Episode 28: Home Loans for the Self Employed

Jul 21

July 19, 2021

We are busting myths over here on today's episode of the Home Loans for the Self Employed! Of course you can get a home loan if you're self employed! This episode is EVERYTHING YOU NEED TO KNOW to get set up for finance for your dream home.

Podcast Transcript Available Here

Duration: 34:18

Trudi Cowan: Hello everyone and welcome back again. Today, we're going to have a bit of a chat about a topic that is quite important for those that are self-employed.

Sarah Eifermann: Very much so. 

Trudi Cowan: And that is getting a home loan when you run your own business. And the reason we wanted to have a chat about this is that there are a lot of myths out there around trying to get a loan, when you do run a business, but also because it is a bit different going for a home loan when you're self-employed, versus if you’re just on a PAYG salary. 

Sarah Eifermann: It can be, not always. Yeah.

Trudi Cowan: So we thought we'd run through some of those differences and dispel some of the myths around that type of borrowing. 

Sarah Eifermann: Absolutely. So, what is it to be self-employed to a lender? 

Trudi Cowan: Well, as a non-broker, I would presume that it's someone that runs their own business and therefore, the businesses or they're in control of what they get paid, I guess.

Sarah Eifermann: Yeah, so, to a lender somebody that is self-employed is someone that is a sole trader, somebody that is the director of a company that pays wages. So, often that's confusing when they say I'm on wages, but you are the director of that company and or shareholder, you're self-employed, and also potentially the spouse of somebody so if you're paying your husband or wife or children. Their wages. They can also be deemed to be self-employed or be assessed under what's called the self-employed policy. 

Trudi Cowan: See that one I do not know. Yeah, okay. 

Sarah Eifermann: Yeah, so self-employed is quite broad. It's like a broad one that they wave over a lot of different structure types and income tax. Yeah, that's what I'm trying to say.

Trudi Cowan: And I presume the difference from a bank perspective is that when you're on wages. It's presumed that your wages are fairly set and secure, but when you're running your own business, your income could be fluctuating from one year to the next and is really relying on you to continue successfully operating that business. 

Sarah Eifermann: Yeah, look, I think it's also historical as well, like, you know remember most banks still think it's 1983. They've only just ditched their fax machine and their horse and cart. Yes but, so there was historical that it was people that were self-employed, often struggled to provide clear and concise financial statements. Back in the day, the income did fluctuate a lot. The laws around employment and PAYG income were also different right you couldn't be sacked as easily as you can potentially be now or let go or retrenched or.

Trudi Cowan: And people probably also typically stay in one job for a lot longer as well. So there was that just general security. 

Sarah Eifermann: Consistency and stability. I mean casual income contracting income, what's the difference between those and self-employed?

Trudi Cowan: Wasn't as common,20 or 30 years ago.

Sarah Eifermann: It wasn't. And I know that casual workforce definitely has been not so probably more like 40 years ago it's definitely been around for as long as I’ve been lending last 20 years. But yeah, I definitely think it is more its historical viewpoint, I take a long time there's a higher risk factor that they think when it comes to self-employed, also then the argument goes, or self-employed people can play with their financials and. Well yes, but then they pay tax. We're not talking about low doc lending today that's a whole different ballgame. We're just talking about fully documented self-employed home loans and the myths that go with getting them because, honestly, it's like banging my head against a brick wall when I say I’ll post it online and a Facebook group or on LinkedIn. Why is it so hard, or at the barbecue? Why can't you get a homeowner's itself and why did they make it so hard I’ll never get financing, you just can't get it.

Trudi Cowan: It's not true. 

Sarah Eifermann: It's not true. Out of my residential clients, 80% were self-employed. It was a big amount that was self-employed, I mean.

Trudi Cowan: The number of people being self-employed is increasing.

Sarah Eifermann: They are increasing. So I think the main important thing like anything is to if you're going to use a broker. Often bank staff and brokers can misunderstand self-employed income, they don't have the knowledge to interpret the data that's in financial statements, I mean, a lot of people don’t, and we've talked about this. Yeah, they don't interpret that data.

Trudi Cowan: So I guess it's important to ask your broker before you start with them. Have you done a lot of self-employed loans and are you familiar with it?

Sarah Eifermann: Do they specialize in it. Yeah, yeah, because I think that's the key. The policies change from lender to lender, so you do need someone that does a fair amount of work in the self-employed space if you want to get a great outcome. Yeah, as quickly as you can, right. So, what are some of your questions?

