It seems like COVID-19 has been the biggest catastrophe of 2020. But the aftermath of this pandemic is more concerning. COVID-19 has put the economy in, what feels like, an infinite loop of financial turmoil. Nations across the globe are struggling to cope up with this abrupt economic downturn. The pandemic didn’t spare either big or small business.
Ever since March, businesses have either furloughed their employees or have released them from service altogether. A lot of businesses were forced to shut down due to exceedingly low demand from consumers.
The UK government is urging banks to free up more money to provide a larger number of loans, to mitigate the situation of business owners. However, the problem is that not a lot of people can avail these loans. Off late, lending institutions have made their eligibility criteria more restrictive, sieving out a large chunk of loan seekers.
Your credit report is crucial to lenders since this helps them assess your creditworthiness. But self-employed people, indeed, face a harder time getting approved for a loan. Lenders usually seek borrowers with a stable source of income. So, if you’re a business owner, chances are that you have a fluctuating income, where you may make profits for a few months, but may not make a single sale for some others. Now that lenders have stricter lending criteria than ever, will the self-employed be entitled to any help?
In this article, we’ll take a look at the loan options available for self-employed people.
Will I be able to apply for a loan if I’m self-employed?
You can certainly apply for a loan if you’re self-employed. Your options, however, may be limited. You are likely to qualify for a loan if you have a good credit history, as long as you fulfill the lender’s criteria. Your credit history and proof of income help the lender evaluate your creditworthiness and affordability. This can help you get loan offers with favorable loan terms – competitive interest rates and a longer tenure.
Lenders often lend money to freelancers and self-employed people who’re looking to bridge some financial gaps. So, if you can prove that you’ve been responsible with credit in the past, some lenders may look past the fact that you’re self-employed.
What credit options are available for self-employed people?
The credit options available to self-employed people are limited but far from zero. Here are some options for self-employed people seeking financial aid:
Personal Loans: Unsecured personal loans are a popular form of credit. Herein, lenders don’t require collateral security from borrowers. However, personal loan lenders often prefer borrowers with a good credit history. It’ll help you get favorable loan terms with an affordable interest rate.
Secured Loans: A secured loan is one where you use collateral to get a loan. A lot of people use their home equity or vehicle to get this loan. However, if you default on the loan, the lender can seize and repossess the secured asset. So you may be at the risk of losing your only home. You might get a secured loan offer at a lower interest rate compared to unsecured loans. You may consider this option if you can’t provide substantial employment history or documented income.
Guarantor Loans: Getting a loan with an average or a below-average credit score can be difficult. Some lenders may approve your application if you get a guarantor to co-sign with you. A guarantor is a close friend or family, willing to co-sign a loan agreement with you. By doing this, they partake in the loan obligations along with you. Now, in case of a default, your guarantor will be held accountable for the loan’s repayments. Having a guarantor to cover you can increase your chances of getting approved for a loan, provided your lender has a stellar credit history and regular source of income. Bear in mind that these loans tend to have higher interest rates than a typical personal loan.
Business Loans: A business loan can help you tend to urgent business expenses that befall you. To secure a business loan, you’ll have to show your business accounts to the lender. Now the lender may lend you the money at their discretion.
Self-employed Income Support Scheme: The SEISS is a specialized scheme designed to help businesses in crisis. SEISS comprises a series of grants to help self-employed people who have incurred losses due to the COVID-19 lockdown restrictions. The Self-employment Income Support Scheme could cover about 80% of the average profits that you earned, up to £7,500 for the three months. To claim the benefits of the third grant, your business must have been impacted by the pandemic on or after November 1’ 2020. You must apply for the self-employed grant by January 29’ 2020.
Is a loan going to cost me more because I’m self-employed?
Your creditworthiness and affordability mostly determine the cost of your loan. Given that you’ve been responsible with credit in the past and can afford to repay the money you’re planning to borrow, lenders will offer you standard rates. For this, however, you must have a decent credit history.
What additional data do lenders require for self-employed loans?
Lending criteria can differ among different lenders. Following is a list of some documents required by most lenders:
Proof of identity: You can provide your driver’s license or passport as proof of identity.
Residential proof: Your utility bills or council tax contains your address. So, use a copy of either of the two to use as residence proof.
Tax returns (SA302): Self-employed people often self-file their tax returns. After filing your taxes, log into your HMRC account and download the SA302 for the last two years. It acts as proof of income that you declare as a part of your application.
Bank statements: Your bank statement will help the lender validate the earnings reflected in your SA302. It will also allow the lender to see a holistic picture of your financial standing over time.
Proof of rental income (if any): If you’ve let a property on rent, then you’ll have to declare the earnings that you’re making out of it. This includes bank statements and mortgage documents. To provide evidence of tenancy, you’ll need to provide a signed lease agreement.
Details of your business: The lender would be interested in the nature and status of your business. You’ll also need to specify if someone co-owns the business with you, with a financial interest in the company.
These data points are pivotal to your loan application. The lender will base their decision and determine the terms of your loan on this. So, ensure that this information is accurate. Missing out on any critical detail can gravely impact your application, hampering your chances of getting the loan.
Lenders might avoid lending to self-employed loan-seekers as they prefer borrowers with a stable income, over a self-employed person, with fluctuating earnings. While your options may be scanty, it’s not entirely impossible to get a personal loan being self-employed. However, you must assess the pros and cons associated with the credit options carefully.