Self-employed people struggle to get funds for their businesses. It is due to the perceived lack of financial stability or a regular income. Creditors face challenges in analysing affordability in this case. A loan provider usually prefers to lend to individuals with a fixed income, even when their irregular income exceeds their stable income.
You may get loans for the self-employed from a direct lender if you have a good business plan and years of expertise. The blog discusses why the self-employed struggle to get a loan. Let’s first understand the basics.
How many self-employed individuals struggle to get a loan in the UK?
According to Tink.com, “Over a quarter (28%) of the UK’s self-employed struggle to access the financial services.”
Most self-employed individuals prefer other ways to finance business needs. They believe that they may not qualify for one due to inconsistent income. However, that’s not true. Finding the right loan provider for your needs may help.
Contact a business loan broker who analyses your situation and connects you with the right loan lender. He may also help you with the aspects that may increase the loan approval chances. Additionally,
“31% of self-employed believe that having a mortgage affects their affordability for other loans and credits.”
Why is it hard for sole traders to get loans?
Access to finance has always been challenging for the self-employed. Applicants struggle to reveal their affordability despite consistent income. It is the nature of the employment that affects the loan approvals. Here are other reasons impacting the loan approval for the business:
1) Lack of asset security
Self-employed individuals lack assets to provide as collateral. It further limits their chances of qualifying for business loans. Most beginning companies could hardly save cash. Asset allocation is not possible at the early stage. Having a low operating history, inconsistent income, and no assets leads to immediate loan rejection.
2) Mixed financial statements
Self-employed individuals, at the beginning of their career, don’t open a separate business account. The reason could be low sales or the number of clients. However, this also affects the loan approval. Most loan providers struggle to define the actual affordability due to mixed finances. You cannot reveal your business expenses with personal ones. It leads to an immediate rejection.
3) Share 100% liability for the business loss
Self-employment is a sole proprietorship business. One person runs it, and hence, he is liable for the profit and loss. It eliminates security, as in the case of a partnership business. In that case, the other partner is liable to repay the dues if the company cannot. Thus, the self-employed struggle to qualify.
4) Low personal and business credit rating
One must ensure a good personal and business credit rating to get loans for the self-employed. However, freelancers with limited operating history, too much debt, and multiple personal and business expenses lack a sound credit score. It further limits their ability to get instant funds for their needs. Aspects like a zero-business credit rating with poor personal financial management also affect the approval.
5) Non-updated taxation and other documents
Most self-employed individuals struggle to qualify for business loans due to old details that persist on their records. They check your business registration proof, business address, and Personal identity proof before providing a loan. Moreover, you must have an updated copy of the self-assessment that you recently filed.
Are loan rates high for self-employed borrowers?
No, a self-employed individual doesn’t need to get a high-interest loan only. The loan interest you get depends on a few factors, like-
- Financial circumstances
- Credit history
- Possibility of the borrower covering the payments
If you can repay the loan timely and share a stable financial profile and credit, you may get a low-interest loan. Alternatively, you may be rejected or face a high interest rate on a loan. This is because the loan providers would like to cover the loss by setting high interest rates.
How to improve your chances of getting loans for self-employed people?
The loan provider may want to know how much you can afford to repay on a loan. Thus, you must provide a detailed overview of your income sources or revenue. Provide bank statements, latest clients or invoice statements, dividend income, etc. It reveals your potential to repay the dues.
Hence, you may qualify for the self-employed loan. Here are other ways to improve your chances of getting loans for self-employed people from a direct lender:
- Create a separate business bank account
It is one of the most important parts to consider before getting a business loan. If you want to improve your business credit history and reveal reliability, the new business account helps. Use it for your business-related expenses only (for at least 6 months).
Consistently using it for the supplier’s payments, up-stocking goods, office rent, etc., helps. You may witness an improved credit history after some time. However, do not use it for personal use. Moreover, stay away from costly credit cards for the time being.
2. Halt big financial decisions momentarily
Most self-employed individuals seek a mortgage soon after starting a business. It helps them own a house at the right time. However, getting a business loan with a mortgage is challenging. It is because you must pay a huge portion of your earnings as a monthly payment on a mortgage.
It limits your potential to pay for the business loan repayments. Thus, you may not qualify. Therefore, if you don’t have a mortgage right now, wait for some time. It is especially important if you need a lump sum to fund your business needs.
3. Prepare your business plan
A business plan is critical to getting a loan as a self-employed individual. It explains your motive and the purpose better. Make sure your company goals align with the business goals. It must define your business goals, target market, competition, and purpose.
Check the executive summary and market research and update it according to the current business progress. Here is what you must check before applying for a business loan:
- Provide a concise overview of your company and business
- Outline your short and long-term goals
- Analyse your target customer profile and reconsider changes
- List the products and services you provide
- Include updated income statements, balance sheets, and cash flow statements
4. Pre-qualify for a business loan
If you want to eliminate any risks of affecting your credit score, pre-qualify with the loan provider. It involves a basic credit assessment that helps you know the approximate costs. It helps you understand whether you may qualify.
It is generally ideal for urgent or emergency business needs. You may get quick business loans with no credit checks in the UK marketplace. It will help you get the right loan that meets your budget and affordability. It helps you meet your business needs without waiting for the cash flow from your clients. It helps you under any money constraints.
5. Improve your credit score
Identify your credit score and research the required one. It may differ according to the different providers. Analyse your current credit score and how you can boost it a little. The improved one is the surefire route to get business loans immediately.
Consolidate the existing debts if you struggle to pay. Secondly, update your credit report and check for delinquency. Don’t forget to check and update your personal credit score as well. It also affects the loan applications.
Bottom line
Getting a loan as a self-employed is challenging. It is due to irregular income, low operating history, and unclear finances. Begin with splitting your personal and business expenses. Set up a different account for the business expenses. Always be on top of your tax liabilities. Providing a legal and updated one may help you get instant approval.
