An increasing number of people are choosing to work on their own rather than working for someone. The millennial generation wants to break free from the usual and hectic 9 to 5 grind by creating employment for themselves. Starting or running your own business is pretty exciting and may bear results if everything goes as per the plan. With the evolution of time, people are now more focused on controlling and mastering their career. However, it is not a joy ride as there are a lot of risks involved in it.
If you’re self-employed, a freelancer, or a contractor, getting access to finance has always been difficult. It’s almost as if the financial system wants to penalise you for having a go on your own, even though that when you’ve built your business, you could earn far more than the national average.
If you’re self-employed, Loan Broker has prepared this special guide for you about the best way to get access to finance. In this article, we’ll cover:
- What is a self-employed loan?
- Why do fewer lenders want to work with them?
- How to prove your income?
- How much can you borrow?
- What happens if you have bad credit?
What is a Self-employed Loan?
For most lenders, someone who is self-employed earns the majority of the money they earn not from an employer. When you work for an employer, you get paid at the end of every week or month and receive a payslip showing how much money is being deducted for tax and National Insurance.
Someone who is self-employed will generally send an invoice to their clients to get paid. They receive payment directly from their clients with no deduction made for tax and National Insurance. On 31st January each year, a self-employed person has to submit a Self-Assessment form and pay their taxes and National Insurance. A self-employed person may be a sole trader, a member of an unincorporated partnership, a member of a limited liability partnership, or a director of a limited company in which they own shares.
A self-employed loan is a personal loan that the individuals can borrow without any collateral. The repayment period may last up to 7 years depending on how the borrower chooses to repay the amount. Also, a borrower may choose to take out a small loan amount from £100 to £1,000 and repay it within 12 months.
Why Do Fewer Lenders want to Work with Self-employed People?
The reason that self-employed people generally have fewer lenders who want to work with them is because lenders only really see risk. An employed person gets a regular wage every month meaning that, once all the bills have been paid, a lender can then see how much is leftover that can be used for making loan repayments.
Some lenders require that all borrowers to be in full-time employment and a few of them will actually ask for payslips as evidence that a borrower receives the salary they claim on their application form. Lenders now have to be very careful to check that all borrowers can afford to make repayments.
If you deal with a lender or a broker who guarantees that they don’t need any further documentation from you before you apply, this is potentially a scam. Please stay well clear and stay safe.
How to Prove your Income?
A few lenders have begun linking to borrowers’ bank accounts so that they can get a clear picture of how much a self-employed person earns and how much they spend before they make a decision. It’s “read-only” access so they can see your statements and your balance but not much more – they can’t make any changes. Other lenders will ask that you send them recent bank account statements and bank deposit statements so that they can verify the income you claim to be making on your application form.
How Much Can you Borrow with a Self-employed Loan?
Self-employed loans are mostly borrowed to cover financial emergencies. If you want to borrow a short-term loan, lenders may allow you to choose an amount from £100 to £1,000 – which needs to be repaid within 12 months. If you want to borrow a loan for a much greater amount, say £1,000 to £35,000, then it needs to be repaid within 7 years. However, the amount that a lender can allow you to borrow depends on several factors:
- Credit Score
- Your annual/monthly income
- Your annual/monthly expenses
- Availability of a guarantor
How to Borrow a Self-employed Loan with a Bad Credit?
When a lender is making a decision about whether to give a loan to a borrower, there are two things they take into consideration – the details you submit on your application form and your credit report. Your credit report shows them how well you’ve been paying your bills (including any other loans or credit cards you have out now), how big the balances on your credit cards are compared with your limits, and so on. Your credit report shows a lender how reliable you’ve been in the past making repayments and meeting your obligations.
Most lenders are interested in who you are now and your current personal and financial circumstances – not who you were five or six years ago when you may have had a few money struggles. Although all lenders take credit history into account, it matters much less to lenders than it does to banks and mainstream financial institutions. For a self-employed loan, what you need to focus on the most is proving that you can make the repayment in full on the date agreed.
We’re a broker and not a lender. Lenders work with brokers like because they trust us to make sure that we only present them with loan applications from people they want to work with. When you apply through us, we match your details to the lender with the borrower profile closest to you and your current financial circumstances.
The whole process takes seconds – if you need money now, we’re able to work just as fast on your behalf as if you’d applied to a lender directly yourself.
We’ll gather up the quotes we get back from the panel of lenders and present you with the information you need to make a decision on the right loan for you. You’re under no obligation to take out any loan we find for you. We never charge for our service, regardless of whether you take out a loan we find for you or not.