Trudi Cowan: Well I guess the one myth that I have come across my desk the most would be that it's really difficult and much more difficult than if I were just on wages.

Sarah Eifermann: Yeah, so they punish me for being self-employed, yeah, Is it more difficult? I don't think that's the right way to assess it. Yep, okay, every loan, No matter what it is, is a unique circumstance, that's why you get 20 billion questions from a broker or their administrative staff, and it's not that it is more difficult. It's that the documentation may be more onerous you might need to provide more data, you might need to loop your accountant in the conversation and let them know we've talked about in the past, not dumping on the account at the day that they need something done for lending. Yep, so you probably just need to be a little bit more communicative.

Trudi Cowan: And maybe a little bit more prepared as well. Yeah, don’t leave it until, I need the loan next week we need to have a bit more of a lead time, Because you might need those additional documents, particularly for a sole trader, often they don't prepare financial statements, and if the bank is going to need them. You're going to need a bit more of a lead time to get some certain documentation actually prepared.

Sarah Eifermann: And look at the moment, to be fair, the banks are running so far behind. They've been impacted by COVID working from home a lot of their assessment centers and administrative centers are in India and Pakistan. And so, they're now affected by COVID and working from home, but also the volume that's coming through and especially in dedicated broker channel our broker share is growing because of what we're doing. Yeah, is working for the consumers people vote with their feet. So, any loan is now taking months to get through so you shouldn't leave it to the last minute, regardless. But definitely add an extra six weeks if you're self-employed and get preapproved. Do the work upfront get signed off, and then go out of it if you're buying, if you're refinancing, then you just need to know it's going to take you a little bit longer to get there it's the preparation time, the more you prepare like anything too, you know, quote, a trade, it's the preparation that prepares the finish, not the finish. If you got to paint a wall and it's got holes all in it you just paint it, it's still going to have holes in it. 

Yeah, right, you've got to fill those holes, you've got to sand those holes. You've got to touch up any of the imperfections and put on an undercoat and then paint it. It's the same with preparing for a home loan for a self-employed person right the right information prepared in the right way, and communicated well, to show the benefit of what you're doing is going to work in terms of convincing the lender, and the individual credit officer that picks up your file, that what you're doing is stable and consistent, and, you know, all the things that, and you got to remember like people, are individuals, it's not some auto robot that, you know, picking up the file at the other end, they're a real person, you've got to convince them why they should lend you money.

Trudi Cowan: Yeah, and that's exactly what going for a loan, is that right, yep, the banks don't just hand out money for the sake of it, they want to know that they're going to get paid back.

Sarah Eifermann: Well the individual person that assesses your file has what's called a delegated underwriting authority or DUI or DLA or there's like 25 different acronyms for that the end of the day their butts on the line if they lend money that they shouldn't have. Yeah. And if the volume goes bust or you default or whatever that said the bank's bottom line, their jobs, potentially, on the line, when it gets investigated. Yeah, that's how the system works.

  Trudi Cowan: So, you got to, I guess make sure that you do have to dot your I's cross your Ts and have that information, ready and available. So one of the other questions that I often get is, all my partner is the breadwinner they earn most of the money. Yeah, and I do have a business as a sole trader, but it's only a little bit of income can a bank just ignore that?

Sarah Eifermann: Okay so, it used to be potential yes it could have been ignored. You just be able to provide a letter from your accountant saying that it wasn't trading, that there were no debts in that entity, even though as a sole trader it's technically an entity right now if it's showing up on the ABN register, they either want full financials that confirm that. Or they want the accountants lead a fully disclosed, stating that now we know that accountants aren't necessarily providing those letters, because unless they've got that information, and they're comfortable and satisfactory. They don't sign off on it and nor should they.

Trudi Cowan: No we can only sign off on facts.

Sarah Eifermann: Exactly. So, yeah, to answer your question, yes, it's important to the application. Yeah, I mean it kind of goes with the same thing that we've been saying all along right if you're in business, even if it's a hobby business, do it right, do it properly from the start. Yeah, and then all of these things don't actually matter it's so nice when you come across a client whose financials are up to date. And just because the financial year is ending on the 30th of June, and your financials don't need to be prepared and lodged as a tax return until even May sometimes. That doesn't mean wait until April next year to do your tax your tax should be done earlier, much earlier. I personally think the tax should be done within the first quarter ending the financial year. There's a couple of reasons for that. So, by September, effectively.

