Self-Employed - Assessing Income/Affordability

Question 1

Lender’s requirement for Self-Employed applicants

Answer 1

Name/address of business, nature of business, sole trader or partnership?

Business plan

How long been established

Previous career history if just started - projections by a qualified accountant.

Financial Information for past 3 years:

• Balance Sheet (End of year accounts)
• Profit and Loss account
• Cash Flow Statement

Question 2

Income for the Self-Employed:

Answer 2

Could be:

• Income from sales (annual turnover)
• Personal drawings from business
• Total income from business and other sources
• Profit

Question 3

Evidence of income from Self-Employed:

Answer 3

Require:

Profit and Loss Account

Balance Sheet (End of Year Accounts e.g. “xxx ltd., as at 31/12/2020”)

For past 3 years

Question 4

Self-Employed Sole Trader:

Answer 4

Asked to provide a set of accounts, normally:

• A profit and loss account
• A balance sheet - although not all self-employed will produce these

Question 5

What is a Profit and Loss account?

Answer 5

Record of income and expenditure of business for the trading year

Will show gross and net profit (lender treats this as equivalent of salary)

Gross profit is gross income of business less the cost of materials

Net profit calculated by:
Deducting routine business expenses from gross profit. These expenses include:
- rent/business rates
- heat/light
- motor expenses (not purchase cost)
- postage/stationery
- telephone

Question 6

What do lenders consider as SALARY for SELF-EMPLOYED?

Answer 6

Net Profit figure is equivalent of gross salary for an employed person

Question 7

What is a Balance Sheet?

Answer 7

A “Snapshot” of assets and liabilities of ONE day at the end of the trading year

a.k.a. “End of Year Accounts”

XXX Company as at 31 Dec 2020

Question 8

Balance sheet includes the capital account:

Answer 8

Capital account =

• What remains of any capital used to set up business
• Any further capital injected since business started
• Any surplus profits from previous trading years
• Any personal drawings during the trading year

Question 9

Personal Drawings

Answer 9

Not used for income multiples but figure is important

If personal drawings are more than the net profit of the business it means that more is being taken out of the business than the business is making. If personal drawings only marginally exceed net profits there may be a satisfactory explanation. If drawings regularly exceed net profit the adviser needs to proceed with caution.