Jasmine Birtles
Your money-making expert. Financial journalist, TV and radio personality.
Borrowing for the self-employed
Kamal Khurana
28th Feb 2020
Being self-employed can be a liberating experience. Think about it: there’s no boss and no commute. You pick the projects you want to work on that really interest you. And that’s only some of the reasons why a growing number of people is turning towards freelancing.
But being self-employed can be a tough gig in many respects. For example, trying to borrow money trends to be a financial nightmare. We share a few tips on how to make it easier.
Credit Cards
Getting a credit card when you are self-employed can be tricky. Banks are much less willing to dole them out if you have a fluctuating income. It certainly helps to have a good credit rating. If not, you could find it difficult to get a credit card and even if you do get one, they might charge you a higher rate of interest.
What would make your credit rating poor? Failing to pay household or credit card bills, loan repayments or rent on time would do that. It won’t help if you have a County Court Judgement (CCJ) against you either. But it can just as easily boil down to failing to get yourself on the electoral register. Make sure you’re registered to vote before you apply for a credit card.
To check your credit rating, sign up for a 30 day free trial with Experian’s Credit Expert service. Clear Score is another free site to do it.
Several providers offer credit cards specifically for self-employed people, but most will have shockingly high interest rates. Unfortunately, these cards are also aimed at people with no credit rating – or those who want to rebuild their credit record. That’s why they have such a high APR. Capital One offers a card at a whopping 34.9% APR – one of the cheaper alternatives.
Don’t bother with credit cards if you can’t pay them off in the interest-free period. Otherwise, the colossal interest will likely cripple your finances.
But if you’re disciplined, they are handy. Use it for 6-12 months – paying off the bill each time – then find a card with a better rate. By then, your credit rating will have become strong enough to get a cheaper deal.
Always compare offers. If you’re not sure where to start, check out our credit card comparison guide for an extensive list of credit card options and borrowing choices.
Mortgages
In the past it was relatively easy for self-employed people to get mortgages. Until the credit crunch. Self Certification Loans (dubbed ‘liar loans’ by some) used to allow you to get a loan without a proof of income. But the new lending rules implemented by the Financial Services Authority require all borrowers to do so.
In practical terms, self-employed borrowers need to submit a minimum of two years’ worth of accounts as their proof of earnings. Some lenders even insist on three years. The change has brought about a new set of hoops for you to jump through to get a mortgage if you are self-employed. It can be tough, but as long as you can verify your income you should have as much chance when applying as anyone else.
You’ll also need to meet these requirements if you plan to remortgage your property. If you’re remortgaging, you’ll likely be in a better bargaining position if you have a positive track record as a result of paying your first mortgage.
Find a specialist broker
If you’re a self-employed borrower with your own limited company, you might struggle to have your mortgage application accepted by high street banks. The way they assess income isn’t very flexible. Most banks and building societies only recognise income that is withdrawn from the business in the form of a salary. This is an issue if you retain earnings within your business as this profit is completely ignored during the loan application process.
In many cases the granting of any sort of loans is decided by a computerised credit-scoring system, stored on a central database. If a lender turns you down, that rejection will show up when you apply for a mortgage elsewhere. They might reject your next application on the basis that you’ve previously had an unsuccessful claim.
You can circumnavigate this problem by seeking help from mortgage brokers. They’ll know exactly what sorts of people the various lenders will consider and may even have access to special deals.
David Hollingworth from London & Country Mortgages (which power our mortgage comparison page) says you should shop around to find the most flexible loan options. He advises that some lenders take into account the difficulties facing freelancers and may offer a mortgage from only one year’s worth of accounts. Those, however, will probably come with a very low loan-to-value ratio. In other words, you’d need to have a lot of money to put down on the property first.
Loans
The good news is that getting a personal loan should prove to be easier than securing a mortgage for most self-employed people. You have quite a few options.
Credit Unions
Credit unions have been growing in popularity in recent years. It’s easy to see why. For someone seeking a small personal loan, a credit union can provide an affordable and flexible alternative to the high street banks.
One of credit unions’ rules is that the maximum level of interest that can be charged on a loan to a member is capped at 2% per month. In many cases the actual rate is much less than this, though. Repayments are also incredibly flexible. There’re no penalty charges incurred for early repayment and you can take out a loan over a period of just a few months.
