Specialist lenders are increasingly able to lend to entrepreneurs based on their latest trading figures, even with less than one year’s accounts, or profit that is retained within the business.
However, just because a lender can lend in these circumstances, it doesn’t necessarily mean that it will always be able to do so.
Lenders still have a responsibility to ensure that a mortgage is affordable and sustainable, and this means there will be situations where lending on most recent figures or retained profit is appropriate.
But there will also be times when it is not.
The right questions
So what questions should you ask your clients to check their self-employed income is sustainable?
Here are some of the things that underwriters will look for when they make a lending decision.
Using latest figures
- Does the client have a good track record in the industry?
- Can an accountant provide draft accounts or projection for current year based on actual trading figures?
- Are current year’s figures realistic?
For example, take the case of a successful solicitor who has run her own department for nearly five years and recently started her own firm, taking her clients with her.
In this situation, the only difference from her previous role is the firm she’s working for.
She has the same clients, same job and as far as can be determined the same, if not better income.
This could therefore be an example of where basing self-employed income on projected accounts could be seen as responsible and sustainable.
Using retained profit
- Does the client have a controlling share in the company so that allocation of monies can be determined?
- Is at least one year of finalised accounts available and does profitability show an upward trend?
- Are there any underlying reasons for money being retained in the company?
- Is the money to be used liquid and available to our client to draw on, without affecting the ongoing sustainability of the company?
In cases where a client wants to use retained profit, it is important that a lender can be comfortable that the client will be able to easily access the funds, without damaging the business, should they need to do so.
In circumstances, for example, where a company is 100% owned by a married couple who choose to retain profit within a business because they do not need to draw the income, it could be appropriate to use the retained profit, particularly if there is a trend of building retained profits year on year.
If, however, the money held within the business is required to pay for new stock or cover depreciation, then a lender may decide only to use salary and dividends.
By asking these questions to your self-employed clients and fully understanding their circumstances, you can ensure you are able to select the most appropriate lender for their needs.