[N314]No Job Need Money

Many people have dreamed of starting their own business, and it can certainly be satisfying. But what happens when you need a loan? If you’re self-employed, even if you have an excellent credit history, you may find it hard. Even though the banks are more flexible these days, and loaned out £41.2 billion to those working for themselves or with less than perfect credit scores, an amazing nine million people were turned down for a loan last year.

Supposing you’ve found a job you love, but it works on a contract basis, or you’ve become your own boss. The problem banks face is that it can be hard for them to assess your employability and long term income prospects using traditional criteria. So they may be wary of giving you a traditional loan.

So what can you do? Well, it can help if you can prove a history of renewed contracts with the same employer, especially if it goes back a year or even two.

In the case of a new position, the lender will examine your circumstances on an individual basis. It can be hard to get approved if this is your first job; you may even be unsuccessful altogether. But don’t be downhearted. What a loan company is looking for is evidence of long-term employability, so you may have to play a waiting game. For the self-employed, it can help if you can demonstrate a history in your chosen field. For example, if your new business is in special occasion cakes, don’t omit your experience working in the catering sector.

To get a head start, consider going through a broker. A broker can research loans for you, and match you with companies willing to lend for your type of work. They may also be able to find specialised deals, even discounts. They can also be useful in another way: many companies use a central database to determine your credit score. Every time a company conducts a credit search on you, this fact will be recorded there. It might be that if you are not accepted for a loan by one company, others will follow suit. A broker can help you to avoid this trap.

It’s not all bad news for those looking to buy a home with a history of poor credit, or working for their own company. According to market analyst Datamonitor, homebuyer loans are now easier to find. Increased competition has driven banks to relax some of their requirements in the hope of capturing a share of the niche market. So what will you need to qualify?

If you’re self-employed, you will probably need to be able to show your last three years’ worth of earnings, or a letter from your accountant. If you’ve just started your own business, then your previous employment history will be useful, especially if you can prove that you have experience working in your chosen field. If you’ve taken the plunge into a completely new area, then you will probably find it hard to get a loan, at least until a reliable forecast of your earnings can be produced.

So, without a crystal ball, what can you do?

There is another option: the self-certification loan. These are offered by many high street banks and building societies. You need to provide details of the amount of income you earn, but you do not need to prove it with paperwork. Of course, such a loan comes at a higher interest rate, and the amount you can borrow is often lower. Be careful you don’t fall into a common trap here. Your accountant may have been doing an excellent job – quite legally – of minimising your profits for tax, but this will also affect the amount you can borrow.

Another option you might like to explore is the flexible mortgage. This allows you to take a “payment holiday" if you encounter temporary cash flow problems, or re-arrange your payment schedule. They also allow you to overpay at no cost in better times, building up a reservoir of credit on which to draw in leaner days. Because you’re not tied in to set payments, you can work to get rid if your loan more quickly.

All is not rosy however. Bad debt is on the rise, and several high street lenders warn that an increasing number of people are having problems meeting their repayments.

Despite this, loans to the self-employed or those with a weak credit score are set to reach even higher levels. Datamonitor predict that the number of credit cards issued to these categories of lender will reach 13 million by 2009, from a current level of 9.5 million.

So while it may not be as hard as it used to be for the self-employed, or people with a poor credit history to find a loan, you do need to remain aware of the risks. There are fears that creditors are lending borrowers money that they simply cannot pay back. Don’t be one of these – always get good advice, and make sure that at the end of the day, you get a loan you can afford.