Trudi Cowan: Putting the pressure on the accountants there.

Sarah Eifermann: I know stiffs hit. There's a couple of reasons right from just business-wise, how do you do your budgets and your cash flow and work out where you're going in business.

Trudi Cowan: If you don't perform.

Sarah Eifermann: Exactly right. So that's the first one is a bit of accountability for self. But secondly, lenders will only take financial statements, up to 18 months after the deadline. So, in the year 2020 Sorry for 2020 financials, they expire in June they're written for June 2020 Right. As of December this year. This is last year's tax. As of December, you can't use it anymore. 

Trudi Cowan: Yeah, because it’s out a date. 

Sarah Eifermann: Correct. That's how the banks view self-employed income. So you can definitely, you may need two years financials, we'll go into that soon, but if they're out of date. How is the bank assessing your income? Yeah, it can't, and often as we see income goes up or drops, and that's the bit of the consistency that they want. 

Trudi Cowan: So, they want to see the pattern of how the business has been performing over multiple years.

Sarah Eifermann: Yeah. And so, if it's December, and you haven't done your returns at coming into Christmas and you need to get a loan, even if you've got a small bit of sole trading income in it, how much extra pressure is it going to put everyone. Yeah, because you just didn't do your returns. Pretty much after the year finished, right. And you know there's I always get my clients to do their tax returns. In August, pretty much no more later than August for that they're the reasons why because it just saves the hassle later because stuff comes up, especially if you're self-employed and you're buying assets and equipment, and you need working cap right because potentially you might need your financials. Today's episode is not about that, look out for that in the future. But to answer your question if there's income. Yes, you do need financials, or you need a letter, so your accountant would then look at your financials anyway to be prepared to write your letter.

Trudi Cowan: Exactly right. So you may as well have them.

Sarah Eifermann: Yeah exactly.

Trudi Cowan: So the other one that I get is, I’ve just started my business, but we need to go and get a mortgage. Can I get a mortgage when I’ve only just started?

Sarah Eifermann: What income, are you using? How do you prove your income? There isn't any proof. 

Trudi Cowan: I know there's nothing for the bank to rely on, not that really.

Sarah Eifermann: Not to mention the fact that most lenders in the self-employed space. They want registration of an ABN for a minimum of two years yes, some lenders will do it on the less, either 18 months 12 months, or six months but you'll be penalized and pay a much higher interest rate, and they also need GST registration most of the time as well, because are you really in business, if you're not registered for GST, in terms of affordability for a loan to pay your living expenses and alone. 

Trudi Cowan: Yes, you are really in business but you're right, you haven't got a high income if you're not registered for GST.

Sarah Eifermann: lending lenses on here right, with how credit teams view. The way that they perceive income so GST registration, it's not necessarily required but, again.

Trudi Cowan: It's more helpful.

Sarah Eifermann: It means that you're more stable, right.

Trudi Cowan: So if I were about to start a business now but I was also looking at a mortgage, either do the loan before I start, or wait two years before I get the loan. Yeah, Is that really, yeah, surprise.

Sarah Eifermann: Yeah. Like, it's a tough one. If you're looking to change your current employment structure. Then, technically, your bank should be aware of what you're planning to do moving forward.

Trudi Cowan: Right, okay. So really, it's a way to use is probably the right answer, then?

Sarah Eifermann: Or do it well before you're planning on leaving, you're actually because a lot of people start side hustles, right. So they don't actually leave their primary place of employment, they start a side hustle on the side, and they do it that way so it's all about the consistency of demonstrating your income, and yeah.

Trudi Cowan: Okay so I'm going to a bank, I'm self-employed, what additional information is the bank actually going to want to see, compared to if I was just on wages?

Sarah Eifermann: Okay, so let's just go with like a generalization so they're going to want to see two years, individual tax returns. Yep, and notices of assessment.

Trudi Cowan: So they want to see that anyway.

Sarah Eifermann: Not necessarily. 

Trudi Cowan: Oh, okay. 

