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Every business, from the largest corporation down to a one-person operation, needs capital to operate and grow. Capital can help a business pay its expenses, purchase real estate, or take advantage of opportunities for expansion.
When you’re running a small business as a sole proprietor (also known as a sole trader), you may not have access to the same kind of cash that a larger business likely does, so you might consider financing as a way to get that capital. Luckily, there are different types of small business loans available for sole proprietors that may be able to help you get access to cash when you need it.
Keep reading to learn more about what sole proprietorships are, different types of business loans offered to sole proprietors, how to qualify for a business loan, and more.
Key Points
• A sole proprietorship is the simplest and most common business structure, owned and operated by a single individual — the sole proprietor or sole trader.
• SBA loans, partially guaranteed by the U.S. Small Business Administration, are offered through various lenders and can provide up to $5 million depending on your qualifications.
• Online lenders can provide a wide variety of loan products, including short- and long-term business loans, equipment financing, lines of credit, merchant cash advances, and invoice factoring.
• Meeting lender eligibility criteria typically requires a good personal and/or business credit score, along with financial documents that demonstrate your business’s viability and ability to repay the loan.
• Preparing key documents in advance — including a business plan, tax returns, financial statements, bank statements, and legal documents — may help streamline the loan application process.
What Are Sole Proprietorships?
A sole proprietorship is a business structure in which a single individual owns and operates the business. It is the simplest and most common form of business, often used by freelancers, independent contractors, or small business owners.
In a sole proprietorship, there is no legal distinction between the owner and the business, meaning the owner is personally responsible for all debts and liabilities. The owner retains full control of decision-making and profits, but also assumes all risks.
Sole proprietorships are easy to set up, with fewer regulatory requirements and lower costs compared to other business structures, like corporations or partnerships.
Personal Liability Considerations
While there are many advantages to a sole proprietorship, it’s important to be aware of potential liability concerns. Because you and your business aren’t legally separate, your assets and your business’s assets are the same. As a result, if your business is on the hook for any reason – if it is sued or can’t pay its debts – you might need to use your own personal assets to pay the costs. Those assets could include your vehicle or your house.
Recommended: Sole Proprietorship Explained
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Pros and Cons of Sole Proprietorships
Before we look at small business loans for sole proprietors, let’s briefly explore some benefits and drawbacks to running your business as a sole proprietor.
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Pros:
• Requires no paperwork or fees (beyond business permits you may need)
• You can file your business profits and loss on your personal taxes
• You have full control over business decisions
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Cons:
• Your personal assets could be seized if your business can’t pay its debts
• Investors may not want to work with a sole proprietor
• The continuation of the business is solely up to you
Now let’s look at loans typically available for sole proprietors so you can decide which is right for you.
Recommended: Sole Proprietorship vs LLC: How to Choose
SBA Loans
SBA loans for sole proprietors are offered by a variety of lending institutions and partially guaranteed by the U.S. Small Business Administration (SBA). The most popular is the 7(a) program, which can provide up to $5 million, depending on your qualifications. Interest rates vary by lender, and terms can typically range between five and 25 years. These loans are generally more difficult than some other options to qualify for.
Recommended: SBA Loan Calculator
Online Lenders
Online lenders offer many different types of small business loans, including short- and long-term business loans, equipment financing, business lines of credit, merchant cash advances, SBA loans, and invoice factoring. Online lenders typically have less stringent qualification requirements and fast funding times.
Bank Loans
Banks and credit unions offer sole proprietorship loans, though they may be harder to qualify for than SBA loans, especially if your credit score is less than 700. Rates and terms vary by lender.
Lines of Credit
Another funding option for sole proprietors is a business line of credit. While loans provide you with a lump sum of capital all at once, a line of credit gives you access to a certain amount decided by the lender. You pay interest only on the amount you’ve drawn out. Rates and terms vary by lender.
Business Loan Alternatives
Loans and lines of credit like those listed above aren’t your only options for getting capital as a sole proprietor. Here are a few business loan alternatives to consider:
Business Credit Cards
Business credit cards can allow you to make purchases for your company when you need to, even if you don’t have cash on hand. If you don’t have good enough credit for a business loan, having a credit card and paying your bills on time can help you build a more positive credit record for your business. Further down the road, you might be able to qualify for other financing options.
