Self-employment has increased across all industries and all regions in the UK.
With so many wanting to become their own boss, it is little wonder self-employment business owners are on the rise.
However, not everyone has the funds available to become self-employed, meaning financing is often required in the form of loans. But what are self-employed loans, and how do you obtain one? Here, we’ll tell you everything you need to know.
What Are Self-Employed Loans?
Many people are now choosing the self-employment route, which means many business owners are keen to explore self-employed loans. In simple terms, these are loans that help those wishing to start their own business to finance it.
From starting your own company to becoming a sole trader to becoming a partner, many individuals require self-employed business loans. However, there are a few factors to take into consideration when applying for self-employed loans, the most essential being you are regarded as high risk. This is especially the case if you are just starting out.
Thankfully, numerous lenders on the markets are willing to lend to SMEs, assisting them in securing the finance they require to succeed. This money can make all the difference between failing and creating a successful business.
Those who invest in these loans are able to use the funding as they please, irrespective of whether they are operating as a limited company, sole trader or a partner in a business partnership.
They can apply the funding to anything from new software, new premises, staff payment, or tax repayments. As sole traders or a limited company, you get a much bigger say on how you use your business loan.
These loans are available to high-risk individuals, such as a sole trader with bad credit ratings.
Types of Loan Options Available if You Are Self-Employed
There are many self-employment loans for self-employed people available, some of which we have listed below:
Personal loan options
Looking for a loan without having to put down collateral? This is the one for you. Self-employed people can apply for a personal loan without the need to secure the funding with assets, such as your home, equipment or your car. However, to be applicable for this loan, you must have a good credit score.
Secured loans
If you’re struggling to showcase a good credit score or don’t have an employment history to your name, a secured loan is a great option. This type of loan uses equity against the loan cost. It also offers a slightly lower rate than standard personal loan options.
Guarantor loans
If you’re struggling to get a loan due to having no business history or poor credit history, you may wish to apply for a guarantor loan. What does this mean? A third party, this could be a family member or a friend with excellent credit history, will act as a loan guarantor.
In a nutshell, they are secured to the lender should you miss any repayments. Although a guarantor loan is easier to obtain, it can have slightly higher interest rates. It also runs the risk of falling out with your nearest and dearest if anything is to go wrong.
Business loans
If you require funds to support a new or existing business venture, this type of loan is a good option. The lender will need access to your business accounts to approve you for this type of loan.
How Can I Get a Loan If I Am Self-Employed?
Lenders help self-employed individuals involved in various industries gain access to funds. To ensure you’re eligible for such funds, you’ll need the following:
- Registered with HMRC in the UK
- You must have been in business for a minimum of six months
- Your card sales or monthly transactions should amount to a minimum of £5,000
- You must be over the age of 18.
What Documents Are Required to Apply for a Loan When You Are Self-Employed?
Different lenders will have varying requirements. However, the majority will ask to see the following. It is important to have these to hand before applying for a loan. If you don’t have all the necessary data available, you may be refused the loan.
- ID: This can be your passport or driver’s licence – it needs to show your personal details.
- Address proof: Copies of utility bills or council tax expense
- SA302- tax returns: As a self-employed individual, you must self-file your tax returns. Once submitted, you can log into your account on the HMRC website or finance and leasing association and download this data. You will likely need to show copies of self-employed income dating back two years.
- Bank statements: These are necessitated so that the lender can get a picture of your financial position as a whole.
- Proof of rental income: This will need to be showcased along with evidence, such as mortgage documents or bank statements. You may also be asked to produce any tenancy or lease agreements.
- Business/Company information: This should comprise of the self-employed business owners’ status, as well as details of business partners.
What Can a Self-Employed Loan Be Used for?
There are many uses for loans within the self-employed business and personal world. From funding new software to building an app, to hiring new employees, to setting up a new venture, throughout the necessary checks, the lender will likely ask about your circumstances, as well as a solid business plan.
There are a set few limitations associated with the different types of loans:
Personal loans:
- Certain lenders will stipulate that you must not use a personal loan for business usage, for example, starting a new venture. For this, a business loan is more suited.
