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Business loans for sole proprietors

Find out how to get a business loan when you're self-employed and don't have an LLC.

It can be difficult to secure financing for your business as a sole proprietor. Banks and other lenders tend to view self-employed business owners as relatively high-risk entities, and for businesses just getting started, it can be an uphill battle to prove the strength of your business model to a lender.

Our guide will help you navigate the loan options available and show you how to choose the right one to support your business.

Why is it more difficult to get a business loan as a sole proprietor?

Because sole proprietors have very little separation between business and personal finances, banks and other financial institutions often view them as risky investments. If a sole proprietor loses out on an important contract, get sick or is unable to continue their business for any reason, the lender has wasted money on a loan that will likely go unpaid.

This risk makes it difficult for sole proprietors to secure a business loan, but it’s not impossible. With the right documentation and a good business plan in place, there are lenders that are willing to extend financing to sole proprietors.

What types of loans should I consider?

As a sole proprietor, you’ll need to take into account your business needs and finances when examining your loan options. The type of loan you choose depends on how you plan on using the funds.

If you’ve been self-employed for a long time, you likely understand your needs well. If you’re new to the world of small business, this can be harder to evaluate. Do as much research as possible and don’t be afraid to reach out to experts or successful self-employed business people for advice. Our table below gives you a brief overview of your options.

5 best loan types for sole proprietors

SBA loan

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$5,000–$5 million

  • Lower rates than similar loans from banks
  • Requires excellent credit
  • Must have solid business financials

Personal loan

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A personal loan can be used for business expenses. The borrowing amounts are typically lower, and it’s harder to deduct the cost on your taxes.

  • Good for small, temporary cash flow shortages
  • Approval based off you, not your business
  • Exposes you to more risk than a business loan

Invoice financing

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80% of the invoice amount

Invoice financing gives you an advance on your unpaid invoices. Costs are typically a percentage of the invoiced amount, and you’re expected to pay the advance back quickly after your invoice is due.

  • A reasonably low-risk option for an established trader
  • Must have invoices due
  • Not an option for startups

Line of credit

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$5,000–$1 million

A line of credit allows you to draw from your credit limit whenever you need, and you only pay interest on the money you borrow.

  • Less risk and cost than a lump sum
  • Access your funds quickly
  • Requires good credit

Term loan

$2,000–$5 million

A term loan allows you to borrow a single lump sum and pay it back over time.

  • Can provide your business with a large amount of capital
  • Fixed monthly payments
  • Requires rigorous documentation
  • Riskier than other loan option

Choosing a loan type: Sarah’s landscaping service

Consider this scenario: Sarah is a self-employed landscaper who designs boutique gardens for wealthy homeowners and small businesses across Seattle. She employs a part-time assistant and hires landscapers on a project-by-project basis.

Recently, a large hotel chain has contracted her to design and build a courtyard garden for a new property. While promising, this is a much bigger job than her usual projects and she realizes she needs at least $60,000 to hire more laborers and rent equipment.

Sarah’s choice: A term loan
With a good idea of her costs and safety knowing her client is large and stable, Sarah opts for a term loan from a bank. Because her business has been in operation for years, she’s able to get a fixed repayment plan with a low interest rate of 9.25%.

Can sole proprietors take out personal loans for their businesses?

Yes. As a sole proprietor, you may want to consider taking out a personal loan rather than a business loan. Both have their benefits, and depending on the age of your business and the amount of revenue you generate, you may find one option suits your needs better than the other.

Personal loans

  • Depends largely on your credit. A lender will mainly consider your personal credit and income to make a loan decision.
  • Flexible. You can use funds from a personal loan for business or personal expenses.

Business loans

  • Stricter lending guidelines. You’ll generally have to provide financial documents related to your business.
  • Strict spending rules. In most cases, you won’t be able to use a business loan for personal expenses.
Compare the differences between personal loans and business loans

What do I need to consider before applying for a loan?

The loan you choose will depend on the age of your business. People just getting started will have different needs than those who have been in business for years. The more you know about your business plans, expenses and cash flow, the better equipped you’ll be to get the right loan.

As an established business owner, you’ll should consider the following:

  • Your finances. As an established business, you should have records highlighting your profits and losses and at least two years of tax returns to show your lender. The state of your accounts has a big impact on your loan options.
  • Cash flow. How much cash will your business have on hand in the coming months? Do you have personal funds to use if you’re short? If you’re facing a temporary cash shortage, you might opt for a line of credit over a lump sum loan.
  • Business costs. Factor in your operating costs into your estimates for the future and work out how much you need to borrow.
  • Debts and assets. Debts may limit what you can borrow, but you can use assets, such as invoices or purchase orders, as collateral to secure a business loan.

If you’re starting a new venture, you’ll face some challenges when looking for financing. You’ll need the following to apply for a loan:

  • A solid business plan. A detailed, clear business plan is reassuring to a lender. You shouldn’t think of becoming a sole proprietor without one. Be sure to include an analysis of your competition, your future plans and cash-flow predictions.
  • Collateral. Having some form of collateral, like cash assets or a residential property, improves your chances of getting a loan since you don’t have a business history to fall back on.
  • Personal credit history. Lenders will want to see a good or excellent credit score from a potential borrower. This helps assure the lender that you’re financially responsible and unlikely to default.
  • Skills and experience. Your career experiences and skills are another metric lenders use to assess the strength of your proposed business. Fix up your resume and, if needed, brush up on the qualifications or skills essential to your trade.
  • Cost estimates. Try to estimate what your business costs will be. You need to compare existing businesses and do your research.

What financial documents do I need to submit to a lender?

  • Tax returns. Having several years of tax returns gives lenders a clear idea of how your business looks financially.
  • Balance sheet. This simple financial statement sums up the total of your assets, liabilities and capital.
  • Profit and loss statement. Usually covering a fixed period or quarter, this statement measures your profits and losses by taking your gross profit and subtracting your operating expenses.
  • Cash flow statement. This statement accounts for all the money coming in and out of your business. This includes all purchases and expenses plus all money from sales, loans and investments.

What if I don’t have financial documents?

If you’re starting up a new business and can’t provide documentation, you’ll find it much harder to get a loan from a bank. You may need to opt for a personal loan or a secured business loan that requires collateral instead. You may also want to consider a loan from an online lender. These lenders often have less stringent requirements for business loans than banks do.

Are there other non-loan options for sole proprietors?

Not all your capital has to come in the form of loans. Although a sole proprietor won’t be able to sell stock like a corporation, you can still receive capital from other sources.

  • Angel investors. An angel investor can help you fund a startup or existing business. If your application is approved and you receive funds for your business, the angel investor will own equity in your company.
  • Business grants. Both the federal government and private organizations offer grants that can help business owners start or expand a business. This is a good option if you qualify because you won’t have to pay back your grant money.
  • Crowdfunding. If you have a popular idea and know how to market your products online, crowdfunding can be a quick way to get community support behind your business and raise funds.

Bottom line

Although it can be more difficult to get a business loan as a sole proprietor, you still have options. Consider your business needs carefully, prepare all the relevant documents and don’t be afraid to compare multiple lenders to find the right loan for your growing business.

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