What Do Lenders Use As Your Income When You’re Self-Employed?

If you’ve ever wondered how much money you could borrow you’ve no doubt found a lender’s borrowing capacity calculator, plugged in a few details and out spits a number – and if you're an employee for the most part that’s fine.  There are a few wrinkles when it comes to casual employment, bonus', and regular overtime etc but generally PAYG income is what it is.

But business owner income.  Ohh boy. Buckle up.

What is “income” when you’re self-employed?

Is it last years profit?

Last 6 months?

The average of the last 2 years?  

What if this year is worse than last year?  

What if this year has seen exponential growth?

Which one is your “income”?  

Well….all of them.

You see, lenders don’t all have the same lending policies.  They’ve each got their own set of policies about who they will lend money to, how much and what sort of security (properties) they will lend against.

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Some will do vacant land, some won’t, some will do rural, some won’t. Some will do 95% Loan to Value Ratio (LVR), some won’t, some have a risk fee, some don’t, some use the last 12 months financials, some use the average of the last 2 years, and some can even go on the last 6 months BAS numbers.  Some will subtract lease payments, some won’t - the list is seemingly endless in the variety of things they can take a different view on.  And with 20+ lenders on our panel, it covers just about every situation you could ever think of.

The complexity of this is both a blessing and a curse.  A blessing in that depending on your situation you have multiple options. 

If you’re a mature business with steady profit, you’ve got an enormous range to select from – and a great chance to get a great loan.


Example Self Employed Income Policy

Average over last 2 financial years

Gross Profit

+ other business income

- business expenses

+/- abnormal income/expenses

= Net Profit Before Tax

+ interest expense

+ financed leasing expense

+ depreciation/amortisation

+ salaries/wages paid to owner*

= Cash from Operations


*only when owner is a borrower or providing a guarantee

If your business is going through a growth phase, and the last 2 financial years average adjusted profit number has no real bearing on where you are now, there are lender's that will use your last 6 months.

It’s a curse because it makes it so difficult for you, the business owner to know what you can borrow.  Going to the online borrowing capacity calculator can be highly misleading, and result in you being way off (both under and over) when it comes to serviceability. 

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The obvious answer to this conundrum is to use a mortgage broker like us to work through it with you.

But what can you do yourself before you get to that stage?

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Get Your House In Order

You should start with getting your taxes up to date.  (Some) lender’s can use prior year data for up to 22.5 months after the end of a financial year.  That’s a long time. That’s using 2019FY financials all the way up to May 2021. Crazy.

But by 2 May's time your accountant should have already done your last financial year, but if not, get it done (if you need help check out our accounting and tax service). Because not only might you need it to get a good loan, you need to do taxes like everyone else and sticking your head in the sand isn’t going to solve anything. 

Next, you should, if you haven’t already, make sure all your BAS are prepared and lodged – and hopefully paid.  ATO debt isn’t a great thing to have for finance applications. It limits the lender’s who will be interested (if any) and those that are interested will load that into their interest rate.

Once you’ve got your house in order it will make the process with a broker so much easier and faster.  You can give them everything they need and they can (relatively) quickly work out which lender’s policies will fit your circumstances, what those lenders will use “income”, and finally what your borrowing capacity is.

Conclusion

Owning a business is a lot different to being an employee, and that extends to getting a loan as well.  There are lenders for almost all situations and it can be difficult when you’ve got a new, or growing business.   But with a bit of preparation and planning you can get through it with a loan to suit your needs and circumstances.  My strong suggestion is to get a pre-approval before you sign any contracts – do the hard work before hand, and it will make the whole process a lot less stressful.  Need a hand?  Contact us here

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