Sarah Eifermann: So, the notice of assessment is the receipt from the HEO that says that you've lodged and paid your tax. They're also likely depending on your structure going to want to see the financial statements of that business now as you said earlier traditionally sole traders don't provide these, but if we need to use some of the tax write-offs for income, then we need to be able to show the bank that their tax write-offs. Yep, okay therefore financial statements are helpful, whether that's just a profit and loss that comes out and a covering letter that says, [crosstalking15:38] yeah, as opposed to fully-fledged financials, but for a company or a trust must have financials, we've talked about this before after the trust deed requires financials, so the bank's going to want to see them. Yep, also because they can be a discrepancy between accounts. In the financials, and accounting in the tax based on cash and accruals. Yeah, so they, sometimes want to see the difference, and that sometimes, if there are no notes to why in the financials that have occurred that can cause issues in assessment. A little tip for any accountants, listening out there please put notes in your financials, yeah, as to why things might be different, whether it's tax variance or, whatever it comes up as. Yeah. What else are they going to want to see?

Trudi Cowan: I often get asked for a printout from the HEO of any monies owing.

Sarah Eifermann: So yeah, so there's an integrated client account portals, showing any PAYG tax outstanding to be paid. If you're in a company but paying yourself wages. They want to see the latest pay slips and things like that.

Trudi Cowan: Just per normal, or no? 

Sarah Eifermann: They don't even want to see them at all. 

Trudi Cowan: They just want to see a business income?

Sarah Eifermann: You’re self-employed, okay. It doesn't matter. That's the.

Trudi Cowan: Alright so the main difference is really those financials and tax returns for the business itself, and then any additional information around debts to the HEO or others?

Sarah Eifermann: Yeah. The only other piece of information which can sometimes be helpful, and it's really helpful for a broker when we put a business case together which is what helps get your loan approved. It's a business plan, what's been happening, and a historical breakdown of what's happened last three years, what have you done, how's that improved income, especially with COVID Right. How many businesses have been affected by COVID? How many thought they would be but then weren’t. Yeah, so you may have qualified for job Capel, but then weren't overly affected. 

Trudi Cowan: Yeah, so only just qualified. 

Sarah Eifermann: Yeah, you’ve only just scraped in, and then what does that mean so all those different things and then strength moving forward what's in the pipeline. Sometimes if depending on the time of the year it is. So like now, April to now, when it's been nine months since the end of the last financial year, and it's three months until the new financial year. We don't have returns they will ask for bank statements. Yeah, that's been new since COVID It's been a requirement. Yeah, but previously I used to use bank statements to say look we're really tight on servicing we're scraping, their borrowing capacity gets this loan, but you can see demonstrated by the HEO lodged bank statement that their turnover has gone up. Yeah, and therefore, this deal is tight, but that is if we were to wait through the rooms there's room in here based on evidence, yeah, that shows that they've, gotten here’s the profit and loss that goes with the bank statements, yep to match we can see additional profit are additional wages paid or other things like that. 

Trudi Cowan: And for anyone that isn't lodging versus at the moment, it does actually show for the quarter your total sales, your total expenses, and total wages paid, so it is a really good snapshot of your business for the quarter when it comes to providing information to a lender.

Sarah Eifermann: And I know that there's been some contentious conversation around GST registration with a lot of the things that have been happening, especially in Victoria. Yes, and whether it's required in business, and yes it does mean more paperwork, but personally from a lending lens again register every time, because for that exact reason, often we get stuck with sole traders that legitimately have income. Yeah, but have to wait an extra three months and they miss out on the right house because they've got no way to demonstrate that 

Trudi Cowan: Their income has gone up, 

Sarah Eifermann: And that their income has been legitimized by the ATR, whereas if they've had bank statements, 

Trudi Cowan: They had some support, 

Sarah Eifermann: They would have had the support because they're formally lodged with the reporting agency you know the ATR-like tax office.

Trudi Cowan: So, now, the other piece of information that I often get asked for when I have a self-employed person going for a mortgage and it's not necessary for the bank, sometimes it's probably for the broker, but a structure diagram. If you’ve got a lot of entities, going on in your structure or lots of individuals involved in the ownership of this structure, then it's really helpful for particularly for the broker to actually have that in a diagram. Yeah, so that they can understand the full picture of what's going on and how some of the income might flow between.

Sarah Eifermann: It makes life a little easier, not just for me but for the credit assessor. Yep. And honestly, even if that is just you with a crayon. Yep, drawing it out and drawing the flows of not only income but potentially debt, because it could be shareholders loans, it makes a huge difference. So yes, I would tick box that absolutely that is probably where a lot of brokers get stuck a lot of clients don't know their own group tree very well though. So. Yeah, 100%.

