Can you get a loan if you are self-employed?

What types of self-employed loans are available?

There are several different types of loans for self-employed individuals. Always check the self-employed loan eligibility criteria before applying.

Why might you need a loan if you are self-employed?

You might take out a self-employed loan to help cover bills and expenses, consolidate debt or help set up or expand your business.

If you’re using the funds for business purposes rather than personal reasons, you’ll need to apply for a business loan.

Because your income tends to fluctuate when you work for yourself, it can be harder to manage your finances, which is why you might need a loan.

You might use your self-employed loan for:

• Car expenses: To cover the cost of new car tyres or buy a second-hand car so you can drive to meet clients.
• Home improvements: Self-employed loans can help you pay for essential repairs to your home, such as electrical issues or water damage.
• New appliances: Maybe you need help spreading the cost of a new washing machine or fridge-freezer.
• Consolidating debt: A loan can help you consolidate existing debts into one monthly, manageable repayment.
• Your wedding: If you’re getting married, a loan can help you cover the cost of your big day.
• Business equipment: A business loan can help you pay for essential stock and equipment for your business.

How to apply for a self-employment loan

There are several steps you should take ahead of the self-employment loan application process to increase your chances of getting the loan.

Prepare your documentation

The documents a lender will ask for can vary, but in general you’ll need to provide:

• Proof of ID: Such as a passport or driving licence
• Proof of address: Such as a recent utility bill or council tax bill
• Bank statements: Lenders will ask to see bank statements from the past three months to get an idea of your monthly outgoings and income.
• Your tax returns (SA302): To do this, you’ll need to log into your HMRC account and download your SA302 calculation for at least the past two years. This is required for income verification.
• Details of your company or business: You’ll need to provide the status of your business and the details of anyone else with a financial interest in your company.

Lenders will examine these as part of the loan underwriting process.

Compare your options

Loan comparison tools enable you to compare your options from several different loan providers to help you find the right deal.

Things you should look at include:

• The interest rates, any application fees and how much you could borrow.
• The loan repayment terms. Choosing a longer term can reduce your monthly repayments but will mean you pay more interest overall.
• The loan processing time – some loan lenders will transfer the funds the same day, while others might take longer.

Check your eligibility

Loan approval criteria can vary from lender to lender, so check the loan terms and conditions to make sure you are eligible. You’ll typically need to be a UK resident and at least 18 years old.

Generally, the higher your credit score and the more stable your income, the more likely you’ll be accepted for a self-employed loan.

Many lenders now offer eligibility checkers that let you see how likely you are to be accepted for a particular loan and it won’t impact your credit score. This can reduce the chances of you being rejected for a loan.

Challenges of securing self-employed loans

It’s important to be aware of self-employed loan risks and rewards before you apply for a loan.

While a self-employment loan can provide you with essential funds, having an income that fluctuates from month to month can make it harder for lenders to assess how likely you are to repay the debt.

When looking at your application, lenders will consider your debt-to-income ratio. This is how much debt you owe compared with how much income you have coming in.

If you already have a lot of debt to repay and this is taking up most of your income, lenders might be reluctant to let you borrow more.

Make sure you know what the loan default consequences are. If you miss loan repayments, you could be charged a fee and your credit score will drop. The lender might also start debt collection proceedings or take court action against you.

If you have a secured loan for self-employed people, you risk losing the asset you used as security.

Are there other forms of funding to consider when self-employed?

There are several other self-employment borrowing strategies or funding options to be aware of before deciding whether a loan is right for you.

Tax relief

As a self-employed worker, you can deduct certain expenses from your profits to minimise your tax bill. This will leave more of your hard-earned cash for yourself. Make sure you use every tax relief you can, otherwise you’re just giving the government money that’s rightfully yours.

Tax allowable expenses include:

• Office costs, such as stationery and phone bills
• Travel costs, including buying and maintaining a bicycle, not just cars and vans
• Stock and raw materials
• Business premises costs, such as heating, lighting and business rates
• Marketing and advertising costs
• Financial costs, including bank charges, loan interest and business insurance
• Business training courses

If you use something for business and personal reasons – for example, your mobile phone – you may be able to claim a proportion of these costs. View the full list on the gov.uk website.

Grants

If you’re after funding for your business, it’s worth checking if you qualify for a grant. These are often offered by public sector and charitable organisations.

Unlike loans, they don’t need to be repaid, but they are often targeted at specific industries, community groups or business types so can be harder to qualify for.

The following websites could help you find a business grant:

• Your local council website
• Government’s Find a Grant website
• Local Enterprise Network website
• Scottish Enterprise
• Business Wales
• Invest Northern Ireland

Credit cards

Credit cards can be useful for borrowing a sum of money up to say £3,000 or £4,000 depending on your credit limit. They let you borrow as and when you need to. Repayments are flexible – you can repay more than the minimum each month.

If you qualify for a 0% purchase credit card, you could spread the cost of your spending interest-free over many months.

Alternatively, 0% money transfer credit cards enable you to move money from your card into your bank account and then use the funds however you wish. Just watch out for the transfer fee (usually around 4%) and pay your balance in full before the 0% period ends.

Self-employment loans: FAQs

Are self-employed people less likely to be accepted for a loan?

Self-employed loans can be harder to get accepted for because self-employed workers tend to have a fluctuating income, which can increase the risk of repayment difficulties.

Use self-employment approval tips, such as ensuring you have up-to-date accounts and improving your credit score. These can increase the chance of you getting the loan you want.

Are loan rates higher for self-employed people?

There’s no reason why loan rates should be higher for self-employed people. You’ll need to show you can afford the repayments, have a regular and steady income stream and have a good credit record.

However, if you have poor credit, you’re more likely to pay a higher interest rate.

What is proof of income?

Proof of income refers to the documents you’ll need to supply to the lender to prove how much you earn. You’ll need to provide bank statements as well as your personal tax returns (SA302), or your business accounts, for the past two to three years.

Summary: Getting a loan while self-employed

If you’re one of the 4.3 million self-employed people in the UK, there’s a chance you might need to borrow funds through a loan at some point.

Getting a loan when you’re self-employed is certainly possible. Make sure you have your business accounts in order and take steps to boost your credit score before applying. Only ever borrow a sum you are confident you will be able to repay. Make sure you understand your loan repayment options.