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Minimum trading history

Minimum trading history

When assessing an application from an employed individual, lenders work on the basis that their income is fairly stable and predicate. This can be evidenced by a number of payslips or contract of employment. When assessing a self employed individual however, it is not quite so easy to identify a level of predictability. The easiest way for lenders to get round this is to insist on a minimum trading history.

What is the minimum trading history required?

Whilst a small number of lenders will accept applications from individuals with only 12 months trading history, the majority require at least 2 years of trading history. And those who will accept just 12 months history may asses based on your experience in that particular field. For example, where you employed as a kitchen fitter before setting up your own kitchen fitting business.

Why do they require 2 years trading history?

The main reason is to negate the fact that income can fluctuate massively both from one month to the next and also from one year to the next. This is especially applicable to seasonal businesses or industries such as farming where weather can play a massive role in the success of a crop.

As well as this nature of unpredictability, the other risk to lenders is individuals manipulating their ‘books’ in order to borrow more. For example, an individual could hold back certain sales until the following accounting year in order to boost their income figures in that set of accounts.

How does the trading history impact how much you can borrow?

Where a lender requires two years of trading history, the majority will apply an approach such as:

– If the latest year’s income figures are higher than the previous year, the average of the two income figures will be used.

– If the latest year’s income figures are lower than the previous year, the latest year’s income figures will be used.

To understand how lenders assess your income, check out our dedicated page here.

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Check you’re eligible for a mortgage

Before you even start thinking about how much you can borrow, or what type of property to buy, the first important step is to make sure you’re likely to be eligible for a mortgage. To help you with this, we’ve created a short quiz that will indicate whether or not you’re likely to be accepted.