Trudi Cowan: Little cheap if you don't have a structure diagram and you have more than two entities involved in structure, go and draw yourself one now for your own benefit.

Sarah Eifermann: Yes, yes. Yeah, absolutely.

Trudi Cowan: Very handy to refer to. And as Sarah said, it doesn't have to be anything fancy or using the right shapes like an accountant or a lawyer might do. Just use some boxes and names, and some arrows. Yeah, and it will really help your understanding of your own structure.

Sarah Eifermann: Yeah, and maybe we will post onto our website, which is soon to be released a group tree example so you can see what that looks like if you don't know and mimic it as best you can.

Trudi Cowan: You can definitely do that. 

Sarah Eifermann: One of the other things I wanted to talk about is. So, when a business has income, we obviously have cash income, whether you do your bookkeeping on accruals or cash basis, physical money that comes into your bank account right. But when you do your tax return. There are things that you can write off from a tax point of view, yep, that are not physical, you don't get cashback for them physically.

Trudi Cowan: It’s not reflected in your bank balance in that year.

Sarah Eifermann: That's the right way to describe it. So, what the bank says is that there are some key things they've traditionally been depreciation and interest payable on debts that we will add them back to your income, they're called add-backs, ironically enough, and that then gets added on to the income so if you have $100,000 as profit, and you've got $50,000 in depreciation and interest. Traditionally you could then say well your interest is now $150,000 But there's a caveat on it. It depends on the type of product that the depreciation has been applied to. And, i.e., if you've got a trucking fleet, and the depreciation is paid to assist with the maintenance as a cash boost to assist with the maintenance on those vehicles, and you want us to add that back to your income, that's not likely to happen, because you've got a huge, big fleet of either trucks or yellow goods, they're called. So, and then machinery effectively. So that we know the cost of machine maintenance is much higher than a vehicle, just a standard car, you're not likely to get your depreciation written back in that case, unless it's a once-off which we'll talk about shortly. The other thing that you can get them out of back sometimes is startup costs.

Trudi Cowan: So, like sitting at my company in the first place being a corporation.

Sarah Eifermann: No, like, if you're fitting out an office or a factory, and you dump 100 grand 

Trudi Cowan: Into the setup or set up a shop?

Sarah Eifermann: Yeah. Or say you were taken to court over something that would never normally happen, and you had legal fees of $25,000 You're in litigation, sometimes you can get those really once-off yeah big ones off things. If you do a trade show every year, it cost you 50 grand you're not getting that out of the back because that's part of doing business.

Trudi Cowan: Okay but yeah let's run through some of the current you want offs. Job Caper is an income for lending purposes?

Sarah Eifermann: Okay, yeah, right, because technically it's not your money but it was taxable, so some lenders are taking it as taxable income. 

Trudi Cowan: Okay, so might just need to shop around. If you need 

Sarah Eifermann: Yeah, there's not many there's like two, one to two. Okay, and then remembering that you've got to fit the boxes. Yes, for all the other things that you might need.

Trudi Cowan: Okay, cash flow based?

Sarah Eifermann: No, it's just adopted straight off.

  Trudi Cowan: Okay, so it's not income from anyone. So if your income is boosted a bit this year because of cash flow cross it out and ignore that number.

Sarah Eifermann: And please make sure that your accountant itemizes that as cash flow boost in their financials.

Trudi Cowan: Yes, that's very important.

Sarah Eifermann: Because do you often I get financials and I look at other items. Other income, for that exact reason and I go is this cash flow boost is this job caper. Is it something, is it a grant because you can't use grants either.

Trudi Cowan: That's probably actually another important point if you are going for a loan. Other Income is not helpful if it's 1000 bucks fine but if you've got a large amount in it not helpful. And same with other or general expenses. Yeah, accountants actually hate both of those things anyway because it doesn't provide anything useful to the user of that report. So try and avoid those categories.

Sarah Eifermann; It's also hard for you to track as a business owner if we put the business strategist and coach hat on, how do you know what that income was for. Yeah. Was it general sales? Was it a once-off event that you did? Like, but blenders look at it the same way they want to see exactly what it is. Okay, what else have you got?

Trudi Cowan: The instant asset write-off so, at the moment, you can write off any assets that you're purchasing, it's unlimited for most companies at the moment.