- If you wish to purchase a home, using a loan as a deposit isn’t the most sensible idea as it won’t look great to a mortgage provider. It could be the reason they say no to your mortgage.
- Similarly, using a loan to cover house bills or home improvements isn’t a great idea, as it could suggest you’re already struggling to make simple repayments within your personal situation.
When a lender asks what you will use your loan for, it’s essential to give them honest answers. This will help them to determine the money is being used to fund the right projects and that you’re personally liable for the loan. This is when setting up a separate business bank account comes in handy.
Business loans:
If you wish to utilise a business loan for personal usage, you will likely need to secure it with some sort of collateral, for example, a business vehicle, a building or a guarantor.
Do I Qualify for a Self-Employed Loan?
If you hold a good credit rating and you’re able to meet the lender’s requirements, as well as provide the relevant documentary evidence, there is little reason why you won’t be applicable for a self-employed loan.
What Are the Costs of a Self-Employed Loan?
From interest rates to fees and repayment terms, there are numerous costs to consider when it comes to self-employed loans for sole traders.
However, if your credit score is less than average and your eligibility criteria don’t meet the correct standards, you will likely face steep interest costs. Be sure to compare fees with other lenders before signing on the dotted line.
Can I Get a Self-Employed Loan If I Have Bad Credit?
Although challenging, it is not impossible to acquire a self-employed loan if you have a bad credit history. There are, in fact, lenders who focus solely on those who are struggling to get standard business loans.
These providers will analyse your business performance to determine whether or not you are eligible for self-employed finance. After all, they are taking a risk and need to know whether you are in a position to make the necessary payments.
Who Provides Self-Employed Loans?
Self-employed people, even those with a bad credit rating, can find loans just like those who are employed. Many banks offer loans for self-employed people, or you can use a specialist online lender.
As a self-employed sole trader, you can enlist the help of a professional to help you find the best loan for your current needs and ensure you are getting the best deal.
Final Thoughts
As a self-employed business owner, the ideal scenario when it comes to applying for a loan is to source one that is unsecured. Why? Should anything go wrong, your assets are not at risk. However, you will be privy to higher rates of interest. If this is your first time applying for a loan, for best results, start with a short-term loan as opposed to a long-term loan.
Whether you’re looking to borrow money in the sum of £1,000 or £500,000, there are numerous options to choose from, many of which boast flexible loan repayments and timescales.
FAQs
How soon can I receive my self-employed loan?
Whether you wish to invest in secured loans for debt consolidation or invest in new business assets, knowing when you will have access to cash is an important part of borrowing money. As the saying goes, ‘you need to spend money to make money,’ having quick access to cash will assist with an array of business purposes.
Providing you meet the correct criteria and fill in the required forms, including your contact details and business registration number, you can access your cash within 24 – 48 hours. This is dependent on the provider you choose.
How much can I borrow if I’m self-employed?
In most cases, a business can borrow up to 4.5 times your annual income. The more you borrow, the higher your monthly repayments and the higher the interest rate will be. Therefore, it is essential only to borrow what you can afford.
This is when having separate accounts for both business and personal use comes in handy as it avoids confusion. Keeping your accounts separate will help you to keep your business and home life organised and makes it easier when it comes to tax returns.
What can I show as proof of income if self-employed?
- Bank statements: These business statements will give lenders an indication of incoming and outgoing payments over the years, whether you’re investing in equipment for the company, paying wholesalers or receiving payments from clients.
- Annual tax returns: Your yearly tax return is proof of profit generated over the year.
- Business loss and profit statements: These statements will show the lender how successful your business is and whether the money being borrowed will be used correctly.
Will I need to provide security to secure a loan if I’m self-employed?
Unsecured loans don’t necessitate collateral. Traditional examples of these types of loans include personal loan options, credit cards and student loans.
To be applicable for this type of business loan, the financial services register requires both your word and your creditworthiness. Due to this, these loans often come with a higher interest rate as you (the lender) are seen as high risk.
What amount of tax can I expect to pay if I’m self-employed?
The majority of self-employed business owners will pay Class 2 NICs.
This does vary and depends on your total earnings. Visit the HM Government website for more information on taxes for the self-employed.