What are self-employed loans?
A self-employed business loan is a type of borrowing designed for sole traders, freelancers, and small business owners.
These loans can help you access essential funds to manage cash flow, invest in growth, or cover unforeseen expenses if you’re self-employed.
Lenders offering self-employed loans typically consider your personal income, trading history, and business performance. This helps make them accessible even without extensive financial records or a formal business structure.
What does being self-employed mean?
Being self-employed means working for yourself instead of an employer. This could be on your own as a sole trader or if you run a small business. You manage your own business activities, finances, and tax responsibilities directly with HMRC.
Unlike employees, if you’re self-employed, you don’t receive employer benefits like paid leave or pensions. However, you have more control over your hours, earnings, and business decisions while handling any risks and responsibilities on your own.
What types of business loans can you get when self-employed?
There are different self-employed business loan options to suit different financial situations and business needs.
Understanding these loan types can help you choose the best fit for your business, whether you require quick cash flow support, larger investment amounts, or flexible repayment options.
Unsecured business loans
Unsecured business loans are a common option for self-employed individuals without significant assets. These loans don’t require security, making them accessible if you have a strong trading history and good credit.
They’re ideal for covering short-term expenses or investing in growth without putting your personal or business property at risk.
Secured business loans
Secured business loans involve borrowing against a UK property you or your business owns. They can be a good option if you’re self-employed because some lenders may view you as a higher risk.
Secured business loans usually offer higher borrowing limits and lower interest rates, which makes them a popular choice when you need substantial financing. However, it’s important to remember that your property is at risk if you fail to meet repayments.
Asset finance
Asset finance can help you as a self-employed business owner looking to acquire essential tools, machinery, or vehicles without large upfront costs.
Whether you’re a sole trader expanding your services or a small business investing in new equipment, this type of loan allows you to spread payments while keeping cash flow stable.
Invoice finance
Invoice finance enables you to access funds tied up in unpaid invoices. This solution helps you manage your cash flow effectively by releasing cash from outstanding invoices.
It’s beneficial for sole traders and freelancers experiencing delays in payments, ensuring they maintain operational stability. However, it’s only an option if you sell goods or services to other businesses on credit terms.
Merchant cash advance
A merchant cash advance could be well-suited to you if your business receives regular card payments, such as running a cafe, working as a beauty technician, or owning a small retail shop.
Repayments adjust according to sales, making this a practical option if your income fluctuates. It’s a popular choice for sole traders who take card payments and are looking for short-term funding with flexible terms.
Revolving credit facility
A revolving credit facility is a flexible option if you’re self-employed. It gives you access to a line of credit that can be drawn upon as needed.
Interest is charged only on the amount you use, making it a practical option for covering short-term expenses or unexpected costs. When you make repayments, your available credit replenishes, making it available again in the future.
How to get a self-employed business loan
To get a self-employed business loan, you need to meet the lender’s eligibility criteria to demonstrate your financial reliability and the health of your business. While exact requirements vary, generally, you’ll need:
- Proof of income: Lenders require evidence of income and typically ask to see your tax returns (SA302 forms), bank statements, and business accounts.
- Trading history: Most lenders prefer self-employed applicants who have been trading for at least two years. A longer trading history can improve your eligibility and loan terms.
- Credit history: Having a strong business credit score improves your chances of being accepted. However, specialist lenders can accommodate self-employed borrowers with less-than-perfect credit.
Before you apply for a self-employed business loan, it’s worth making sure you meet the eligibility criteria to give yourself the best chance of success.
Pros and cons of self-employed loans
It’s important to consider the advantages and potential drawbacks before deciding if a self-employed business loan is right for you.
Pros of self-employed loans
- Flexible options: A variety of loan types are available to suit different business needs.
- Improves cash flow: They can offer quick access to funds to manage your business’s day-to-day operations or capitalise on growth opportunities.
- Builds business credit: Repaying your loan on time can improve your credit rating, making it easier to get finance in the future.
- No usage restriction: You can use a self-employed loan however you want, as long as it is for the benefit of your business.
Cons of self-employed loans
- Potentially higher costs: Interest rates may be higher, especially with unsecured loans or if you have poor credit.
- Personal asset risk: Secured loans put your personal or business assets at risk if you don’t keep up with repayments.
- Irregular income: Many self-employed people have fluctuating income, which can impact repayment planning.
- Personal guarantee: Some lenders may ask for a personal guarantee if you are self-employed.
Alternative funding options if you’re self-employed
While self-employed loans can be an ideal way to fund your business, there are other options worth exploring. Here are some alternatives that might be a better option for your circumstances:
- Grants and government schemes: Local and national government schemes that support small businesses can be available if you qualify.
- Business credit cards: These are a useful and convenient option for short-term expenses and small purchases.
- Friends and family lending: Borrowing from close family and friends can be a flexible option with lower interest rates.
- Personal savings: Using your own funds means eliminating interest payments and avoiding debt.
Exploring different funding options can help you find the best solution for your self-employed business.
Self-employed business loans FAQs
How much can I borrow if I’m self-employed?
The amount you can borrow with a self-employed business loan depends on things like your turnover, credit history, and the type of loan you choose.
- Unsecured business loans: Typically range from £10,000 to £500,000, depending on your financial profile.
- Secured business loans: They allow you to borrow larger amounts, up to £2m, as they are backed by a UK property.
- Invoice finance and merchant cash advances: These are based on your revenue, so borrowing limits are tied to your outstanding invoices or card sales.
Lenders assess your ability to repay before determining the loan amount, so having a strong financial track record can improve your borrowing ability.
How much does a self-employed business loan cost?
The main cost of a business loan for the self-employed will be the interest rate you’re charged. The interest rate the lender sets depends on several factors, including:
- The loan amount
- The type of finance
- Repayment term
- Your credit history
Some loans also come with additional fees, like arrangement fees or early repayment charges.
Secured loans typically offer lower rates, while unsecured loans may cost more due to higher risk. At Aurora Capital, we help you find the most competitive rates and terms to ensure affordable financing that suits your needs.
What can I use a self-employed loan for?
A self-employed loan can be used for virtually any purpose, as long as it is for legitimate business needs.
This typically includes managing cash flow, purchasing equipment or inventory, expanding operations, investing in marketing, and covering unexpected expenses.
It offers flexible funding tailored specifically to the financial needs of sole traders, freelancers, or small businesses, helping you to grow effectively.
Can I get a business loan with no proof of income?
Getting a business loan without proof of income can be difficult, as most lenders require evidence of financial stability.
However, some lenders may look at other factors, such as bank statements or invoices, to assess affordability.
If traditional proof of income isn’t available, you will need to demonstrate your business’s financial health through other documentation.
Can I get a self-employed business loan with bad credit?
You may still qualify for a self-employed business loan if you have bad credit, but your options will be more limited and may come with higher interest rates or require additional security.
Secured loans, where you provide assets as collateral, may be easier to get with bad credit. Merchant cash advances and invoice finance may also be an option, as lenders focus more on your revenue than your credit history.
In some cases, lenders may ask for a personal guarantee, meaning you’ll be personally responsible for repayments if the business can’t meet them.
Aurora Capital works with various lenders to help businesses find funding solutions that suit their circumstances.
