If you're a business owner, you no doubt have a lot on your plate. Between managing your business and planning for the future, it can be tricky to keep a handle on how financial decisions impact your personal goals.
Will actions you take as a business owner impact your desire to become a homeowner in the future? A business loan may offer you a large sum of money to improve your organisation. But will it limit your odds of getting a bank to pay out again when you want to buy a house?
We're here to break it down for you plain and simple, so you can make the best choice for both your business and yourself.
Understanding business loans
First things first – what exactly is a business loan? Simply put, it's a sum of money borrowed to help your business expand, manage cash flow or invest in new opportunities.
Business loans come in different forms. At mcl finance, for example, we offer access to unsecured business loans with regular monthly repayments and merchant cash advance finance, where repayments are made in line with your credit card takings.
For the 5.6 million SMEs in the UK, business loans are often a lifeline for driving growth.
But any loan is a serious financial commitment. It's important to think about how taking on debt could impact other areas of your life – especially when it comes to personal finances like securing a mortgage.
Is it harder to get a mortgage as a self-employed business owner?
Getting a mortgage when you're self-employed can be trickier than if you're an employee. Indeed, a survey of self-employed people found that 25% reported difficulty in getting a mortgage, with the need to provide more paperwork a key factor.
Lenders may see you as a higher risk because your income might not be as steady. But don't worry – plenty of self-employed people get mortgages every day. The key is knowing what lenders are looking for and how a business loan might play into their decision.
What lenders think about business loans
When you apply for a mortgage, lenders take a close look at your overall financial situation. One of the big things they consider is your debt-to-income ratio. Essentially, how much of your income goes towards paying off debt each month? If you've got a business loan, that debt will be part of the calculation.
If your debt-to-income ratio is too high, lenders might see this as a sign you're overstretched financially. This then harms your chances of getting approved for a mortgage.
That said, it's not just the loan itself that matters – how you manage it is crucial too. If you're on top of your payments and managing your debt well, it can actually work in your favour by showing lenders that you're financially responsible.
Your credit history is also key, especially for sole traders and partnerships. A business loan could impact your credit score if you miss payments or are close to your credit limit.
Get mortgage-ready by managing business debt
Given the potential impact of a business loan on your mortgage application, it's a good idea to get your ducks in a row before you apply.
1. Get your financial documents in order
This means having your tax returns, business accounts and proof of income all up to date and easy to access. The clearer and more organised your documents are, the smoother your mortgage application process will be. Having your documents prepared by a qualified accountant can help ensure nothing slips through the cracks.
2. Provide proof of a large deposit
The larger your deposit, the less the bank has to provide and the more likely they are to accept an application. In truth, this increases the odds of anyone getting a mortgage – self-employed or otherwise.
3. Check and improve your credit score
Before you apply, check your credit report to see where you stand. If there are any mistakes or issues, get them sorted out. If your score isn't as high as you'd like, focus on improving it by paying down existing debts and making sure you don't miss any payments.
4. Keep an eye on your debt-to-income
Lenders like to see a low debt-to-income ratio. If yours is a bit high, see if you can clear any debts before applying for a mortgage. If your business loan is a big chunk of your debt, you might want to look into refinancing or consolidating loans to reduce your monthly payments. This can make your financial situation more presentable to lenders.
5. Timing is everything
When you apply for a mortgage can be just as important as how you apply. Lenders prefer to see a stable financial history, so if you've just taken out a business loan, it might be wise to wait until you've made several consistent payments before you go for that mortgage. This shows lenders that you're capable of handling your financial commitments and still have room for a mortgage.
Contact mcl finance
Own a limited company? Apply for a business loan with mcl finance and we'll be by your side to take that next big step in your future.
