Gaining finance as a business owner
It can oftentimes be challenging for business owners and the self-employed to obtain finance. However, there are a number of steps you can take to make sure the banks will assess you favourably when you are trying to obtain your next loan.
For regular wage earners, getting finance can often be as simple as submitting two payslips to your lender or mortgage broker. However, business owners and people who are self-employed are faced with a far more arduous process when looking to obtain finance from both banks and lenders.
The issue for self-employed borrowers is that more often than not, they have irregular income and for lenders, this can be a problem.
One of the ways lenders get around this issue is to insist that a borrower completes two years of tax returns. This way they can accurately assess the applicant's ability to pay back a loan, based on their monthly average income.
This means that to obtain finance in the first two years of business, at a time when costs are also likely to be at their highest, can be tricky for business owners. Fortunately, for the self-employed, there are other options out there.
Andrew Woodward, Founder of The Investors Way, suggests that self-employed people are able to get finance, but need to be on top of their financials.
“The most important tip for a self-employed person looking for finance is to ensure that your records are up to date and accurate. This includes your business tax returns, BAS returns and your personal tax returns.”
“Unlike an employee, you aren’t able to produce a regular payslip, so having up to date and accurate tax information is crucial in demonstrating your ability to meet the loan repayments for the amount you are seeking.”
Outside of regular full-doc loans, there are also various other options that self-employed people can look at depending on their situation.
“There is also the option of low doc loans that some lenders offer, although they are less common now with the change to responsible lending requirements. Low doc loans tend to look at different financial measures to determine your suitability for a loan. It is normally a requirement that you have been in the particular industry for a minimum of 12 months.”
“It is helpful if your other debts are minimal, ie credit cards, store cards, car loans. These types of loans will impact your borrowing capacity and the bank's view of your suitability. Get help from a professional, like a mortgage broker. A broker will be able to guide you through what is required and assist you to present your application in the best way possible based on your circumstances.”
Mr. Woodward also says it’s important to have consistency in your earnings and paying yourself out of your business on a regular basis is something banks like to see.
“Another way to show your suitability is to be in the habit of paying yourself a wage. Having a consistent wage from your business is a good way to show consistency. Any additional cashflow that becomes available can be seen as a bonus, which can also be used by the bank to consider suitability and capacity to pay.”
Canstar Financial Expert and Chief Spokesperson, Steve Mickenbecker believes that it is important to understand the three areas that the banks will be assessing self-employed borrowers on.
“We have to remember that there are around three million people in Australia running their own businesses and they are not all locked out of the home loan market by any stretch of the imagination. So it’s not an insurmountable problem,” said Mr. Mickenbecker.
“When you look at lending, it has to stand up on three criteria. Firstly you need to stack up in terms of your income and expenses. Secondly, you need to offer the bank enough security. And that means you have enough equity. And the third is that you have a good credit record.”
“That’s the same, whether you’re self-employed or not. The only problem is that self-employed people often have trouble proving that they do have that surplus of income over expenses.”
“If you’re going to make it more challenging for the bank to get comfortable with your income and expenses, make sure you’re strong in terms of your security (deposit) and credit record.”
Mr. Mickenbecker also suggests that there is a lot of value for business owners to build a relationship with the one bank.
“It can be a good idea to stay close to your bank. Work out where you want to borrow and bank for your business there. That way the bank can look at all your records and see that there is enough cash low and they can get themselves comfortable. But don’t be totally limited by that.”
“It’s always a bit suspicious to a lender if you have your business banking somewhere and you’re looking elsewhere for another loan.”