Being self-employed can be a liberating experience. No boss, no commute, working on projects that really interest you – just some of the reasons why more and more people are turning towards freelancing. However, being self-employed isn’t without its disadvantages, it can be a financial nightmare borrowing money. So here’s how you borrow money if you are self-employed.
Getting a credit card when you are self-employed can be tricky as banks are much less willing to dole them out if you have a fluctuating income. Like with many other forms of borrowing, it helps to have a good credit rating. If not, then you could encounter difficulties trying to acquire a credit card and be charged a higher rate of interest.
You’re likely to have bad credit if you have previously failed to pay household bills/credit card bills/loan repayments/rent on time or have a County Court Judgement (CCJ) against you. However, what is less well known is that not being registered on the electoral register can adversely affect your credit rating, so make sure you’re registered to vote before you apply for a credit card.
If you’re unsure of your credit rating then sign up for a 30 day free trial with Experian’s Credit Expert service for a free credit check.
Several providers offer credit cards specifically for self-employed people, but the majority of these cards have shockingly high interest rates. Unfortunately, these cards are also aimed at people with no credit rating or those who want to rebuild their credit record, which is why they have such high APR. Capital One offers a card at a whopping 34.9% APR – one of the cheaper alternatives.
Only consider one of these self-employed credit cards if you’re absolutely sure that you can pay them off in the interest-free period. If you’re already struggling with debt then these should be avoided at all cost, otherwise the colossal interest will likely cripple your finances.
However, if you’re disciplined it can be worth getting one of these cards, using it for 6-12 months – paying off the bill each time – and then looking for a card with a better rate. By this time your credit rating will have become strong enough to get you a cheaper card.
Our advice is to compare credit card offers. Why not check our credit card comparison guide to find an extensive list of credit card options and the right borrowing choice for you.
In the past it was relatively easy for self-employed people to get mortgages – that was until the Credit Crunch. Self Certification Loans (dubbed ‘Liar Loans’ by some) used to allow you to get a loan without proof of income, but new lending rules implemented by the Financial Services Authority now require all borrowers to prove their income.
These new rules mean that self-employed borrowers now need to submit a minimum of two years of accounts as proof of earnings, with some lenders insisting on three years of accounts. The change has brought about a new set of hoops for you to jump through in order to get a mortgage if you are self-employed, but as long as you can verify your income you should have as much chance when applying as anyone else does.
These requirements also need to be met if you plan to remortgage your property. However, if you are remortgaging, you will likely be in a better bargaining position if you have a positive track record as a result of paying your first mortgage.
If you are a self-employed borrower with your own limited company you might struggle to have your mortgage application accepted by high street banks due to the inflexible way that they assess income. Most banks and building societies only recognise income that is withdrawn from the business in the form of a salary. This presents an issue for those of you who retain earnings within your business as this profit is completely ignored during the loan application process.
In many cases the granting of any sort of loans is decided by a computerised credit-scoring system, stored on a central database. If you are turned down by a lender, that rejection will show up when you apply for elsewhere for a mortgage meaning that your current application could be rejected on the basis that you’ve previously had an unsuccessful claim.
This problem can be circumnavigated by seeking help from mortgage brokers, who will know exactly what sorts of people the various lenders will consider and may even have access to special deals which aren’t generally available.
David Hollingworth from London & Country Mortgages (which power our mortgage comparison page) says you should shop around to find the most flexible loan options. He says that some lenders take into account the difficulties facing freelancers and may be able to offer a mortgage from only one year’s worth of accounts – however – such a deal would likely have a very low loan-to-value ratio. In other words, you would need to have a lot of money to put down on the property first.
The good news is that getting a personal loan should prove to be easier than securing a mortgage for most self-employed people. There are a quite a few options open to borrowers, which should mean that there’s a tailor-made solution to suit your needs.
Credit Unions have been growing in popularity in recent years and it’s easy to see why. For someone seeking a small personal loan, a credit union can provide an affordable and flexible alternative to the high street banks.
