How to access finance when you are self-employed
Being self-employed, a freelancer or commission earner is a different ball game altogether
Access to finance is vital for one to take part in the economy and start accruing assets that translate into wealth over the long term.
Those with a regular salary and decent credit record are often able to access credit fairly easily.
However, being self-employed, a freelancer or commission earner is a different ball game altogether. Anyone who has a business or earns money from multiple sources without having a full-time position knows how difficult it is to access finance. To some it may even seem impossible to get a home loan.
Tess Rodrigues, MD of Property Factor and an expert in property finance, says it has always been possible for the self-employed to get a home loan, but it requires diligence and meticulous management of paperwork.
"Unfortunately, many only wake up to the need for proper financial record-keeping, candid transacting and up-to-date tax returns when finance is required," she says.
Geoff Lee, managing executive of home loans at Absa's retail and business banking division, says the decision to grant credit is based on your income and expenses, and whether you are able to prove that you have sufficient disposable income after expenses to cover the instalments.
"In the case of a self-employed applicant, the ability for the business to generate cash is by nature more volatile than for a salaried employee. Any changes to the income levels of the company could immediately affect the earnings of the owner," Lee says.
Rodrigues says that just as with an applicant who is employed, the three most important factors to consider before applying for a home loan are your credit record, your declared income - "which must be paid monthly into your transaction account; do not use the business account for payment of personal expenses" - and the proper conduct of all bank accounts.
Mpho Ramatong, the head of housing schemes at FNB's home finance division, says that though it is possible for a self-employed person, freelancer or commission earner to access home finance or any other type of credit, they must be aware that "additional supporting documents will be required to assess affordability and verification of income".
Ramatong advises those seeking credit to do affordability checks before starting the process. "Check how much you can potentially qualify for by performing a pre-approval with the financial services provider before you apply for a home loan, vehicle finance or credit card."
Being prepared goes a long way to achieving success in your credit application, says Lee. "What you present and the format in which you present your application for a home loan, or loan of any nature, speaks volumes of your view on not only your business, but your financial responsibility."
What is clear is that the burden of proving you can service a loan over many years increases when you are self-employed.
Rodrigues summarises what the self-employed, freelancers and commission earners need to do to apply for a bond.
lSelf-employed: Banks will generally need to see two years of signed- off financial statements with year-on-year comparable figures. "These financials must clearly depict the directors' emolument or members' remuneration. The turnover and salaries paid will be compared with what goes through the bank accounts.
"Banks will also check the accuracy of the information, profitability of the business, liquidity and the financial relationship between the various stakeholders and related companies. Banks also reserve the right to ask for assessed tax returns for both the business and the applicant."
lFreelancers: They may be viewed as self-employed individuals, especially if they freelance for a range of organisations and are not on a tax directive. In other words, at the end of the financial year, when determining their tax responsibility, they will be required to submit, at the very least, an income and expenses statement.
"Should they be freelancing, or a locum, to one organisation only and are on a tax directive, six months' remittance advices and bank statements should suffice."
lCommission earners: The banks will need to see pay slips and bank statements for a six-month period to determine an average, says Rodrigues.
Lee adds that a deposit is an important factor in the application for most forms of finance, because not only does it lower the amount that you are liable to repay monthly, "it also shows financial discipline and could assist in a preferable interest-rate concession on the loan".
Improve your chances of getting credit
Self-employed people can improve their chances of getting home or vehicle finance by following a few tips, Geoff Lee, managing executive of home loans at Absa's retail banking and banking division, says.
• Buy within your means. If your income levels fluctuate, be realistic about what you can afford in months with lower income.
• Draw up a detailed budget, review your bank statements and make notes of your commitments. Consider all expenses, regardless of their size and include those due on an annual or quarterly basis.
• Always be realistic and honest. Not being able to afford a loan has far worse consequences than the embarrassment of being declined upfront.
• Use the tools available on your banking website and obtain advice from an expert.
• Consider the impact of increasing interest rates and whether you will be able to afford the instalment in the event of an interest rate hike.
• Check your credit record. When it comes to managing your finances, your credit status and your debt, it's best to make sure you know what's going on in your credit report. Absa provides a free credit check for its customers on WhatsApp Chat banking.
• Manage your spending and personal credit accounts well - do not miss payments or go into arrears.