Company, small business or contracting on ABN?
If yes, then certain criteria needs to be considered.
Important update as of 1.04.2020 due to Covid 19: Most lenders are now requesting current BAS statements. They may also request further evidence to confirm your business is still trading during this unprecedented time. If your business is not open or had a considerable change to your revenue, then this may require your to wait until your next BAS statement depending on the amount you wish to borrow. please call or email us, so we can determine this for you.
How long after I start my business can I then apply for a loan?
To achieve approval for a self-employed home or investment loan, most lenders prefer 2 to 3 years of trading. Of course, There are some exceptions to the rule:
• If your ABN has been registered for more then 18 months, however you have only been trading for 1 year or more, then this can be considered. You must have your first year of trading tax return completed.
• If you are self-employed, contracting on ABN within the professional space (Medical, IT, finance etc) this is viewed differently by the lenders. This options requires 2 consecutive BAS statements.
• If you have purchased a business that has completed financials, we can use them to prove consistent income and the business is still running at the previous owners productivity level. If you take on further debt or make any other changes to your newly acquired business then this can effect your immediate options.
• Low document lending, this will require an Accountants letter and other evidence to show your income instead of completed Financials.
The lenders can also consider other strong scenarios, so its best to enquire.
Less than 1 year of trading?
Less than one year of trading, can be difficult to show consistent income.
Many new businesses have larger costs in the first year, which will reflect poorly on your first tax return. The standard Lenders are then restricted by law with their ability to approve your loan, without consistent profit and without a completed first year tax return.
Every lender calculates self-employed income differently based on the risk they are willing to take.
Note: Investment property income can appear on a company/trust tax return if the property is owned through a trust/company, however this income cannot be considered as your only source of income. Especially investment properties like AirBnB, Student Accommodation or Serviced Apartments.
Lenders have come a long way with their view on self-employed income with our client's now having more flexibility with products and a larger pool of lenders to choose from then ever before.
Don’t expect smooth sailing, they may still procrastinate or show a lack of understanding with some industries due to the ever-changing modern way we now do business.
How the lender will calculate your ability to borrow?
Considering every lender has different policies or appetite for certain loans, they could consider any of the following to determine Self Employed borrowing power:
• When considering your 2 most recent tax returns, most lenders will take the lowest income of the two years.
• Some may consider your most recent years tax return and may or may request to see the year prior to ensure your had income in that year.
• Some will consider the average of the two most recent years income, (similar to how they view overtime with PAYG)
We can then use "Add Backs" (expenses that are not ongoing or 'book transactions'. e.g. Depreciation, one off car or equipment purchases, voluntary Superannuation Contributions and many others). Further detail on "Add Backs" bellow.
What financial year tax return, needs to be completed to apply?
By March to April the lender will begin requesting the most recent financial years tax return.
For example, prior to March 2021 we are able to use financial year ending June 2019. After March 2021 Lenders will no longer accept 2019 Tax Year Financials and will begin requesting to see the tax return June 2020. However, if the lender requires more detail regarding your income, you may be asked to complete the outstanding tax return sooner to achieve your borrowing goals and this is at the lenders discretion.
There are lenders that can make exceptions for this depending on the circumstances.
How can “Add Backs” be used to increase your borrowing power?
As you are aware, your revenue minus expenses and/ or other costs will determine your profit.
Some expenses can be added back for the purpose of increasing your borrowing power, due to the lender regarding some expenses to have no on going commitment or a 'book transactions'.
When the lender considers your ability to pay your loan over 20 - 30 years, some one off costs are added back to your profit as they are comfortable that you will not have this expense ongoing. Using the "Add Back" strategy will increase your borrowing power.
Some examples of “Add Backs” are:
• Trust distributions: Discretionary trust distributions made to family members can sometimes (rarely) be added back to then increase your borrowing power. In most cases the lender will require a letter from your accountant to confirm the beneficiaries are not dependent on this distribution and could potentially turn it off, allowing for the trust to retain this income.
• Depreciation: Lenders will allow you to add back items you have claimed depreciation for.
• Additional superannuation: If you have made voluntary contributions to your super, some lenders will then consider allowing you to cease this contribution and retrospectively add it back to your profit.
• Net Profit Before Tax: Retained profit inside your company can be considered to be added to your borrowing power. If there are multiple owners of the company, the lender will consider the percentage of ownership you hold, as the percentage of retain profit to be yours. This is rarely granted and would need to be enough retained profit to cover the portion of lending for the life of the loan. This would be unusual.
• One off expenses: If you had a large one off expense, sometimes this can be added back. We may need an accountant letter to confirm this and it also depends on the item that was purchased.
• Interest expenses: If you have a loan through your business or investment loans, then lenders can consider adding this back to increasing your borrowing power. Equally, if you are paying yourself interest for a Directors loan, this can be added back also.
• Rental property expenses: for investment properties Depreciation. Your rental income is also assessed separately to your personal and company income as they hold different weightings. If you are paying yourself rent for a property owned by an entity you control, you can add that rent back also.
• Company car: Lenders will consider allowing some expenses associated with your company owned vehicle to be added back in as income.
All these strategies are considered when determining your borrowing power. Whilst we will provide you with your maximum limit, you may wish to consult your lawyer, accountant or other professional advice before taking on further lending.