Sole traders
Individuals operating a business under their own name or registered business name.
Specialist Finance
Self-Employed Finance
Being self-employed does not necessarily make finance difficult, but lenders can assess business income in very different ways. The right lender often depends on how your income is structured, how long the business has operated and what financial information is available.
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Finance for self-employed borrowers
Self-employed borrowers can apply for many of the same types of finance as employees, including home loans, refinancing, investment property finance, commercial lending, vehicle finance and other business facilities.
The main difference is usually how income is assessed.
A PAYG employee may be able to demonstrate income with payslips and employment records. A self-employed borrower may need to demonstrate business performance using tax returns, financial statements, management accounts, BAS statements, bank statements or other acceptable evidence.
Who may be considered self-employed?
The lender's definition can vary, but self-employed borrowers commonly include:
Company directors
Directors who own or control a significant interest in the company may be assessed as self-employed even where they receive a regular salary.
Business owners
Shareholders or owners receiving salary, dividends, distributions or other income from a business.
Partners
Individuals receiving a share of partnership income.
Contractors
Some contractors may be treated as self-employed depending on their business structure, industry and income arrangements.
Why can self-employed borrowing capacity vary between lenders?
Self-employed income is not always assessed in the same way from lender to lender.
One lender may use an average of two years of business income, while another may place greater weight on the most recent financial year. Some lenders may accept certain business add-backs, while others may treat the same expense differently.
This means two lenders reviewing the same set of financial statements can arrive at different borrowing-capacity results.
What income might a lender consider?
The assessment depends on the business structure and lender policy.
Salary or wages
Regular salary paid from the business may form part of the income assessment.
Business profit
Net business profit may be used where the borrower owns or controls the business.
Director fees
Director remuneration may be considered depending on how it is reported and evidenced.
Dividends
Company dividends may be considered where they form part of the borrower's regular income.
Trust or partnership distributions
Distributions may be considered where the borrower has an ongoing entitlement and the lender is satisfied with the underlying business.
Other acceptable income
Rental income and other eligible income may also contribute to the overall servicing position.
What are business add-backs?
Business financial statements can contain legitimate expenses that reduce taxable profit but may not always reduce the cash available to service a loan in the same way.
Depending on lender policy, certain expenses may be added back when assessing self-employed income.
The treatment of add-backs can vary considerably, and not every accounting expense will be accepted.
Examples of items lenders may review as potential add-backs
Whether an item is accepted depends on the lender and the circumstances.
Depreciation
Non-cash depreciation may sometimes be added back, subject to lender policy.
Interest expense
Some business interest may be treated differently where the associated debt is being refinanced or separately included in the servicing calculation.
One-off expenses
A genuinely non-recurring business expense may sometimes be adjusted if appropriately evidenced.
Director or owner expenses
Certain expenses paid through the business may be reviewed where they are discretionary or already included elsewhere.
Superannuation above required amounts
Some lender policies may consider specific discretionary contributions differently.
How many years of financials are required?
Traditional self-employed lending commonly relies on completed business and personal tax returns and financial statements.
Historically, lenders often requested two years of financial information, but lender policy can vary. Some lenders may consider the most recent year where the business is established and the result is considered reliable.
The appropriate approach depends on the business history, recent performance and the lender's current policy.
Documents that may be used
A self-employed application may use different forms of financial evidence depending on the lender.
Business tax returns
Tax returns can provide evidence of business income and taxable profit.
Personal tax returns
These can help confirm salary, distributions, dividends and other personal income.
Financial statements
Profit and loss statements and balance sheets can show the financial performance and position of the business.
ATO notices of assessment
These may be required to confirm declared personal taxable income.
Management accounts
More recent management accounts may help demonstrate current trading performance.
BAS statements
Business Activity Statements may be used by some lenders to help assess turnover and current business activity.
What if the latest financial year is stronger?
Business income can change significantly from year to year.
If the latest year is materially stronger than the previous year, some lenders may still average the results while others may consider placing greater weight on the latest year where there is a reasonable explanation for the improvement.
Examples may include business expansion, a new contract, increased capacity or recovery from an unusual prior period.
The important issue is whether the stronger income is considered sustainable.
What if business income has fallen?
Where recent income has declined, lenders may take a more cautious approach.
A lender may use the lower income, investigate the reason for the decline or require more current information to understand whether the reduction is temporary or ongoing.
This is one reason the most suitable lender may depend on the pattern of the business rather than simply the interest rate.
What can affect self-employed borrowing capacity?
The overall assessment considers more than taxable income alone.
Business profitability
The lender will consider the income available to support the proposed loan.
Business stability
Length of operation and consistency of earnings can affect lender confidence.
Existing business debt
Business loans, vehicle finance, credit cards and other commitments may affect servicing.
Personal debt
Home loans, investment debt, personal loans and credit limits are also considered.
Business structure
Sole trader, company, trust and partnership income can require different assessment approaches.
Lender policy
Different treatment of income and add-backs can produce very different borrowing outcomes.
What is alternative-documentation lending?
Some self-employed borrowers may not yet have the traditional financial documentation required for a standard full-documentation application.
Certain lenders may offer alternative-documentation or streamlined self-employed lending where income can be supported using different forms of evidence.
