Self-employed business loans

Candlestick makers, dressmakers, bakers, video game makers – the self-employed and sole traders are some of the nation’s most entrepreneurial workers.

However, like most businesses, there are times when the self-employed need a business loan. But what kind of loans are available, and what do you need to secure them? Read on the find out all you need to know about business loans for the self-employed.

What loans are available for the self-employed?

Just because you’re self-employed, it doesn’t mean you can’t get a business loan. Lenders may require more paperwork from sole traders and the self-employed than they would from fully employed borrowers or larger companies, but there are still finance options for those who work for themselves:

Unsecured loan: Similar to a personal loan. It does not require you to provide security (collateral) to the lender. Unsecured loans are primarily based on your credit history and personal income instead of your business’ performance. A good credit score is typically required to obtain an unsecured loan, and the sum you can borrow may be less than you may secure with other finance options.
Small business loan: Works like a regular bank loan and is issued for business purposes. The lender will usually check your personal and business credit score as part of the due diligence process. Your business records will also be reviewed to assure the lender that your business generates enough income to cover the repayments.
Secured loan: You provide collateral to protect the lender from loss. In most cases, this means property, such as your home, although other hard assets may be considered by some lenders. Secured loans usually come with lower interest rates and may offer a higher loan amount than unsecured borrowing. Bad credit can also be less of a problem with this type of loan.
Guarantor loan: If you credit history has some issues that make it difficult to obtain a loan, you may wish to ask a relative, friend, or business associate to act as guarantor for your borrowing. This means they are liable for any loss should you default on the loan. Your guarantor will need a good credit record and may even need to provide collateral. Guarantor loans tend to have higher interest rates and fees than some other types of loan.

Top tip: Don’t get caught out by an error on your credit report, always check your personal and business credit scores before you apply for loan refinancing (secured or unsecured).

How to apply for a self-employed loan

Applying for a self-employed loan involves several steps and considerations. Firstly, you should gather relevant financial documentation, including tax returns, bank statements, and profit and loss statements, to demonstrate your income and financial stability to potential lenders.

Once the necessary documentation is gathered, you can research and compare loan options from various lenders to find a product that meets your needs and offers favourable terms and interest rates.

When ready to apply, you can typically complete the application process online, over the phone, or in person at a bank or lending institution. The application will require personal and financial information, including income details, employment history, assets, and liabilities.

During the application process, lenders may also assess your creditworthiness by checking your credit score and credit history. A higher credit score generally improves the likelihood of approval and may result in more favorable loan terms.

After submitting the application, the lender will review the information provided, verify the documentation, and assess your ability to repay the loan. Once approved, you will receive a loan offer outlining the terms and conditions, including the loan amount, interest rate, repayment schedule, and any additional fees. It’s important to carefully review the offer before accepting to make sure it aligns with your financial goals.

What documents do I need to apply for a loan as a sole trader or self-employed?

The documents you will need to secure a loan will vary from lender to lender and for the type of loan you are applying for. However, most lenders will need to see:

Bank statements – up to the last three years.
Tax returns – notice of assessment and tax returns for the last two years.
Company/business information – incorporation documents for limited companies, overview of the business, list of major clients, balance sheet and cashflow forecast if you have them.
Proof of any other income – such as dividends, bonuses, or rental income.

Does my self-employed status affect my loan value or rate?

No. If your credit is good and you have all the necessary documents, the interest rate you pay and the amount you can borrow should be no different than for fully employed borrowers.

Can I get a self-employed loan if I have bad credit?

Even if you have bad credit and have been turned down elsewhere, it may still be possible to secure the loan you need. Note that weak credit may mean paying a higher interest rate, and, depending on the type of loan you are seeking, some lenders may also ask you to provide collateral to secure the loan.

What am I able to you use the loan for?

General self-employed and sole trader loans can usually be used to cover any business need. However, some loans may only be used for specific activities.

Loans for specific activities:

Asset finance and refinance: Pay for plant and machinery, including commercial vehicles. Refinance your current equipment loans, or free up the sunk capital in hard assets that your business already owns to gain ready cash.
Working capital: Borrow up to R50,000 to get a new business off the ground.

What are the benefits of loans for self-employed?

Loans for self-employed individuals offer several benefits to their unique financial circumstances and needs:

Access to capital: Self-employed individuals often face challenges in accessing traditional forms of financing. Loans for the self-employed provide access to capital for business expenses, investment opportunities, or personal financial needs.
Flexible eligibility criteria: Unlike traditional loans, loans for the self-employed typically have more flexible eligibility criteria. Lenders may consider alternative forms of income verification, allowing self-employed individuals with varying income sources to qualify.
Repayment options: Self-employed loans often offer tailored repayment options to account the fluctuating income of self-employed individuals.
Business growth opportunities: Loans for self-employed individuals can promote business growth and expansion initiatives. Access to financing can help self-employed individuals capitalise on opportunities to grow their business and increase profitability.
Tax benefits: Depending on the purpose of the loan, self-employed individuals may be eligible to deduct the interest paid on the loan from their taxable income, reducing their overall tax liability.
Building credit history: Responsible repayment of a self-employed loan can help individuals establish or improve their credit history. A positive credit history is important for getting future financing.

How much does a self-employed loan cost?

The cost of a self-employed loan can vary depending on several factors, including the lender, loan amount, repayment term, interest rate, and any associated fees. Generally, the total cost of a self-employed loan includes the principal amount borrowed plus interest accrued over the repayment period.

Interest rates for self-employed loans may be fixed or variable and can range from relatively low rates for borrowers with strong credit profiles to higher rates for individuals with less favourable credit histories. Additionally, some lenders may charge origination fees, application fees, or other upfront costs, which can increase the overall cost of borrowing.

To accurately assess the cost of a self-employed loan, you should carefully review the loan terms and conditions provided by the lender, including the annual percentage rate (APR) and any additional fees or charges.

What happens if I can't repay my self-employed loan on time?

If you find yourself unable to repay your self-employed loan on time, it’s important to communicate with your lender as soon as possible to discuss your situation and explore potential solutions. Depending on the terms of your loan agreement and the policies of your lender, the consequences of not repaying your loan on time may vary:

Late payment fees: Many lenders charge late payment fees for missed or late payments which can increase the total cost of the loan.
Negative impact on credit score: Late or missed payments can negatively impact your credit score. A lower credit score can make it more difficult to qualify for future loans or credit products.
Collection actions: If you continue to miss payments, your lender may take collection actions to recover the debt. This could include contacting you to arrange payment, reporting the default to credit bureaus, or starting legal proceedings to recover the outstanding balance.
Default: If you consistently fail to repay your loan, your loan may go into default. Defaulting on a loan can have serious consequences, including legal action, repossession of collateral, and further damage to your credit score.
Loss of collateral: If your loan is secured by collateral, failure to repay the loan may result in the loss of the collateral to the lender.

Get started with Swoop

Whether you need a loan to grow your business, cover a cashflow dip, or even pay your taxes, there’s a self-employed and sole trader loan for you. Don’t waste time going from lender to lender. Register with Swoop to access the widest range of loans at the best rates, and with the best terms and conditions. One click is all it takes. Get the self-employed loan you need today.

Testimonials

Swoop was amazing! I was looking for refinancing and they were straight onto finding me the best possible option. I would highly recommend them.

Laree Smith

Owner, F45 Cambridge

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, Legal and General, Inshur Zego, AIG, Met Life, State Farm, Direct Line, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance and insurance.

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