Small Business Women Australia
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Being a small business, and having been in business for *cough* almost 20 years, you could say Bec knows a bit about how they are run. Lending for Self Employed applicants has some quirks and navigating the rules takes an awful lot of wine.
Fortunately we have a subscription delivery...
Each lender has an almost entirely different approach to treating self employed applicants; their business structures, their business liabilities, their growth - I am fond of saying you have almost no chance of being approved by walking in the door of your local branch, and this so true when it comes to self employed lending.
The most common question from self employed applicants - is it even possible to refinance or buy a home or investment when you're self employed?
The answer is yes - it may require more information, but it's not impossible.
Review your loan every 1-3 years
Review your loan often - this will save you in multiple ways, and it doesn't have to mean refinancing.
Saving 1% on an average loan size would save $4,000 a year which is around $20,000 in sales on average retail margins before tax. I don't have to tell you how hard you work to make $20k in sales.
A simple call to your lender, acknowledging that a refinance would cost you around $1,000 in fees (and it does), and asking what they can offer you - could see this kind of saving. Calling armed with comparable information from a broker is even stronger. If they won't come to the party, then you should consider refinancing.
Right now, money is incredibly cheap - and while we have no crystal ball, so we cannot say if we are at the bottom of the market yet - fixed rates are even more attractive. A word on these super attractive fixed rates - be mindful of the lack of flexibility & consider them in conjunction with your needs and goals.
Sometimes its not just about the interest rate either, sometimes the way you actually use your loan is not suited to the type of product that you have - have you heard stories of someone with a fixed rate loan, and a chunk of cash sitting off to the side waiting until it expires? There is a better way.
For the best chance of success with the widest range of lenders aim for;
Minimum of 2 years in business is best
Stability of income
Minimal other expenses / unnecessary credit
Definitely a surplus
2 years financials up to date & well prepared with notice of assessment
Savings set aside in a separate bank account 'genuine savings'
Clear credit file - repayments up to date
As an interesting side note, in 2019 we had the Royal Commission into Banking Misconduct, one of the outcomes of which had the potential to remove brokers as a viable business.
Without brokers, you lose access to many small lenders who don't have a main street presence, indeed MyState are a small Tasmanian bank who are fantastic for self employed applicants - no main street presence outside Tassie, you've likely never heard of them.
In the fortnight immediately after the report was released I had 16 enquiries 14 of whom could ONLY be placed with non main street lenders due to policy. I bet you didn't even realise that for brokers it's policy first, then pricing?
Regardless, cheers to competition.
The variance between lender policies will make your head spin.
About the only thing lenders agree on is they prefer you to have been in business for a minimum of 2 years (and even this is slightly flexible), other than this the way each lender treats your income is astonishingly different and keeping up with who does what (today) and wants which documents could almost be a full time job of it's own. In a way, this a good thing - it means we have options.
In a nutshell, some lenders will
Use the average of your last two years income
or the lower plus 20%
or the lower plus 50%
or the higher
Depending on your structure - we also have lenders who
Require all business to be included in our assessment
and those who won't
will or won't add back interest or depreciation,
or might - depending on what it relates to
allow profit and directors wages to be used
You might say... great! Tell us who! Thats the extra thing - it's a rapidly changing beast.
Lenders are not all the same
Is that what all those numbers are?
What lenders are looking for in your tax returns
So we know lenders are looking for the average of your last two years tax returns – lets drill down into what it is exactly that they look for – and this comes with a warning, it’s best consumed with a chilled white (and will help you understand how to read your own statements a lot better).
A. Turnover – gross revenue – your total income. While this figure actually doesn’t mean anything, they’re looking for trends – steady or growing is great, declining will require an explanation.
B. Depreciation – for assets that aren’t key to the business (think backhoes for excavation firms) depreciation is essentially a paper loss and can be ‘added back’ to your bottom line in most instances
C. Interest – both as an indicator that there could be a liability, and, as a potential add back (if the loan is repaid, is being refinanced or is being included as a liability)
D. Profit & your taxable income – the bit you (theoretically get to keep). Depending on your structure you’ll likely find these items on the business worksheet in your company/trust or personal return with your personal income added to the profit from the company/trust.
E. Non-ongoing income, things like Capital Gains, have to be pulled out of our available income as essentially once the asset is sold you won’t have that income again – and be careful if this asset was, say, a business division
F. One off income or expenses – with accountant verification these could be added back or should be excluded from calculations – think extraordinary legal fees or purchases.
They’ll look at your balance sheet (your business assets and liabilities) to indicate if the company has a nice healthy balance of assets and liabilities.
Essentially the combination of B, C & D with consideration for E & F is where we come to the income available for your loan.
In a very simplified fashion, lenders calculate your affordability by working out what you have left after meeting all your existing commitments - and bringing that back to a loan amount. That simple. So squeezing your expenses leaves more "left over".
By now we have all heard the bad news that 'Ubereats' is to our affordability - but have you ever wondered why?
the more we demonstrably spend on our living expenses,
the more we have available on our credit facilities
the more we are committed to in other loans or insurances and school fees...
the less there is available for us to meet our new repayments.
Never mind the concept of discretion; that we might actually give up having high tea every Sunday to afford the dream home - it's based on what 'is' in our statements for the last 3 months.
So if you are thinking of buying a home, pull it right back for a time & cut out all the credit (after pay, zip, credit cards etc) that you don't need.
It also pays to have a meeting with your broker about the same time as you meet with your accountant, let's call this - mortgage planning - many a plan can come undone by overzealous accountants who mean very well but who leave you with no taxable income. You can't pay loans off without income. I'll just leave that there.
Affordability is all about the bit "leftover"
It could cost you a bedroom, or the suburb you want
While we are on the subject, a $10,000 limit on a credit card - that you aren't using - could reduce your borrowing power by as much as $80,000.
This is huge. This is virtually the difference between a 3 or a 4 bedroom home. Or neighbouring suburbs.
A $10,000 credit card is taken as a mandatory $300 - $380 a month repayment... how much is the repayment on your car loan? What impact is that having?
Look, certain things you have to do - but it's about positioning yourself for best effect, or, timing your purchases well (and if you bought the house BEFORE the car you'd get a better interest rate on it as well).