How clients with unstable, ‘choppy’ income can beat the bank, get approvals, and obtain the finance they need

They’re considered “risky” by most lenders, especially the big banks. They’re considered “too unpredictable” in that at any moment they may not be able to make interest payments.

And so, sole traders and small-business owners (especially in seasonal industries like hospitality) face a constant battle of trying to obtain finance.

This problem is faced by millions of Australians, with 17 per cent of the Australian workforce (2.2 million people) now self-employed.

Regular Aussie battlers are forced to work harder and harder, often for less and less – only to face the potential that they’ll never turn their dreams into a reality.

For brokers and their clients, it’s an ongoing battle that is becoming harder and harder to win. But it is not impossible.

How a restaurant with unstable income got a $2.2m business loan

One of my borrowers was a restaurant chain. They were deemed to be in a “volatile” industry and so couldn’t get a loan from traditional lenders.

This was an experienced hospitality operator in St Kilda, Victoria – loyal customer base and great business. But they were in hospitality – largely a seasonal industry.

The restaurant had potential and so we gave them a $2.2 million business loan on a 9.75 per cent interest rate at 70 per cent LVR, secured by the operator’s existing restaurants.

This funding allowed the operator to buy in a new location and renovate it to their brand.

Today, the restaurant is drawing crowds, the operator is making tonnes of money, and the loan is being paid back.

What lenders look for when faced with a business client with ‘unpredictable’ income

The perfect customer for a lender is somebody with a steady income, with stable employment, and beautifully crafted paperwork.

They pay their debts on time. They earn good money on a weekly, fortnightly, or monthly basis. They’ve been in full-time work for years.

But not everybody is like that. The restaurant operator above certainly wasn’t.

And so lenders take an extraordinary amount of care when they see a potential borrower with an income that isn’t regular.

When a mortgage broker presents their client’s case right, businesses with unpredictable income can get their finance. According to a report published by the Australian Banking Association in 2022, the total value of outstanding finance to small businesses was $142 billion as at August 2022.

To make informed decisions, lenders typically assess borrowers based on a framework known as the “five Cs of credit”:

1. Character: A borrower’s financial reputation and reliability – credit scores, past repayment behaviour, years in business, and so on.
2. Collateral: Assets like property, vehicles, or equipment may serve as security for the loan.
3. Capacity: The borrower’s ability to repay the loan – they’ll look at income patterns, current debts, living expenses, and other financial commitments.
4. Capital: A borrower’s overall financial position, including the value and liquidity of their assets relative to liabilities.
5. Conditions: The broader economic environment and the specific conditions of the loan – interest rates, repayment schedules, fees, and so on.

As a mortgage broker, your job is to work closely with your clients to strengthen their loan applications by presenting their case for a loan.

You’ll need to emphasise their strengths and address their weaknesses.

You’ll need to showcase their periods of steady revenue and address any concerns by fluctuating their income.

And you’ll need to demonstrate how your business client shows proactive financial management, such as whether they have an emergency fund and a low debt-to-income ratio.

If that doesn’t get you results, then try this:

The growth of ‘low-doc’ non-bank lenders

It is no joke that traditional banks are continuously tightening their lending criteria.

They’re much more selective. They demand more and more documents. They want stronger credit profiles. They want more security. And so, non-bank lenders have stepped in to fill the gap.

Citi estimated that private credit lending rose by 45 per cent as of July 2024 over the past five years in stark contrast to the 25 per cent growth experienced by traditional lenders.

Today, we’re seeking more and more non-bank lenders offering “low-doc” loans that cater to borrowers with limited financial documentation.

These loans are especially valuable for small-business owners whose fluctuating income may not meet the strict tight bank requirements.

Non-bank lenders often assess applications using alternative measures.

This includes things like business cash flow, asset valuations, and projected revenue growth as opposed to historical income records.

Additionally, we evaluate the borrower’s industry trends, the quality and location of their security asset, and their repayment history with other non-traditional lenders.

These factors allow non-bank lenders to paint a more comprehensive picture of a borrower’s creditworthiness without relying solely on traditional income documentation.

Brokers should maintain a strong understanding of non-bank lending options to ensure their clients receive tailored solutions that align with their circumstances and financial goals.

The 5 steps every broker should take when they receive a client with unpredictable outcome

Securing finance for clients with unpredictable income requires brokers to adopt a proactive and strategic approach to navigate the challenges and present a compelling case to lenders.

Here’s how I’ve structured that approach in five steps.

1. Understand your client’s financial story

Gather all their relevant documents, including bank statements, tax returns, cash flow records, and invoices and identify income patterns and financial habits.

This is about understanding the full picture.

I’m talking about the seasonality of your client’s income or any mitigating factors like savings or secondary income stream.

This is so that you can position your client’s financial story in a way that demonstrates reliability and resilience to potential lenders.

2. Set realistic expectations for your borrower

While it’s possible to get them the finance they need, it’s hard.

So it’s essential to have an honest discussion with your client about the challenges they may face in securing finance.

Explain how their irregular income affects their risk profile and the potential trade-offs, such as higher interest rates, stricter terms, or reduced borrowing limits.

If you set clear expectations early on, it’ll make your life easier when they don’t suffer disappointment or frustration.

3. Find the right lender and strengthen your client’s application

You know better than anyone that matching your client with the most suitable lender is critical.

Research lenders that have a track record of working with clients in similar financial situations, particularly those who understand the dynamics of self-employment or seasonal income.

Once the right lender is identified, help your client prepare a strong application.

Emphasise their financial strengths, such as periods of consistent income, an ability to save, or a strong asset base.

Provide cash flow projections and explanations for any income fluctuations to address potential concerns proactively.

4. Have non-bank lenders at the ready

Sometimes traditional lenders still won’t budge – no matter how good your application is.

Non-bank lenders often provide greater flexibility for clients with irregular income, offering low-doc loans or alternative assessment criteria (i.e. exactly what I’ve set above).

Establish strong relationships with these lenders and stay updated on their products and policies.

This readiness can make a difference when your client doesn’t meet the stringent criteria of traditional banks.

5. Monitor the process and keep following up with your lender

Once the application is submitted, maintain regular communication with the lender to ensure progress.

I don’t mean be annoying. I mean be persistent.

Keep your client updated on the status and provide any additional information the lender may request promptly.

Persistence and follow-up can make a difference in getting applications across the line, especially when dealing with more complex financial scenarios.

Gee Taggar is the managing director of Archer Wealth