Australian small businesses make an important contribution to our economy. Small business owners are often more financially secure and have a much greater potential to scale their income than people who work as employees.
BY ROLF SCHAEFER
However, self-employed people often face hurdles when applying for a loan because, unlike employees, they don’t receive a regular salary and therefore don’t fit lenders’ standard credit assessment criteria.
The three main obstacles that a self-employed loan applicant faces are proving their income, demonstrating a capacity to repay the loan on time and being in a good net asset position.
In applying for a fully documented loan it can be difficult for the self employed to prove their true income, as our taxation system allows them to offset their expenditure against their income and only declare their profit once a year.
Many lenders will require evidence of income in the form of certified financial statements, which include balance sheet and profit and loss statements, as well as certified taxation returns for the borrower(s) and their business and/or company.
Lenders want to see at least the previous two financial years of good profit and increasing income. Self-employed applicants often have erratic revenue, may be vulnerable to economic decline, may incur rising operating expenses and be affected by changes in market movements – so they need to demonstrate their income over a longer period of time than an employee.
In conjunction with assessing your income, lenders have an obligation to verify your ability to service the loan, as well as other liabilities you may have. Therefore, in addition to providing the abovementioned financials, you may be required to supply interim financials and/or a statement of income signed by your accountant to support your loan application.
The lender may also require information about your business, such as the length of time it has been operating and its specific nature. The longer you have been self employed in the same business, the better it is for your application.
If you have changed business but still work in the same industry, your application may still be considered providing it’s supported by relevant financials for each business. But if you have been self employed across multiple businesses and industries within a short period of time, it’s highly likely that you’ll need to wait until you have financials for at least two years in the same business before you are eligible to qualify for a home loan.
As well as being able to demonstrate sufficient income to repay the new loan, lenders will look at the strength of your asset position. If your business generates a good profit, but you own no assets of significant value, the lender will question what you do with your money. They may think that you are not sufficiently disciplined to develop an asset base.
When you purchase a property, you need to have sufficient funds available to contribute to the deposit and cover the purchase costs, for example, mortgage and/or transfer stamp duty. An application which shows a consistently good savings history will generally be considered more favourably than one where there is no evidence of savings. Alternatively, savings in the form of payments to an existing loan may be demonstrated by equity in a property you already own.
If you will have difficulty meeting the assessment requirements for a full documentation loan, then a low documentation loan may be more suitable. Low doc applicants need to fully disclose their assets and liabilities and self-declare their income by signing an ‘income’ or ‘borrower’ declaration form. The Australian Taxation Office has data matching capabilities and is able to detect inconsistencies in declared income and reported taxable income.
Rolf Schaefer has a wealth of knowledge about property investment, property finance and complex structures. His ‘can do’ approach has helped many property investors through the finance maze. Rolf has rated among the top Australian Mortgage Brokers for the past five years. For more information about Rolf visit www.metropolefinance.com.au.