Its fair to say that, over recent years, many lenders have expected self employed borrowers to prove their income by way of the last two or three years trading accounts. Whilst it’s true that a decent set of trading accounts will give borrowers more options, in the second charge / secured loan sector that approach has softened and there are more options open to the self employed than you might think.
Self employed less than 1 year
Self employed secured loans are available for borrowers who have been trading for a minimum of six months. Lenders will ask to see management accounts – plus projections – from the accountant but the rates and types of secured loan available are more restricted than those offered to self-employed applicants who have a profitable, established business. If you can wait until your first years trading is complete you are likely to find more choice and lower rates.
Self employed more than 1 year
Whilst accounts will strengthen any application a number of lenders will accept SA302’s as proof of income – sometimes backed up by bank statements. Often the latest accounts have not been prepared – explain this to an adviser and they can also look at lenders which will accept projected profits from your accountant.
Salary, dividends and retained profit.
Those borrowers who have set up a limited company structure will be used to lenders judging their income based on their salary and dividends. If profits were retained in the business lenders would ignore them as they are not being drawn as income. However, common sense is prevailing with some lenders which now add back retained profit in to the affordability calculation – just because business owners have not stripped out profits in the past why should they be penalised if they wish to do so in the future to service their proposed debts? This is a sensible bespoke underwriting approach to offering secured loans for self-employed customers rather than a blinkered rules based attitude.
Loans to limited companies – including start ups or where bank debt has been called in
Those who are trading through a limited company can take out business loans secured on their homes or on business premises they own. These have proved useful for those declined by the high street due to insufficient trading accounts or a poor credit history.
We have seen scenarios where lenders have taken a third charge which allows self-employed borrowers to retain their competitive first and second charges and borrow less at the higher business interest rates. A third charge is also helpful where the bank (sometimes holding a second charge for an overdraft) want its debt reduced. Rather than recalling the whole debt, which could scuttle the business, we have arranged loans to simply keep the bank at bay whilst the business either restructured or improved trading.
Where borrowers are starting a new business in a limited company, our lenders will lend in scenarios the high street lenders would never consider.
Many contract workers are penalised because they move from one job to another, despite enjoying virtually continuous employment – or should we say self employment?
Whilst most lenders are nervous of this scenario, we have lenders which recognise the transient nature of the contractor’s role and effectively treat them in a similar manner to employed borrowers. Of course they will be looking for stable and regular income but are sympathetic to people who move contracts or even move industry. Explain your situation to a Promise Money adviser and they will approach the lenders most likely to accept your application at the best rates we have available.
Landlords, Buy to Lets and HMO’s
In the BTL sector raising capital for deposits or to refurbish properties has become tougher due to changes in tax laws and regulations which more rigorously test affordability.
The second charge sector has reacted in a number of ways with some prime lenders reducing their rates, offering 5 year fixed rates and allowing additional earned income to be used to support shortfalls in the rental coverage. More cases are now being accepted as a result of these changes.
Some lenders are also less affected by regulations so can offer more generous affordability rules which are not available in the mainstream mortgage market.
Self employed with credit problems
Many self employed people suffered during the credit crunch and damaged their credit history whilst trying to stay in business. Some even went out of business. A bad credit history is not a barrier to the self employed provided they can afford the proposed loan now and have property to offer as security.
Mild adverse credit can be catered for at prime rates although heavy adverse is also acceptable up to 75% LTV.
Some self employed people have been forced to resort to debt management during the downturn resulting from the credit crunch. Lenders will now consider borrowers who are keen to repair their credit history by paying off debt management plans, allowing them to access the mainstream remortgage market sooner. This may not always be good advice so options also exist to keep the debt management plan in place provided it is being adhered to. Even IVA’s and bankruptcies can be cleared from the proceeds of a loan where it is suitable and affordable.
Summary for self employed, limited company owners and contract workers
If you have been turned down for a mortgage, an unsecured loan or a further advance, talk to a Promise Money adviser. Even if you have been accepted it is always worth comparing what is available as greater choice may be available to you from the second charge loan market.
Overall, the second charge secured loans sector is generous to self employed borrowers because of the appetite for manual underwriting combined with the tenacity and expertise of a specialist broker who knows the finest detail of their lenders criteria and is not afraid to present a case where common sense should prevail.
Speak to an adviser to submit an enquiry for them to work on for you.