Guide to self-employed loans

Finding funding for your business is often a top priority for start-up owners who want to make their business dreams a reality.

However, self-employed entrepreneurs who are sole traders could find it more difficult to successfully apply for loans than founders of a limited company.

As a self-employed person, you may have fewer lending options, as lenders may view you as higher risk due to your lack of trading history, less detailed financial records, and potentially irregular income.

But that doesn’t mean securing a loan is impossible – financial options, including loans for self-employed people, are available.

What are self-employed loans?

Self-employed loans are available to individuals who work for themselves, such as freelancers, contractors, or sole traders.

These loans can cover various needs, including cash flow management, business expansion, or equipment purchasing.

Self-employed loans can be personal loans (such as a Start Up Loan where the individual’s credit is considered) or business loans (where the profitability and financial health of the business are assessed).

A key difference between personal loans taken by self-employed individuals and business loans for limited companies is that self-employed individuals are personally liable for their loans.

Business loans have several advantages, such as larger amounts available, lower interest rates, and longer repayment terms.

However, they may also require more stringent credit checks and often require collateral.

Personal loans can be more accessible, but they typically have higher interest rates and offer borrowers smaller amounts.

Self-employed or sole traders are deemed individuals and may find it more challenging to access specialised business loan services and products available to limited companies.

If you’re self-employed, you may struggle to get access to specialist loans and financing such as:

• invoice finance – provides an advance on outstanding invoices and is only available to businesses with B2B customers.
• merchant cash advance – based on a company’s credit and debit card transactions and isn’t suitable for businesses that don’t process card payments.
• commercial mortgages or fleet financing – asset-based loans where sole traders often don’t have the assets required for these loans.
• purchase order finance or trade finance – large-scale products designed to help with supply chain payments or international trading, they are typically suited to larger businesses.

Whilst there are challenges for self-employed individuals in accessing finance, the good news is that many lenders have tailored products to suit their needs.

Researching thoroughly to understand which financial product best suits your business model and growth plans can be key to successfully financing your business.

Types of loans for the self-employed

Despite the financial challenges of starting your own business, several loan options exist for the self-employed.

Personal unsecured loans

This type of loan does not require any security against the funding, such as your home, but your credit score is likely to be checked – so you may need a good credit history to apply for a personal loan successfully.

A Start Up Loan 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.

With Start Up Loans (a government-backed scheme), 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 also receive 12 months of free business mentoring with this loan.

Secured loans

A secured loan uses property you own, such as your home, as security against the loan amount.

A secured loan could be viable if you’re self-employed because lenders may see you as higher risk.

By using your house or another property as security, you’re assuring the lender that they can get their money back if you can’t repay the loan.

This can make it easier for you to get a loan, often at a better rate – but remember, your property could be at risk if you can’t meet repayments.

Guarantor loans

This type of loan involves a third party, such as a relative or friend, acting as a guarantor on your behalf.
If you fail to make the repayments, the guarantor will be liable for your debt.

Guarantor loans can be easier to apply for than other loans, but interest rates may be higher because those who decide on this type of loan may have a poor credit history and be deemed at a higher risk of defaulting on the loan. 

Business loans

Banks and other lenders offer standard business loans, which can range from as little as £1,000 up to £100,000 or more.

Lenders will look at your business profits and your personal credit score and history to decide if they will lend to you, and you may agree on the collateral to be used to secure your loan.

Sole traders without a good trading history may find securing this type of loan difficult.

How much money can I borrow?

The amount you can borrow with a self-employed loan can depend on several factors, including your credit history, business profits, and the lender’s policies.

Depending on your business needs, the amount of money available can range from a few hundred pounds for small, short-term needs to tens of thousands for larger investments or business expansion.

Each lender sets its own limits, and some may offer more to borrowers with a strong credit history or to a well-established sole trader with proven profits.

Remember, borrowing responsibly – ensuring you can make regular repayments – is important, and you should seek professional financial advice if you’re unsure.

What can loan money be used for?

Self-employed loans can be used for a variety of business purposes.