Recommended: Business Line of Credit Calculator
Crowdfunding
Crowdfunding is another option for getting access to capital, with the added benefit that you might not need to pay the money back. A company can set up a campaign on one of several crowdfunding sites to raise money for a new product line, for example. Anyone can donate to your project, and you don’t have to pay that money back. You may, however, be required to offer perks, like products or t-shirts to those who donate.
Microloans
Small business microloans are loans that are typically for no more than $50,000. They can be issued by a variety of lenders, including SBA lenders and mission-driven nonprofits. They may often be intended primarily as startup loans and can sometimes be easier to qualify for than larger loans.
Applying for a Business Loan for a Sole Proprietor
If you’re considering applying for a business loan as a sole proprietor, it can be a good idea to start by reviewing what each particular lender you’re interested in requires for the application process.
Some lenders list the specific credit scores you need to have to qualify, as well as how long you must have been in business. Others do not. But with a little research online, you may find other websites that tell you what a particular bank requires for a sole proprietorship loan, even if the bank’s website doesn’t.
Documentation Needed to Apply
Before applying, get your business documents and information in order so you can streamline the process. You’ll typically need to provide the following documents:
1. Business Plan: A business plan is an outline of your business strategy, your financial projections, and how the loan will be used.
2. Personal and Business Tax Returns: Lenders often request two to three years of both personal and business tax returns to assess financial stability.
3. Financial Statements: This includes profit and loss statements, balance sheets, and cash flow statements.
4. Bank Statements: The lender usually wants to see the last three to six months of business and personal bank statements. Lenders will likely use these in conjunction with other documents to assess your debt-to-income ratio.
5. Legal Documents: Legal documents include business licenses, articles of incorporation, contracts, leases, and any other relevant legal papers.
6. Personal and Business Credit Reports: These assess your creditworthiness and payment history.
7. Collateral Documentation: If you’re applying for a secured loan, documents showing ownership of collateral, like real estate or equipment, will be needed.
Recommended: How to Build Business Credit
Reviewing Lender Offers
When looking for a small business loan for a sole proprietorship, it’s always smart to shop around to find the best rate and terms for your situation. Many lenders offer the opportunity to prequalify, meaning that you can provide a few details about yourself and your business to see if you’d be eligible for financing. Prequalifying should not impact your credit, and it can help you identify which lender offers the best terms.
Before applying, it’s a good idea to check your credit scores and see where they stand. It can be helpful to have a business credit score established. If not, your personal credit score may be used.
How to Qualify for a Sole Proprietor Loan
As with other small business loans, loans for sole proprietors can have different requirements based on the lender and the type of loan. Typically, to obtain a loan, you’ll need to meet the criteria, which generally include a good credit score (personal and/or business) and relevant financial documents. Lenders want to establish your financial creditworthiness and stability, the viability of your business, and your probable ability to repay the loan.
If you have difficulty obtaining a sole proprietor loan, providing some kind of security to lower the lender’s risk might help. This could include offering collateral, such as real estate, vehicles, or financial assets. Just remember that pledging any assets as collateral means that if you default on the loan, you could lose them.
The Takeaway
Taking out a small business loan for a sole proprietor can give you access to the capital your business needs to thrive. There are a variety of funding types available, and with so many options, it’s just a matter of choosing the one that best fits your business’ needs.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Can sole proprietors get SBA loans?
Yes. SBA loans are open to all types of business structures, including sole proprietorships. Eligibility typically depends on creditworthiness, business viability, and the ability to repay the loan.
What credit score do you need to get a business loan as a sole proprietor?
Credit score requirements vary from one lender to another. But to give an example, an SBA loan for a sole proprietor might require a credit score of at least 640.
What are the benefits of being a sole proprietor?
There are many benefits to running your business as a sole proprietor. These include simplified taxes, retaining control of decision-making, and no complicated paperwork or fees to file.
Is getting a loan as a sole proprietor difficult?
Getting a loan as a sole proprietor can be challenging since approval depends on personal credit, income, and collateral. However, funding from alternative lenders and SBA-backed loans can help improve access to financing options.
What is the easiest loan to get as a sole proprietor?
Although the loan it’s easiest to obtain as a sole proprietor can vary, in general, microloans can be relatively easy to qualify for. That’s because in many cases, microloans are intended for new businesses and may have more lenient requirements and terms than other kinds of loans.
Photo credit: iStock/laddawan punna
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