How do lenders assess loan applications from self-employed borrowers?

March 07, 2023

As a self-employed individual, getting approved for a loan can be challenging. Unlike traditional employees who have a steady income and employer-provided documentation, self-employed individuals have to provide adequate proof of income and often meet additional lender requirements. However, with the right preparation and background knowledge of necessary requirements, it can be easier than you think to secure funding for business or personal needs. 

In this blog post, I explore the various factors that lenders may consider when reviewing loan applications from freelancers, contractors or SME business owners. Please note, this article is general information only. It should not be interpreted as advice, and some or all of it may not be relevant to your unique situation. 

Your Credit Score

Your credit score is one of the most important factors assessed by lenders. The quality of your credit score represents how well you make payments and repayments on time, based on your history as a bill payer and borrower. You can maintain a positive credit score by paying bills and debt obligations on time, and by keeping debt levels as low as possible. Strategies to improve your credit score include:

• Paying down outstanding balances
• Relying less on credit for cashflow, and 
• Auditing your credit report for any potential inaccuracies.

Your Proof of Income

When applying for a loan as a self-employed individual, lenders will require you to provide proof of income documentation, like everyone else (like bank statements or tax returns). However, they may also require other documents demonstrating consistent income such as invoices or contracts with clients. Therefore, it’s important to keep accurate records and present them in a manner that clearly demonstrates your earning potential.

Your Collateral

Collateral is often used by lenders to secure loans. As a self-employed borrower without traditional collateral like property or vehicles, you may need to offer alternative forms of collateral such as equipment or accounts receivable from clients. Please note, this varies from lender to lender.

Your Debt-to-Income Ratio

Your debt-to-income (DTI) ratio compares  how much debt you have against how much income you make each month or year. Lenders look at this ratio when considering whether or not to approve your loan application, because it shows how much money you can afford to pay back after expenses are taken into account. 

Time in Business

Lenders prefer borrowers who have been in business for at least two years, because this demonstrates stability and experience in managing finances effectively over time. Please note, this also varies from lender to lender.

Your Business Plan

While not always required, having a solid business plan can increase your chances of loan approval as a self-employed individual. A business plan should outline your goals, target market, competition analysis and financial projections. This document shows lenders that you have thought through all aspects of your business and have a plan to succeed.

Industry Type

Different industries have different requirements when it comes to obtaining loans as a self-employed individual. For example, service-based industries may find success with unsecured lending while larger, product-based businesses may benefit from business loans designed specifically for their industry. Please speak with us to learn more about industry-specific lending.

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In conclusion, being self-employed shouldn’t prevent you from getting the funding you need to grow your business. While there are some additional requirements and challenges compared to traditional employees, by understanding what lenders look for in loan applications you can greatly increase your chances of approval. 

Remember to maintain a good credit score, keep accurate records of income, have a solid business plan, offer collateral if necessary, aim for a low DTI ratio and demonstrate stability and experience in your industry. 

6 Reasons Why Self-Employed Borrowers Choose MoneyPlex Instead Of Their Bank (Or Other Brokers)

Finding the right loan can save you interest and accelerate your journey towards home ownership, business success, and financial freedom. However, the wrong loan can lock you into needlessly overpaying for years. Here are just some of the things we do differently to banks and brokers to help you get the right loan for your circumstances:

We understand bank policy for self-employed borrowers

This allows us to choose the right lender(s) for your specific situation and needs, and put forward an application with a higher degree of confidence. We have a comprehensive understanding of additional policies, discounts and/or benefits for specific industries.

We understand loan structuring to avoid cross-securitisation

We’ll avoid restrictive cross-securitisation where possible. And depending on your unique circumstances, you may benefit from offset accounts and other strategies that help you manage cash flow amongst your entities.

We consider your future business opportunities

We’ll recommend a strategic approach to enable future investment opportunity(ies) inside or outside your business. This high-level, future-conscious approach helps you grow faster and with less restriction.

We structure for flexibility and control

We’ll help you structure your loans for maximium flexibility and control, so you don’t have to provide more security than you need to. Say “hello” to more control over your assets.

Our processes won’t make you jump through hoops

We’ll only request the docs and supporting evidence we actually need – not the contents of your whole hard drive “just in case”.

Technology streamlines your journey with us

We use a secure document collection portal and other tech to save time and hassle when providing the docs we need.

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As experienced Mortgage Brokers, Accountants, and Bookkeepers with collective experience of more than 30 years, the team at MoneyPlex has helped hundreds of self-employed professionals and tradespeople get fast approval for the right finance. For more information specific to your situation, request a Lending Strategy Session. 

Disclaimer

The materials printed in this article are provided as general information only. Examples of projected earnings, strategies and techniques are based on the personal experiences and knowledge of the author only and have not taken your unique circumstances into account. As a condition of reading this article you acknowledge that techniques which the author says have brought success may not work as well or at all for you. By reading this article, you agree to hold harmless and indemnify the author and their associates against any losses allegedly caused by your reliance on information contained in this document.