Self-employed individuals, most of whom are sole traders opens in new window, may find it harder to successfully apply for a loan than founders running a limited company opens in new window.
They may have fewer options because lenders may view the self-employed opens in new window as riskier due to a perceived lack of regular income and potentially having less detailed financial records opens in new window and trading history.
Type of loans for the self-employed
Despite the challenges, there are several loan options for self-employed people.
Personal unsecured loans
This type of loan does not require any security against the funding, such as your home.
However, your personal credit score will be checked, so you need a good credit history opens in new window to apply for a personal loan successfully.
A Start Up Loan opens in new window is a good example of a personal loan available to those who have not yet started trading or have only been trading for up to 36 months.
You can borrow up to £25,000 with a fixed interest rate of 6% per year and a repayment term of one to five years.
You will also receive 12 months of free mentoring opens in new window.
Secured loans
A secured loan opens in new window uses property you own, such as your home, as security against the loan amount.
Guarantor loans
This type of loan involves getting a third party, such as a relative or friend, to act as a guarantor on your behalf.
If you fail to make the repayments, the guarantor will be liable for the debt.
Guarantor loans can be easier to apply for than other loans, but interest rates tend to be higher.
Business loans
Banks and other lenders offer standard business loans opens in new window.
You can typically borrow anything from as little as £1,000 up to £100,000 or more.
You may agree on the collateral to be used when securing your loan.
Your personal and business credit history opens in new window is typically checked as part of the application process.
Sole traders without a good trading history can find it difficult to secure this type of loan.
However, some lenders offer specific loans for sole traders.
How to apply for a loan if you are self-employed
It’s a good idea to start by researching your options to find the best deal.
Search online, visit the websites of banks and other lenders, and use business loan comparison services.
Check each lender for how much you might be able to borrow, as well as interest rates and payment terms.
Think carefully about each one and whether it fits your financial circumstances.
Before formally applying for a loan that may impact your credit score, you should check your eligibility.
Most lenders allow you to do this in a way that doesn’t affect your credit rating.
Once you have made a full application, a lender will check your credit history.
Depending on the type of loan, this will be your personal credit history or a combination of personal and business credit history.
If you have a poor credit history, it may be harder to successfully apply for a self-employed loan, but it may still be possible to access funding.
You may not get the best interest rate, and the amount you can borrow may be less than someone with a good credit history.
When you apply for a loan, the lender will likely request the following documents:
- proof of ID and address: examples include your passport and a recent utility bill
- SA302 tax calculation: this outlines your self-employed earnings. You can download the details via your HM Revenue & Customs (HMRC) online account opens in new window; you usually need to provide at least two years’ worth of SA302 calculations
- bank statements: this is so the lender can confirm your monthly outgoings and income
- proof of rental income: if you are a landlord and receive rental income, you will need to provide evidence using documents such as mortgage and bank statements
- business details: the lender will want confirmation of your business status and details of anyone else with a financial interest in your business.
Other forms of funding to consider
Alternative ways the self-employed can fund their business or boost cash flow include:
Grants
This type of funding is typically offered by public sector and charitable organisations, and it’s money you don’t need to pay back.
You may be able to get a full grant, or it will be match funded, which means you need to get a proportion of the amount you’re looking for from other sources.
There are many business grant schemes opens in new window available, but they can be complicated to apply for.
Check your local council website for details of grants and use the following links:
- Government business support finder opens in new window
- Government find a grant service opens in new window
- Local Growth Hubs opens in new window in England
- Business Wales opens in new window in Wales
- Scottish Enterprise opens in new window in Scotland
- Invest Northern Ireland opens in new window in Northern Ireland
Credit cards
A credit card opens in new window provides a pre-agreed amount of credit you must pay back once you’ve used it.
You will need to pay interest, although some credit card companies offer interest-free periods.
You need a good credit history to get a credit card.
Tax reliefs
If you’re self-employed, you can deduct certain expenses from your profits to reduce your tax bill and boost your cash flow.
Allowable expenses opens in new window include:
- office costs such as stationery opens in new window and phone bills
- travel costs such as fuel, parking, and train fares
- financial costs such as bank charges and insurance opens in new window
- business premises costs such as heating opens in new window, lighting, and business rates opens in new window
- advertising opens in new window or marketing opens in new window, such as website costs and advertising
- the cost of business-related training courses opens in new window.
Self-employed individuals can also claim tax relief opens in new window on pension contributions, charity donations, maintenance payments to an ex-spouse or civil partner and time spent working on a ship outside the UK.
Crowdfunding
Crowdfunding is a way to attract money for your business from members of the public and traditional investors using an online crowdfunding platform.
The two main types of crowdfunding are equity and rewards-based.
Equity opens in new window involves giving away a share of your business; rewards are when you provide investors with a non-financial reward, such as a product or service.
Self-employed individuals are unlikely to be able to use equity crowdfunding services as you usually need to be operating a limited company, but reward crowdfunding may be suitable.
Read more about how to crowdfund opens in new window successfully.
Want to learn how to manage your start-up’s finances? Check out our free online courses in partnership with the Open University on being an entrepreneur.
Our free Learn with Start Up Loans courses opens in new window include:
- Introduction to bookkeeping and accounting opens in new window
- Financial accounting and reporting opens in new window
- Financial methods in environmental decisions opens in new window
Plus free courses on finance and accounting, project management, and leadership.
Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.
