Self-Employed Debt Consolidation

There are three broad ways lenders verify self-employed income. Which one applies to you depends on what you can produce, and each carries a different set of consequences.

Taxable profit is not the same as the income available to service a loan. Lenders will add certain items back to the profit figure, because they are not genuine cash costs or because they are one-off. Getting the add-backs right can change a file from declined to approved without a dollar of income changing hands.

• Depreciation, which reduces profit without leaving the business
• Interest on debts that are being repaid or consolidated by the new loan
• One-off and non-recurring expenses, where they can be evidenced
• Additional superannuation contributions above the required amount
• Certain non-cash and provision items
• Net profit retained in the company, where the lender allows it and the shareholding supports it

Lenders do not apply add-backs identically. Some accept retained profits, some do not. Some add back all interest being refinanced, some only part. Knowing which lender treats your particular profile most favourably is most of the value in using a broker on a self-employed file.

Add-back

An item returned to the profit figure because it is not a genuine cash cost or will not recur. Depreciation is the most common one.

Alt doc

An evidence path built on BAS statements, bank statements or an accountant's letter instead of lodged tax returns.

Low doc

A declaration of income supported by limited evidence. Priced higher, and usually capped at a lower loan-to-value ratio.

Retained profit

Profit left in the company rather than drawn. Some lenders count it towards your income where your shareholding supports it, and some will not.

Directors' loan

Money moving between you and the company. Without an explanation it reads as a liability, or as income the lender declines to count.

Integrated client account

The ATO statement showing what the business owes across income tax, GST, PAYG withholding and super. Assessors read it before they read your summary of it.

Self-employed consolidation and tax debt usually arrive together. A business that fell behind on cards also fell behind on the BAS, and the two problems have to be solved in the same transaction rather than one after the other.

An ATO balance is not just another creditor. The general interest charge compounds daily and is not deductible the way ordinary business interest usually is, so leaving it out of the consolidation to keep the loan smaller is often the more expensive choice.

1. 01Pull the full integrated client account statement, including income tax, GST, PAYG withholding and super.
2. 02Establish which balances carry director penalty exposure. That changes the priority order.
3. 03Include the tax debt in the funding request rather than planning to catch it up from cash flow.
4. 04Have the accountant confirm what is still to be lodged, because unlodged periods hide future liabilities.
5. 05Set the current-year obligations aside separately, so the consolidation is not immediately followed by a new balance.

Give your accountant notice. Most self-employed delays come from waiting on financials, and an accountant who knows a file is coming produces them faster than one who finds out on the day the lender asks.

1. 01

   Read the whole position

   Business debt, personal debt, tax, equipment finance, directors' loans and personal guarantees. Business owners often carry personal exposure they have stopped noticing.

2. 02

   Establish the income picture

   What the returns show, what should be added back, and what the current year actually looks like. This determines whether the file is full doc, alt doc or low doc.

3. 03

   Choose the security

   The family home, an investment property, commercial premises or business assets. Where property equity exists, it is usually the cheapest structure by a distance.

4. 04

   Match to the lender, not the advertisement

   Panel lenders treat self-employed income very differently. We select on how your specific profile is assessed, not on a headline rate you would not qualify for.

5. 05

   Settle everything at once

   Payout figures for each facility, the ATO paid directly at settlement where applicable, and nothing left half-cleared.

6. 06

   Build the buffer back

   A separate account for tax and super, funded on the same day as revenue. It is the mechanical fix for the problem that created the file.

A self-employed consolidation can be written as consumer credit, as business lending, or as a combination. The choice affects pricing, the protections that apply and how the debt appears on your file.

The purpose has to be stated accurately. A loan taken as consumer credit and used for business, or the reverse, creates a problem for you and for the lender. We will structure it correctly rather than the way that happens to be easiest to approve.

We talk like people, not like a bank. No jargon, no judgement, no fine-print games.

Three things we say to nearly every self-employed client, whether or not they are welcome.

• Rolling short-term unsecured debt into a long mortgage term lowers the repayment and can raise the total interest paid. Use a shorter split, or set an extra repayment, and look at both figures before you sign.
• Putting the family home behind business debt is a real transfer of risk. It is often the right call, and it is never a small one.
• If the business is not viable at current trading levels, refinancing extends the runway without changing the destination. That is a conversation for you, your accountant and, where warranted, a registered insolvency practitioner.