One of the rules of a credit union is that the maximum level of interest that can be charged on a loan to a member is capped at 2 per cent per month, but in many cases the actual rate that is charged is much less than this. Repayments are also incredibly flexible – there are no penalty charges incurred for early repayment and loans can be taken out over a period of just a few months.
You have to become a member of a credit union if you want to take out a loan with them, but you can find your nearest union by searching FindYourCreditUnion.
Social lending – or peer-to-peer lending – is another alternative to conventional loans that is becoming increasingly popular. The nature of peer-to-peer lending means that sites such as Zopa.com can offer better rates to both lenders and borrowers compared to conventional banks.
The way that Zopa works is that lenders make lending offers at rates which suit them – the best of which are snapped up by borrowers – meaning that if you don’t like any of the rates going you can always check back to see if a more suitable loan deal for you gets posted on the site another day. Zopa is free to join, but they do charge a £130 administration fee which is added on top of any approved loan.
It’s also worth bearing in mind that Zopa only consider customers with good credit ratings, so if you’re trapped under a mountain of debt then Zopa isn’t a viable way out.
Short term loans
Sites such as online pawnbrokers Borro.com offer short term loans secured against valuables including jewellery, luxury watches, fine art, antiques and luxury & classic cars. These sorts of lenders can be useful if you need a small amount of money fast and with Borro you can repay your money early without any redemption fees.
Be warned though, these loans do have very high interest rates – almost 5 per cent a month on loans under £10,000 at Borro – meaning that you will be paying back some hefty interest.
You can also try 62days.com which offers a good deal because it will let you sell an item to them, albeit for less than you could get for it in say a jewellers or eBay, but then you have the option of buying it back within 62 days for exactly the same price. So if you manage to pay it back before 62 days is out you get the loan for free. Check out the details at 62days.com.
If you’re self-employed then there’s a fairly good chance that you’re running your own business as well. In that case, you might need a sizeable loan to help the running costs of your business, but securing one can be rather tricky.
High street lenders are the best bet for most small businesses, offering small to medium sized loans for around 8-12% interest.
Barclays offers flexible business loans of £1,000-£25,000 in multiples of £250. You can also select a monthly repayment term from one to 10 years, providing that the loan term doesn’t exceed the life of the asset. Also, you can choose a repayment method that best suits your needs – from lower monthly repayments over a longer term to higher monthly repayments over a shorter term.
At HSBC you can get a small business loan from £1,000-£25,000 at 7.9% AIR (Annual Interest Rate). An arrangement fee, currently £100, is taken when the loan is drawn down. This is added to the AIR to give the APR.
It is also worth mentioning that this loan is only open to customers who currently have a HSBC Business Current Account.
For those looking for flexibility, Lloyds TSB has both bank rate linked and fixed interest business loans available. You can borrow as little as £1,000 with no early repayment charge on base rate linked loans, however, early repayment on a fixed rate loan may incur on loans over £25,000. Be aware that Lloyds TSB charges up to 1.5% arrangement fees on all its business loans to cover administration costs.
When applying for a bank loan it is essential to have a credible business plan and be able to provide cash flow predictions to prove that you can comfortably meet interest and loan payments. You should also be aware that the average lead time is between 3-6 months so you could be waiting a while before your company sees any investment.
If you’re finding that the banks aren’t suitable for your borrowing needs then why not try a different option?
Funding Circle is a social lender designed to provide loans to small and medium sized businesses. They advertise themselves as an alternative to the banks and offer unsecured loans between £5,000-£100,000 on a 1 or 3 year term.
After filling out a simple online application form, and if your application is successful, Funding Circle will place your business into a risk band. From there, registered investors compete to lend you money, meaning you get the lowest rate possible and speedy payment. However, Funding Circle do charge borrowers 2 per cent on their loan for their services.
Having a creditworthy business is essential to getting the best loan deal, so if yours doesn’t, you might struggle to secure a decent loan. Funding Circle doesn’t lend to new businesses, so if your business isn’t already fairly well established you should look elsewhere.