What Loans May I Apply for When I’m Self-Employed?

Since the financial crisis of 2007–8, banks have been warier of lending to individuals who can’t demonstrate a solid financial track record. This can prove especially true if said individual is self-employed.

Nic Redfern Last updated on 17 November 2020.
What Loans May I Apply for When I’m Self-Employed?

Self-employed people often have income that fluctuates from month to month. But as more and more of the UK workforce turn to self-employment, so competing providers have identified and sought to tap into an expanding market.

It can prove trickier to secure a loan if you’re self-employed, but if you understand the process and what lenders are looking for then there’s no reason you shouldn’t have a variety of options open to you.

What types of loans can I apply for when I’m self-employed?

Broadly speaking, there are three types of loans that you may wish to apply for as a self-employed individual.

Personal loan

You can apply for a personal loan without needing to secure the amount you’re borrowing against an asset you own. Personal loan acceptance will be based on your credit profile and financial information.

Personal secured loan

A secured loan is a personal loan that leverages the equity in your belongings as security against the cost of the loan. A secured loan could be a mortgage or it could be another form of finance secured against a valuable asset, such as a car. It generally can have a lower interest rate than an unsecured loan, or may enable you to access a higher loan value than would be available without the additional security for the lender.

Business loan

If you’re self-employed and need funds to support or launch your business, a business loan could be right for you. The provider will check your business accounts to form an understanding of your business’s finances to decide whether you would be a reliable borrower

If you want to learn more, read about the reasons why a business loan could be right for you, and be sure to check out our ultimate guide to business loans.

How to apply for a loan

The application process for a loan is similar for those who are employed and self-employed. However, you might need a few more pieces of paperwork if you’re self-employed, with regard to your income and business.

1. Documentation

Providing the lender with your financial documents helps them assess your eligibility for a loan. They will need to see some or all of the following:

  • SA302 (tax return), which you can download from your HMRC online account
  • Bank statements to corroborate the earnings demonstrated by your SA302 calculation
  • Details of any dividend payments and shareholdings
  • If your income comes from property, you might need to provide proof of rental income by way of bank statements, mortgage documents and statements and potentially a lease or tenancy agreement
  • Evidence of addresses dating back three years, usually in the form of bank statements or bills for utilities or tax
  • Company information if applying for a business loan, such as your status (limited company, partnership, sole trader etc.) and details of any individuals with a financial interest in the business
  • Proof of ID, such as passport or driving licence

2. Check eligibility

Most providers have tools enabling you to check how you match up against their loan criteria. Importantly, these tools facilitate so-called soft searches, which do not impact on your credit score, unlike hard searches.

Utilising these tools is quick and easy and can save time and effort you might have otherwise invested in applying for a loan you were never going to be approved for in the first place.

For more information on credit checks view our credit checks guide.

3. Compare loans

It’s crucial that you compare the offers from different providers to find the deal that best suits your current financial situation as a self-employed individual.

Will a loan cost more because I’m self-employed?

Loans to self-employed individuals don’t necessarily cost more, especially if the person meets the provider’s eligibility criteria and has the relevant documentation and financial records dating back at least three years that prove their creditworthiness.

If your circumstances paint you as a higher-risk borrower, however, you might be charged a higher rate of interest when you borrow, especially if you haven’t been self-employed long.

Can I secure a loan if I’m self-employed and have bad credit?

It’s not impossible to find a provider who will lend to you if you’re self-employed and have bad credit, but it can be difficult. If you do get approved for a loan, it may be at a higher interest rate than a standard personal loan—and for a lesser amount than you need.

Secured loans for self-employed individuals

If you’re self-employed and don’t have the requisite documented income or financial history to acquire an unsecured personal loan, a secured loan may prove a suitable alternative. This type of loan leverages the equity you have in your house or other valuable assets as security against the cost of the loan, and typically offers a lower rate of interest than a standard personal loan.

What if I don’t qualify for a secured or unsecured loan?

If you don’t meet the eligibility criteria for a secured or unsecured personal loan, don’t worry—there are still other options available.

Asset finance

If the loan you require is specifically for purchasing materials or equipment for your self-employed business, asset financing involves a provider lending you money against the value of one or more assets that you already own and use for your business. This is likely to be more expensive than a standard personal loan.

Guarantor loan

If you’re struggling to find a provider willing to lend to you, you might consider a guarantor loan. This involves a third party who is a homeowner and has a good credit record—usually a friend or relative—acting as a guarantor for your loan.

If you miss a repayment, your guarantor is responsible. This can help boost your chance of being accepted for the loan, although be aware that interest rates on guarantor loans tend to be higher than on standard personal loans.

Invoice finance

You may advance a loan against money owed to your business on an outstanding invoice. With invoice finance, the lender will pay you the quoted sum and then be responsible for chasing up the original invoice. Invoice financing will probably prove costlier than a regular personal loan.

Credit card

Depending on your credit rating and the purpose of the loan you wish to take out, there may be a credit card suitable for your financial situation. With a 0% purchase credit card, you can make purchases and not pay interest for a set period—sometimes as long as 30 months—although withdrawing cash will entail a hefty fee.

Alternatively, a 0% balance transfer credit card will enable you to transfer funds from the card to another account, again without paying interest for a set period. You will, however, be required to set a repayment schedule to ensure you complete your repayments prior to the period of low interest ending—or you will incur a substantial amount of interest over an extended period.

Getting a loan when you’re self-employed doesn’t have to break the bank

If you’re self-employed, the eligibility requirements for loans may seem tighter and require you to jump through more hoops—but if you can demonstrate a solid and reliable income and provide the lender with all the relevant documentation, there’s no reason you shouldn’t qualify.

About the author:

Finance Director at NerdWallet UK and business adviser to SME's Nic is spokesperson for small and growing businesses with a strong understanding of the financial needs of business Read more

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