We know most Start-Up Founders find getting a home loan hard. A common complaint we hear is, “My senior developer can get a loan, why can’t I?” This is despite taking all the risk, being the brains behind the company, and earning a good income prior. We are a mortgage broking firm that specialises in Finance for Founders. Let us help you unlock the code of securing your next home loan.
Can banks help Start-Up Founders?
Yes, banks are able to assist Start-Up founders. However, the options available to you depend on:
- Your company age and lifestage
- Whether you are paying yourself a salary or not
- Whether your company is turning a profit
- Your percentage shareholding in the company
- The quality of the paperwork you have available
Why do Start-Up Founders find it difficult to get a loan?
A start-up founder is technically considered by the bank to be “Self-Employed”, especially when the founder owns a controlling shareholding – say 20% or more.
Once self-employed, the bank will only approve your loan if:
- Your company is ABN and GST registered for at least 18-24 months
- You can provide 2 years financial statements and tax returns – this is for your core business, as well as any related entities, and family trusts that hold your shares
- You can provide 2 years individual tax returns and notices of assessment
- The company is trading profitably
This last requirement is what “kills” most Start-Up Founder applications, because most start-up companies are pursuing growth not profits. Banks get concerned because even if your financing strategy is to source investors, technically shareholders have to fund any losses incurred by the company, and this includes you as a founder.
What are the loan options for Start-Up Founders?
Depending on how you are paid, and the duration of income payments, you can qualify for a bank loan. However, bank choices are limited because banks generally consider start-up founders “risky”. If you do not qualify for a bank loan, you must consider a non-bank loan, or wait until your circumstances change.
At what stage of my company can I apply for a Home Loan?
To meet a lender’s criteria, you would typically need to wait until the 18-24 month anniversary of your company’s ABN and GST registration date. We understand this may seem like a long wait. Good news, that there are some solutions which you can access as soon as 6 months, but they may be limited or more expensive.
It also helps if:
- Your company has achieved profitability at the time of application
- Your accountant can provide letters of support for your company
- Your company has reached a size and status where it is widely recognised
- Your shareholding is no longer a controlling interest
So, if the start-up is still not turning a profit, but has been very successful at raising venture funds and scaling, it is possible to start being considered by more banks for a loan as long as the company has started paying you a high enough salary and you no longer have a controlling interest.
How does a Full Doc / Full Verification Self-Employed Assessment Work?
If your percentage shareholding remains high, a bank will still likely impose a “Full Doc” or “Full Verification” self-employed assessment on you.
The two years business and personal accounts listed above, and unfortunately any material losses reported in your company accounts usually leads to a decline in your loan application.
So even where a company is venture-backed, has good cash flow and plenty of funds, the bank will still want to multiply the company’s loss by your founder shareholding, and apply it to your personal servicing income. This typically negates the chances of getting a loan for most founders.
How does a Simple Self-Employed Policy Work?
Knowing that it can “all get too complicated” for Start-Up Founders, and Business Owners generally, banks have devised simpler rules for self-employed clients to get a loan.
Where your start-up has been paying you a consistent salary for at least 6 months, it is possible to activate a “Director’s Wages” Policy or “Simple Self-Employed Verification” policy with select banks. You will need to prove this salary using a combination of:
- Your pay slips
- Salary credits into your account
- ATO Income Statement
- Individual Tax Returns
Depending on the lender, you may need to provide an Accountants letter advising your company has been trading profitably. However, the strictness of this requirement can vary between lenders and some may not require a letter if the other paperwork is adequate. The other key element is that your salary must be high enough to support the loan you want, so it usually helps for the Start-Up to be further developed and has received at least 1 major round of venture capital.
How does an Alt Doc Loan work?
If you still do not fit the bank’s criteria, you may qualify for an Alt Doc Loan from a non-bank lender. This is when you do not need to provide company financial statements, tax returns or your prior pay slips or salary credits, and the lender allows alternative documentation to verify your income.
Typically, when Founders apply for an Alt Doc Loans, an Accountants Verification Letter is the most common form of income verification – so the endorsement of a supportive and understanding accountant is key.
Please read here to find out more about Residential Alt Doc Loans.