending criteria to minimize the risk of defaults, narrowing the access to money for self-employed loan seekers.
Your credit report is a crucial element of your loan application since it helps the lenders understand how responsibly you handle credit. For many lenders, a regular income, too, is a pivotal factor that drives their lending decision. This is the gap that holds back the self-employed – in most cases, they earn a fluctuating income.
So what funding options are available for the self-employed? Read on to find out!
Can I apply for self-employed loans?
Yes, you can apply for a loan even if you’re a business owner. Although, the loan options available for the self-employed are limited. In such cases, you should focus on fulfilling the lender’s criteria to qualify for the loan.
Several lenders lend to freelancers and business owners seeking funds to bridge some financial gaps. So long as your credit history is strong, the lender may consider you even if you’re self-employed.
Your credit score gives the lender insight into your relationship with credit. A good credit score is a reflection of your responsible behaviour with credit. Having a good credit history and a source of income can strengthen your application since these factors help the lender determine your creditworthiness and affordability.
With a weighty application, you are likely to qualify for a higher loan amount at competitive rates for a longer tenure. But, it is in your best interest to only borrow an amount that you can afford to repay. If you borrow based on your eligibility rather than your need, you may end up falling into a debt spiral.
Is there a personal loan for self-employed people?
Personal loans are not earmarked for a specific purpose. You can apply for a personal loan even if you’re self-employed. Moreover, you won’t have to secure an asset to avail of an unsecured personal loan. A solid application helps you qualify for better rates.
What type of self-employed loans can I apply for?
Here are some loan options that you can apply for if you’re self-employed:
- Personal loans: Unsecured personal loans are a great way to spread the cost of your purchase into fixed monthly instalments over a period without securing collateral. Personal loans are suitable for self-employed people with a good credit score seeking urgent financial aid. While someone with poor credit can avail of a personal loan, they may not qualify for competitive interest rates. Carefully compare your loan options in terms of interest rates and APRs before choosing one. Missed repayments or defaults can gravely impact your credit score, hampering your chances of securing any other credit in the future. So, ensure that you make timely repayments each month until the loan is paid off.
- Secured loans: Secured loans may be a good option for people who have an asset to offer as collateral. Most people use their property or home equity to secure this loan. Now, if you fail to keep up with repayments, the lender will most likely recover the money by selling your property. You can consider this option if you can’t present a substantial employment history or documented income. While secured loans have lower interest rates than other credit products, there is a high risk for the borrower. Weigh the pros and cons of this option before taking your call.
- Guarantor loans: If you have a below-average credit score, your lender may ask you to present a guarantor. A guarantor is a close friend or family member willing to partake in the loan’s obligations with you. Now, if you were to default, the onus of the loan’s repayments will fall on your guarantor. Most lenders accept guarantors with a strong credit history and regular income to minimize the risk of default. If you’re sure of your ability to repay the loan, having a guarantor by your side can improve your chance of securing credit. But, bear in mind that these loans have higher interest rates than personal loans.
- Business loans: Business loans can help you finance urgent business expenses or regulate the company’s financial flux. For a business loan, lenders would generally require details of your business accounts.
- SEISS: The Self-Employed Income Support Scheme (SEISS) is a government initiative to mitigate the financial struggle of the self-employed. The SEISS comprises 80% of the average monthly trading profits of businesses over 3 months, capped at £7500. Only businesses whose profits were severely impacted by the pandemic between November 1’ 2020, and January 29’ 2021, are entitled to claim the grant. While you won’t have to repay the grant, the funds will be subject to income tax and national insurance. Thus, businesses taking the SEISS will be required to report it on their 2020/21 self-assessment tax return. Other initiatives rolled out by the government to tackle the COVID-19 downturn include the Bounce Back Loan Scheme and the Coronavirus Business Interruption Loan Scheme (CBILS).
Can I borrow a personal loan if I’m self-employed – bad credit?
It isn’t entirely impossible to avail of a loan with bad credit, but your options may be limited. Besides, with a below-average credit score, you may not be able to qualify for competitive interest rates and better loan terms.
Self-employed loans, no credit check – truth or hoax?
Normally, FCA-authorized lenders would run a hard credit check on you when you apply for credit. If a lender agrees to lend you money without a credit check, there’s a high chance that they will offer you an excessive rate of interest. So, beware of such lenders.
How to apply for online loans for self-employed?
A lender would generally require the following documents to assess your online loan application:
- Proof of identity: A driver’s license or a passport can serve as identity proof.
- Residence proof: A copy of your utility bills or council tax papers that contain your current address can be submitted as proof of residence.
- Tax Returns (SA302): If you’re self-employed, the chances are that you self-file your tax returns. Log into the HMRC website to download your SA301 for the previous 2 years. You can use this to declare your income.
- Bank statement: Lenders use your bank statements to match the earning mentioned in your SA302. Bank statements also give a general insight into your financial standing over some time.
- Proof of rental income (if any): If you have let a property on rent, you are required to declare this income. You can produce bank statements, a signed lease and mortgage documents to prove tenancy.
- Details about your business: The lender would want to understand the nature and status of your business. You should also mention if someone co-owns the business with you, with a financial interest in the business.
Getting a loan can be difficult if you’re self-employed, but if you work on your credit habits, you can increase your likelihood of qualifying for credit, even with scanty options. Remember to compare your options before making the final call.