Sarah Eifermann: For the 2022 financial year.

Trudi Cowan: 2021 and the 2022 financial year.

Sarah Eifermann: Right so you could spend $500,000 on a piece of machinery and write off 500k and not pay tax on that and therefore reduce your profit and therefore not pay taxes.

Trudi Cowan: Reduce your profit by the amount of the asset.

Sarah Eifermann: Of the actual assets.

Trudi Cowan: So what do lenders do with it?

Sarah Eifermann: They balk, usually, one is getting a broker that understands the way your business works and how you've done your taxes first. Two is getting the credit assessed sorry, two is getting a lender whose policies match that. Three is getting the credit assessor to agree with their policies match your business.

Trudi Cowan: Yeah, okay, so, there are some banks around that will,

Sarah Eifermann: There are some banks around that will add it back depending on what it is again. Yeah, some will take it at 100% Straight add back to your income, but then they'll tax you as if you paid profit,

Trudi Cowan: Yeah, okay right so basically recalculate what you tax?

Sarah Eifermann: Correct. A recalculate of what it would have been if you hadn't bought the asset, some will only take 80%. And some will only take 20%.

Trudi Cowan: Right, so again it comes down to how important it is for you to have that additional income I guess as to how much you might want to reduce your tax right.

Sarah Eifermann: Which is why tax planning is so important, especially if you've got other things going on while going for borrowings.

Sarah Eifermann: Correct right so 

Trudi Cowan: As an example, I did have a client that we had that conversation with, they wanted to go for a loan, they had the option of depreciating the asset or applying the full write-off. And so we chose to depreciate.

Sarah Eifermann: Just normal depreciable

Trudi Cowan: Normal depreciation because we want the income to be a bit higher. There is nothing Dodgy or untoward about doing that it was just making a decision. 

Sarah Eifermann: I say it just delays the depreciation across a few years as opposed to the one, the individual year, but depending on what you're trying to achieve.

Trudi Cowan: Sometimes that makes sense.

Sarah Eifermann: it's the right thing to do, and you're paying tax anyway so it’s the right thing to do.

Trudi Cowan: So, what about if I try to have a trust, and I pay distributions, sometimes just to me sometimes I pay it to my husband, sometimes my clients, how does that work?

Sarah Eifermann: So, especially if you're paying it to relatives and children that are over the age of 18 most lenders won't take those distributions as your income. So, they will take them as well that's money gone. Yep, we're not adding that back to your total pool of income, even though you chose as trustee to pay. So Sarah chose to pay Trudi. Yep. But Sarah can choose not to pay Trudi next year, most banks will say, Well, bad luck, we're not adding that back to your income Sarah because you chose to pay it in the past, therefore behaviorally you'll probably pay in the future. Yeah. Whereas some will say no, that's completely fair, there's only like too low. 

Trudi Cowan: Yeah, what about if it was just my husband, I had to commit to the same family pool. 

Sarah Eifermann: Well if you're applying for a loan together it's the same family pool but if it's not, you're in trouble. And if you want to use it as income you usually need to say two years’ worth.

Trudi Cowan: Right so you got to have consistency in the distribution getting paid?

Sarah Eifermann: And it's the same for dividends as well, do I want to explain what a dividend is?

Trudi Cowan: So dividend is a company paying out its profits. Effectively it's paying its profits up to the shareholders.

Sarah Eifermann: Yes. So those two distributions or dividends kind of go together for that reason right. Franking credits is another one that comes up again, a very small pool of lenders that accept franking credits as income, but they'll tax you at 100% of the income so if you had $100,000 80,000 is paid income, and 20,000 is a franking credit. Yeah, then they will only take it if it's been paid for two years and again there's like one lender that, takes that but it can be done. Okay, sorry. Do you want to explain what a franking credit is because that content might be foreign for a few people?

Trudi Cowan: Very quickly because we have talked about it in other episodes, but a franking credit is basically when you pay out the profits from the company. A tax credit gets can get attached to that, that is represented, it's representative of the text that the company has already paid.

Sarah Eifermann: So you just pay the gap in your personal account?

Trudi Cowan: The difference between the company right and your personal right. Okay. So, the last one I’ve got on my list is I'm trading through a company. I've got some loans in that company, does the bank, consider them my loans when they're looking at lending to me?