You have to become a member of a credit union if you want to take out a loan with them. You can find your nearest union by searching FindYourCreditUnion.
Social lending
Social lending – or peer-to-peer lending – is another popular alternative to conventional loans. The nature of peer-to-peer lending means that sites such as Zopa.com can offer better rates to both lenders and borrowers compared to conventional banks.
The way that Zopa works is that lenders make offers at rates which suit them. Borrowers snap up the best ones. This means that if you don’t like any of the rates going, you can always check back to see if they’re offering a more suitable loan deal another day. Zopa is free to join, but they do charge an administration fee. They add it on top of any approved loan.
It’s also worth bearing in mind that Zopa only considers customers with good credit ratings. If you’re trapped under a mountain of debt, skip this one.
Short term loans
Sites such as online pawnbrokers Borro.com offer short-term loans secured against valuables. Think jewellery, luxury watches, fine art, antiques and classic cars. These sorts of lenders can be useful if you need a small amount of money fast. With Borro you can repay early without any redemption fees.
A word of warning: these loans do have very high interest rates. It can be almost 5% a month on loans under £10,000. So you’ll be paying back some hefty interest.
The site 62days.com also offers a good deal. You can sell them an item – albeit for less than you could get for it in, say, a jeweller’s or eBay. You then have the option of buying it back within 62 days for exactly the same price. So if you manage to pay it back within that deadline, your loan is free.
Business Loans
If you’re self-employed, you’re probably running your own business. In that case, you might need a sizeable loan. Securing one can be rather tricky, though.
As a small business, you’ll benefit from high street lenders. They offer small to medium sized loans for around 8-12% interest.
Barclays offers flexible business loans of £1,000-£25,000. You can repay monthly from one to 10 years if the loan term doesn’t exceed the life of the asset. You can also choose a repayment method that best suits your needs – from lower monthly repayments over a longer term to higher monthly repayments over a shorter term.
At HSBC you can get a small business loan from £1,000-£25,000 at 7.9% AIR (Annual Interest Rate). They take an arrangement fee when you draw down the loan. They add it to the AIR to give you the APR.
Mind you, this loan is only open to customers who currently have a HSBC Business Current Account.
Need flexibility?
If you need flexibility, Lloyds TSB has both bank rate linked and fixed interest business loans available. You can borrow as little as £1,000 with no early repayment charge on base rate linked loans. Bear in mind that early repayment on a fixed rate loan may incur on loans over £25,000.
When applying for a bank loan, you need to have a credible business plan and provide cash flow predictions to prove that you can comfortably meet interest and loan payments. You should also be aware that the average lead time is between 3-6 months so you could be waiting a while before your company sees any investment.
Are banks just not the right option for you? There’re other ways.
Social lender
Funding Circle is a social lender designed to provide loans to small and medium-sized businesses. They advertise themselves as an alternative to banks, offering unsecured loans between £10,000-£500,000 on a 6-month to 5-year term.
If your application is successful, Funding Circle will place your business into a risk band. From there, registered investors compete to lend you money. You get the lowest rate possible – and speedy payment. However, Funding Circle do charge borrowers from 1.9% on their loan for their services.
Having a creditworthy business is essential to getting the best loan deal. If yours doesn’t, you might struggle to secure a decent loan. Funding Circle doesn’t lend to new businesses, so if your business isn’t already fairly well-established, try looking elsewhere.
Can u help me if u can
I,de like to know that can I get aloan am self employed so I needed a loan so can I qaulify .
Which country are you in? We can only help with UK residents. If you are a UK resident then you need to have a good credit rating to have a chance of getting a loan. There are more and more loans available for businesses. You could try FundingCircle, for example, although it’s best to try your own bank first. Also, are you sure you really need a loan? Many people who set up a small business think they need money to start it but actually they don’t. It’s better to get advice on how to start without spending any money… Read more »
Contractors from all industry sectors typically hit a brick wall when applying for a mortgage. The truth is that the majority of lenders simply don’t “get it” when it comes to contractors.
At Freelancer Financials, we’ve worked tirelessly over the years to negotiate bespoke underwriting with a number of mainstream lenders and building societies.
This allows us to package and submit contractors mortgage applications based on gross contract earnings without the need to use accounts.
This includes lenders like Halifax, Clydesdale, Leeds and Kensington.