I’m Self-employed..why does my employee find it easier to borrow money than me?

Being self-employed or a business owner has its perks. Unlimited income-earning potential, flexibility of time, and finding ways to give the tax man as little cut of your hard-earned coin as possible.

So, so often, we see self-employed people come to us with sets of financials that reduce their profit so dramatically to avoid tax that their borrowing power with lenders does not reflect their actual financial position.

There are a few swift things we can do here, like add back depreciation and interest components on these tax returns. However, a lot of the time, expenses not typically related to business are written off to reduce profit, and these cannot be added back. Having said that, we totally get why you do it.

As self-employed people ourselves, we understand the frustration when it comes to buying your dream home, and your nineteen-year-old apprentice looks more appealing to a bank than you do. Do not fear! We are here to help!

It is so important that well before you are looking to buy, you have a broker on your side assisting to provide guidance on how to structure your financials so that you don’t come across any speed bumps when you go to buy that family forever home.

But did you know…there is more than one way in which a bank can assess your income for loan servicing, as a self-employed person? It’s paramount that you discuss this well in advance and plan for it, as all three ways have their pros and cons.

  1. Full doc – Full sets of tax returns for individual and company structures along with company financials

This way of assessing business income is a way that will provide the least amount of restrictions when it comes to lenders, LVR (loan to value ratio), and security type (type and location of property being purchased).

Most lenders will ask for the two most recent years’ worth of documentation and average them out; some have policies for just the one year’s worth. If there is any depreciation expensed, this will be able to be added back as income, along with interest paid. Usually, an interest expense on a tax return is associated with business/company debt like a car loan, so in 95% of cases, these company/business debts will also need to be expensed. If you’re a boy who likes his toys…this could cause you a few problems… so the following two options might be a bit friendlier.

  1. Directors wage – payslips

This way of assessing income only works if you have a company structure. As a director, you can pay yourself a wage, and as long as this is recorded on payslips for at least 6 months, you can use these payslips as proof of income. You will, however, be required to submit a letter from your accountant stating that the company is still trading profitably. There is no point paying yourself $150,000 a year from your company, and because of this…it’s then trading at a loss.

You will be restricted on lenders with this form of documentation, but typically the standard assessment of regularly employed persons will apply. This is a great way to exclude company debts from servicing if you’ve got a few. You won’t be restricted on LVR or security either; the standard lender policy here will apply.

  1. Alt doc – BAS statements, Business banking statements, Accountants verification or a combination of a few

The option of using alternative documentation, such as BAS statements, business banking statements, or accountant verification, can be beneficial for businesses that are rapidly scaling or growing. These documents provide a more up-to-date picture of a company’s financials, as they assess the most recent 3 or 6 months of trading.

However, this option does have some drawbacks, such as limited lender options, lower loan-to-value ratios, and higher interest rates. The use of BAS statements involves calculating the business’s profit based on the two most recent statements and annualising the data, while bank statements typically require analysis of 3 months of business banking statements to determine income and expenses. Verification letters from an accountant may also be used in rare cases.

Overall, it is important to plan ahead when seeking financing as a self-employed individual, business owner, or company. Consulting with a financial professional can help individuals navigate the various options available and choose the best path forward for their financial goals.