Some lenders may not restrict what you can use the money for, but other lenders may only offer it for specific purposes.

Typical uses for self-employed loans can include:

• buying new equipment
• upgrading your work premises
• marketing materials
• cash flow management
• hiring staff - sole traders aren’t limited to working by themselves and can hire additional staff to support trading.

Can I get a self-employed loan with bad credit?

It is possible to secure a self-employed loan if you have bad credit, but you may face more challenges in applying or meeting loan criteria.

Some lenders specialise in loans for people with poor credit histories.

However, these loans often come with higher interest rates to compensate for the increased risk, so you may need to prove to the lender that you can afford to repay the loan.

Can I get a self-employed loan with no proof of income?

Securing a self-employed loan with no proof of income can be difficult, as lenders may want evidence that you can repay the loan.

However, some lenders may consider other factors, such as your credit history, business plan, or assets, so it’s a good idea to be transparent about your financial situation.

If you can’t provide proof of income, it may be a good idea to speak with a financial advisor or the lender to determine what other evidence could support your application.

How to apply for a loan if you are self-employed

Before applying for a self-employed loan, you may want to research your options to find the best deal for you personally.

This research could include which providers offer loans to self-employed individuals, how much you can borrow, interest rates, and payment terms.

Not all loans are the same, so you may need to compare them to find the one that best suits your financial circumstances.

Before formally starting an application process, you may need to check your credit score – some loans can impact your score, but lenders might allow you to apply without affecting your credit rating.

Once you have applied, the lender will check your personal and business credit history, depending on which type of loan you are applying for.

The lender will then reject or accept your application based on their findings.

Payment terms, including a payment schedule, the loan term, and the interest rate, are likely to be discussed before the loan is finalised.

These should all be outlined in your final loan agreement.

What documents do I need when applying for a self-employed loan?

When you apply for a loan, the lender could request the following documents:

• proof of ID and address – this could include your passport and a recent utility bill
• SA302 tax calculation – this outlines your self-employed earnings, and you can download the details via your HM Revenue & Customs (HMRC) online account (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 may 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

Here are some alternative ways you could fund your business or boost cash flow as a self-employed business owner: 

Grants

Grants are money awarded to businesses without repayment requirements and are typically offered by the public sector and charitable organisations.

You may be able to secure a full grant or a matching grant, which requires you to match the grant money with your own funds or funds from other sources, effectively doubling the original grant amount.

There are many business grant schemes available.

Check your local council website for details of grants:

• Government business support finder
• Government find a grant service
• Local Growth Hubs in England
• Business Wales in Wales
• Scottish Enterprise in Scotland
• Invest Northern Ireland in Northern Ireland.

Business credit cards

A business credit card may be an option for the self-employed and can help business owners manage cash flow while providing a flexible way to separate personal and business expenses.

They may also come with benefits such as reward points or cashback offers.

Eligibility for a business credit card can depend on factors such as your credit history, business income, and the nature of your self-employment.

You will need to pay interest, although some credit card providers offer interest-free periods.

To secure a business credit card, you will likely need to demonstrate a good credit history.

Tax relief

If you’re self-employed, you may be able to deduct certain business expenses from your profits to reduce your tax bills and boost your cash flow.

Allowable expenses can include:

• office costs
• travel costs, including fuel, parking, and train fares
• financial costs such as bank charges and insurance
• business premises costs such as heating, lighting, and business rates
• advertising or marketing, such as website costs and advertising
• the cost of business-related training courses.

Self-employed individuals may also be able to claim tax relief 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.

There are two main types of crowdfunding: equity and rewards-based.

Equity 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 may be unable 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 crowdfunding could help fund your start-up business.

Angel investing

Angel investing involves investors giving money to start-up businesses in exchange for equity in the company.

They can also provide valuable mentorship along with the funding, especially if you are in the early days of your start-up journey.

However, in exchange for their investment, angel investors will own a portion of your business, meaning you will need to share profits with them – and you may need to consult them on significant business decisions.

Not all angel investors are the same, and it could take time to find the right investor who understands your industry and vision.

Read our complete guide to angel investing.