This does not mean that income is not assessed. The lender still needs reasonable evidence that the borrower can service the proposed loan.
Alternative evidence may include
Requirements vary substantially between lenders and loan types.
Business bank statements
Recent transaction history can help demonstrate actual business turnover and cash flow.
BAS statements
Recent BAS information may help support reported business revenue.
Accountant information
Some lending structures may use information provided by the borrower's accountant, subject to lender requirements.
Management accounts
Current financial information may help demonstrate more recent business performance.
How long does the business need to have operated?
Many lenders prefer an established trading history, but minimum business-age requirements can differ.
Some lenders may consider relatively new businesses where the applicant has relevant industry experience and suitable income evidence, while others may require a longer operating history.
The lending options can therefore be significantly different for a business operating for six months compared with one operating for several years.
Self-employed borrowers can require many types of finance
Being self-employed affects the income assessment, but does not necessarily determine the finance product.
Home loans
Self-employed borrowers can purchase or refinance an owner-occupied home.
Investment property finance
Business owners can purchase and refinance residential investment properties.
Commercial property
Finance may be available to purchase business premises or commercial investment property.
Business finance
Working capital, acquisitions and other business-purpose lending may also be required.
Vehicle finance
Cars, utes, vans and commercial vehicles may be financed through business facilities.
Equipment finance
Machinery, plant and equipment can be funded through specialised asset finance.
Refinancing when you are self-employed
A borrower may have originally obtained a home loan while employed and later become self-employed.
When refinancing, the new lender will generally assess the applicant based on their current income position rather than relying on the circumstances that existed when the original loan was approved.
This can be particularly important for recently self-employed borrowers or businesses where the latest tax returns do not reflect current trading performance.
Why lender selection matters
Self-employed lending is one of the areas where lender policy can make a major difference.
Income calculation
Different lenders may use different financial years or averaging methods.
Add-backs
Acceptable business add-backs can differ materially.
Business age
Minimum trading-history requirements vary.
Alternative documentation
Some lenders provide a wider range of income-verification options.
Business structure
Some lenders are more comfortable with complex company, trust or partnership arrangements.
Overall borrowing capacity
Differences in policy can produce significantly different lending outcomes.
The lowest rate may not be the lender that can use the most appropriate income
Interest rate is important, but it is only useful if the lender can appropriately assess the borrower's actual financial position.
A lender with a slightly lower rate may use a more conservative income calculation and offer a materially lower loan amount. Another lender may have a stronger policy for the borrower's business structure or income pattern.
For self-employed borrowers, policy and borrowing capacity often need to be considered before comparing pricing.
How I help self-employed borrowers
My role as a mortgage and finance broker is to understand the business and income structure before selecting lenders.
That means looking beyond the headline taxable-income figure and understanding salary, profit, dividends, distributions, business expenses, existing debt and recent trading performance.
I can then compare lenders whose self-employed income policies are more appropriate for the circumstances rather than submitting the application to a lender that does not suit the business structure.
A typical self-employed finance journey
The exact process depends on the type of finance required and the financial information available.
- 1
Understand the finance requirement
Clarify whether the requirement is for a home purchase, refinance, investment property, commercial property or business finance.
- 2
Understand the business structure
Review how the business operates and how income is received by the borrower.
- 3
Review financial information
Assess tax returns, financial statements, management accounts, BAS or other available income evidence.
- 4
Calculate usable income
Consider how different lenders may assess business income and acceptable add-backs.
- 5
Compare lenders
Identify lenders whose self-employed policy, borrowing capacity, documentation requirements and pricing suit the application.
- 6
Prepare the application
Provide the appropriate financial and supporting information for the selected lender.
- 7
Approval and settlement
Complete the lender's assessment and review the final loan terms before proceeding.
Self-employed finance questions
Can I get a home loan if I am self-employed?
Yes. Self-employed borrowers can obtain home loans, but the lender may require different income evidence from a standard PAYG application.
Do I need two years of tax returns?
Not necessarily. Requirements vary between lenders. Some may use two years of financial information, while others may consider the most recent year or alternative evidence in suitable circumstances.
What income does a lender use for a company director?
Depending on the ownership structure and lender policy, the assessment may consider salary, company profit, dividends and other eligible income.
What are business add-backs?
Add-backs are certain business expenses that a lender may adjust when assessing income because they may not represent an ongoing reduction in available cash flow. Acceptance varies between lenders.
Can a lender use my latest financial year only?
Some lenders may consider the most recent year where the business is established and the result is considered sustainable, but policy varies.
What if my latest year's income is higher?
The lender may investigate why income increased and whether the stronger result is sustainable. Different lenders may treat the improvement differently.
What if I have only recently become self-employed?
Options may be more limited, but some lenders may consider shorter business histories where the borrower has relevant experience and acceptable income evidence.
What is alternative-documentation lending?
It is lending where a self-employed borrower may support income using acceptable evidence other than the traditional full set of completed tax returns and financial statements.
Is self-employed finance more expensive?
Not necessarily. Standard lending may be available where normal documentation and policy requirements are met. Specialist or alternative-documentation lending can sometimes have different pricing and fees.
Can I refinance if I became self-employed after taking out my current loan?
Potentially. The new lender will generally assess your current self-employed income and financial position when considering the refinance.