The impact of the pandemic goes as far as it has derailed the global economy, making it so that nations are yet to recover fully from the downward spiral over a year later. While the pandemic has affected the working populations, it has also reached into the livelihood of many small and big business owners. With lockdown restrictions, some companies had to close their operations due to very low consumer demand.
As people fail to adapt to this sudden change in the economy, the UK government calls upon banks to increase their credit supply for business owners. The lending institutions have, however, contained their granting criteria to reduce the chances of default; thereby limiting access to money for self-employed loan applicants.
Your credit report is a crucial element of your loan application since it helps lenders understand how responsibly you handle credit. For many lenders, a regular income, too, is a pivotal factor that drives their lending decisions. 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!
Should Apply for Self-Employed Loans
Yes, you can apply for a loan even when you are a business owner. However, loan options for self-employed individuals are limited. Under such circumstances, you should only concentrate on the lender’s eligibility criteria to be eligible for a loan.
Several lenders grant funds to freelancers and business owners in order to bridge a portion of the gaps in finances. Providing your credit history is good, a lender may consider you even if you’re self-employed.
Your credit score allows the lender an overview of your relationship with credit. A good credit score reflects your responsible nature with credit. Being able to show a good credit history combined with having a source of income serves to strengthen your application since these also help the lender determine the ability and affordability.
With a heavy application, you’re most likely going to get an increased amount loan at a reasonable rate of interest for a tenure period. Still, in this regard, you would only need to take such an amount as you will have to pay later. Taking based on the amount you’re eligible for, and not what you actually require can get you in a vicious circle of debt.
Personal Loan for Self-Employed People
Personal loans do not have to be used for a specific purpose. You can apply for a personal loan even if you’re self-employed. Additionally, you will not be required to provide an asset as security to be able to receive an unsecured personal loan. A good application helps you get better rates.
Types of Self-Employed Loans
Here are some loan options that you can apply for if you’re self-employed:
1. Personal Loans
Unsecured personal loans are an excellent way to distribute the cost of your purchase over a period through fixed monthly installments without collateral. Personal loans are suitable for self-employed individuals with good credit scores who are in dire need of urgent financial aid. However, though it is possible to avail of a personal loan if someone has a poor credit rating, he will not qualify for competitive interest rates.
Carefully examine your loan options in terms of interest rates and APRs before making one because missed repayments and defaults can have a big impact on your credit score, thus destroying your chances for any other credit in the future. Ensure you pay every month until the loan is paid off.
2. Secured Loans
Secured loans could be ideal for people with some assets that can be put forth as security. Most of them use the equity in their property or house. Now, in case you default on payments, the lender is likely to recover the amount through the sale of your property. You could look at this route if you can’t show much employment history or documented income.
Secured loans have relatively low interest rates, but they also carry a great risk for the borrower. Make sure to consider the pros and cons before taking your call.
3. Guarantor Loans
If you have a poor credit rating, your lender may ask for a guarantor. A guarantor is somebody close to you, such as a friend or family member who is willing to share the obligation of the loan with you. In case of default, it would be passed on to your guarantor, and most lenders accept guarantors with excellent credit ratings and steady income as a way to reduce the chances of defaulting.
If sure of the ability to return the money, then one can get credit with a guarantor to boost the chances of acquiring credit. However, these loans entail higher interest rates compared to personal loans.
4. Business Loans
Business loans can be helpful in financing current urgent business expenses or regulating the company’s financial flux. For a business loan, details of your business accounts would generally be required by lenders.
5. Seiss
The self-employed income support scheme is a government program aimed at reducing the financial struggle of the self-employed. SEISS is based on 80% of the average trading profits in a business over a period of 3 months and is capped at £7500. The grant only covers businesses whose profits were severely affected by the pandemic between November 1st, 2020, and January 29th, 2021.
Though you do not need to repay the grant, the money will be treated as income subject to income tax and national insurance. Therefore, businesses that would receive the SEISS will declare it in their 2020/21 self-assessment tax return. Among the government’s efforts to mitigate the effects of COVID-19 are the Bounce Back Loan Scheme and the Coronavirus Business Interruption Loan Scheme (CBILS).
6. Home Loan
This may not be drastically different from others who are salary earners, however the lenders mostly check the sources of income, stability, etc., differently, for self-employed. Home loans are provided to self-employed, but much more detailed paperwork and better analysis of one’s financial solidity might be considered.
It may be helpful to consult with mortgage consultants who understand more about the challenges of self-employed individuals in connection with home loans.
Borrow Personal Loan for Self-Employed
It is not impossible to avail of a loan, especially with bad credit, but the options would be limited. In addition, having a below-average credit score would not qualify you to get competitive interest rates and better terms on your loans.
Credit Check– Truth or Hoax
Normally, FCA-licensed lenders will pull a hard credit check on you before they extend credit to you. You are likely to get over-charged interest if a lender accepts your offer to lend you money without checking your credit. Be cautious of such lenders.
Apply for Online Loans for Self-Employed
A lender would generally require the following documents to assess your online loan application
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Proof of Identity
A driver’s license or a passport can be used as identity proof.
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Residence Proof
Proof of residence can be provided by submitting a copy of your utility bills or council tax papers, showing your current address.
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Tax Returns (SA302)
If you are self-employed, then you might be filing it yourself. First, log onto the HMRC website and print out your SA301 for the last 2 years. Then you can fill it out declaring your income.
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Bank Statement
Lenders use bank statements to tally the earnings contained in your SA302. Moreover, bank statements provide a broad overview of a person’s position over a long period of time.
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Proof of Rental Income (if any)
If you rent a property and leave it while earning income from the same, then you will have to report that income. You can demonstrate tenancy with bank statements, a signed lease, and mortgage documents.
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Details About your Business
The lender will want to know the nature and status of your business. Also, if you have a business that is co-owned by someone else, they have a financial interest in your business.
Conclusion
Getting a loan is not an easy thing to do if you are self-employed, but by working on your credit habits, you can improve your chances of getting credit, even with limited options. Be sure to compare your options before making the final call.