Sarah Eifermann: You know, is there a personal guarantee is usually the first question, most companies and trusts do have personal guarantees Yeah, so, yes, okay, but it's called quarantining of debt in that entity as the lending policy terminology, and there are quite a few lenders out there that regardless of company or trust structure will quarantine debt and then there's a couple that will only quarantine it, if it's a company, not a trust, yeah. So yeah, there are about six lenders that will say no that's complete because technically, it's already included. There are payments are included within the company's books. Yeah, so if there's a profit it's already taken out that.

Trudi Cowan: So I guess from just that conversation. You really do need to sit down and find the right lender for you. Yeah, based on some of those factors that you need to be taken into consideration.

Sarah Eifermann: One thing we didn't talk about was one-year financials, so some people say Can I just use last year's financial so 2020. You can but again it limits your pool of lenders there are only four lenders Yeah, most will want two years. Some take an average, some take 120% So, again, it is literally treasuring and ending novel, kids book playground snakes and ladders, try to make it work.

Trudi Cowan: That also shows the importance of going to a broker that knows the self-employed space, because they're going to be able to look at your situation and go Well, we can only go to one of these three lenders, or you've got a choice of 10 lenders based on your 

Sarah Eifermann; But it's also why you should use a broker and not go to one bank. 

Trudi Cowan: Yeah, because they might say no when you've just picked the wrong one. 

Sarah Eifermann: Yeah, but you don’t know that. Yeah, right, because you don't have banking knowledge and lending policy so how would you know, and also often what happens is they say yeah, we can do that no dramas, and then you wait six weeks and ah sorry. Actually,

Trudi Cowan: Whereas a broker might have been able to tell you straight off the bat that lender won't. 

Sarah Eifermann: Yeah, happens a lot, but on the flip side, I’ve also had lenders say no sorry and I’ve gone that lender does that give me, and I’ve done deals, and where the mutual client this exact thing happened to. Yep. And I wrote the deal it was nine months, and it still hasn’t been approved I had it approved in eight days because the structure was put together correctly, the information was explained to the assessor, and it just sailed straight through.

Trudi Cowan: They understood better. 

Sarah Eifermann: Exactly. 

Trudi Cowan: Okay, so there's one last question I want to ask before we close off. Now, anyone that's ever had a discussion with me about structuring their business. Yeah, would know that there are lots of different factors that I take into account. Yes, when I'm setting up how the best business structure for you. Yeah, I know that brokers also have an opinion on the best type of structure for trying to get a mortgage, or what some of the preferences to make it easier for you to get a mortgage. What's your view on that?

Sarah Eifermann: Consistency for a start. Yeah. So pick your structure because when you change ABN, it changes the history of the ABN.

Trudi Cowan: Starting again from a borrowing perspective?

Sarah Eifermann: Potentially right because some lenders are cut and dry and others will merge them together and say oh, we can see the history across multiple entities. I personally like a company, where the shares are owned by a trust with a corporate trustee that full structure that we've talked about for multiple ranges of reasons I like that, but it doesn't have to be, I think it's just going to be your financials are done properly. Set upright, you've got consistency in your financials and you're able to provide the information once upfront in one go. So we get the full picture from the start.

Trudi Cowan: Yeah, with the group tree, makes it a lot easier for everybody involved.

Sarah Eifermann: Yeah, lots of information there. 

Trudi Cowan: So we'd love to hear from you guys what, sort of myths or walls have you come up against when trying to borrow funds as a self-employed person. Yeah, shoot us through some questions and messages, or just tell us what your experience has been.

There was one other thing I wanted to say but I cannot for the life of me remember what it was, which is why I should write things down, but if I remember I’ll post it on our socials. Yeah, one other comment that ever comes back to me, is in the financial year.

Sarah Eifermann: So, yeah. Awesome. 

Trudi Cowan: All right, well thanks for listening, everyone, and we'll see you next time.

Sarah Eifermann: Sounds good to me looking forward to it. Cheers. You've been listening to Financial FOFU with Sarah Eifermann and Trudi Cowan. 

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Just two industry experts (and guests) having a friendly chat and sharing our knowledge. We aim to raise your knowledge base and dis-spell any myths surrounding finance. tax and a range of other financial topics.

This is a safe space to ask questions and hear useful info on financial matters.

Episode 28: Home Loans for the Self Employed

Podcast Transcript Available Here

Episode 29: Investments and Tax!

Episode 27: Investment Properties and Lending (the deductibility of finance)