Paul has been self-employed for five years running an online textile company and his wife Katie is employed as a head teacher. As their living costs are modest and Katie earns a good income, Paul only takes a low salary and minimal dividends from his limited company and has left the remaining profit in the business.
The business made a loss in the first year, a small profit in year two, another loss in year three, and then has made increasingly good profits in the last two years.
Paul and Katie’s broker has been struggling to find a lender to help as they are finding that many will only use the income and dividends that have been drawn from the business to assess affordability. This doesn’t provide enough income, and they need a lender who can see the bigger picture.
Their broker contacts Furness for Intermediaries who recognises that just because income hasn’t been drawn; it doesn’t mean that it hasn’t been generated, and that a decision to leave it in the business is often a personal one. In Paul’s case, this was being done as part of longer-term retirement and tax planning. It could however be drawn if Paul needed it to live on.
Furness for Intermediaries was therefore able to look at Paul’s pre-tax profits,
In actual fact, an average of the last two years’ figures wouldn’t have provided enough borrowing capacity. By working with Paul’s accountant and obtaining management accounts for the last six months, we were able to satisfy ourselves that this was a growing business, and we could safely base all our calculations solely on the most recent year of trading.
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This case study is based on a real case but the names and some details have been changed and stock images have been used to protect confidentiality.