How to get funding if you are self-employed

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Date: 18 November 2021

Phone calculator next to a notepad and pencil

With more than 4.3 million self-employed people in the UK, including freelancers and contractors, many will try to get funding at some point to grow their business. Whether it is for buying stock, adding staff members or leasing vehicles for their business. 

However, being self-employed can come with challenges when getting funding and there is a barrier for those who are self-employed looking for loans from banks and mainstream lenders. This is largely because self-employed income is not always seen as being stable and constant, compared to regular employment. So, to maximise your chances of being improved, there are a few things to include, as highlighted in our guide below.

Present two years of accounts

Typically when seeking funding as a self-employed individual, you will need to show a minimum of two years of accounts. This is a way of demonstrating whether or not you are a responsible spender and have a reliable financial profile. Additionally, it can show whether your incoming payments are sustainable in the long run.

For the self-employed, this can sometimes be difficult depending on the nature of your business. In some cases, your business may not have been trading for two years which means you lack the necessary information. Similarly, if your business has changed structure within the last two years (i.e. from sole trader to a limited company), this will affect your account history.

Demonstrate profitability

Your business model will need to be profitable in order to secure funding - or at the very least be on the verge of generating a profit if funding were achieved. 

Thus, when asking for funding, you will need to show past revenue and demonstrate that your company is indeed profitable. If you are a new business, you will need to present a forecast of the company and how the funding could impact profit.

Good credit score

Those with a good credit score, as with any type of loan, are more likely to secure funding. If you are self-employed and have a good credit score, you are showing investors that you can be trusted with money and can reliably meet repayments.

The better your credit score, the less risk you are to any potential investors. In general, a credit score of 700 or above is considered to be a good credit score.

Your outstanding debts

It is not uncommon for businesses to have outstanding debts, after all, you might be applying for funding to help you get out of debt. But the magnitude of your outstanding debt will be important.

For instance, how far behind are you on your debts? Have you ever been profitable? Will getting funding bring you out of debt? Do you have any IVAs or CCJs? What is your debt-to-loan ratio?

A lender will typically look at what other outstanding debts you have and will want you to be in a position where you are getting better financially and not just adding more debt on top.

Anything you can do to clear your debts, whether it is personal loans or credit cards to help better your financial picture, will only help your application for funding.

Assets or collateral 

If you have any assets or collateral, you may find that there are certain types of secured loans that are better for your business needs. Certainly, if you have property, office space, valuable items (like art or jewellery) or fashion items (like clothing) or even just a ledger of strong invoices that are outstanding, you could borrow large sums against these for your business.

Secured or asset-backed lending may also suit those with a less than perfect credit score, since your eligibility is based on the value of your asset or collateral, rather than your credit history.

However, you should always be aware that any collateral that you put up could be taken by the lender if you are unable to repay the loan.

Copyright 2021. Article made possible by Tudor Lodge Digital.

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