Editor's choice: SmartBiz business loans
- Large network of SBA lenders
- Low potential APR
- Loans from $30,000-$5,000,000
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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.
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.
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.
|Loan type||Typical amounts||How it works||Pros and Cons|
|SBA loan||$5,000–$5 million||An SBA loan is backed by the government. Although these loans harder to qualify for, they’re designed for small businesses with just a few employees and target borrowers who’ve had trouble getting a traditional loan elsewhere.|
|Personal loan||$2,000–$100,000||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.|
|Invoice financing||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.|
|Line of credit||$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.|
|Term loan||$2,000–$5 million||A term loan allows you to borrow a single lump sum and pay it back over time.|
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%.
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.
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.
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.
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.
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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