Small Business Loans For Sole Proprietors

What is a sole proprietorship?

A sole proprietorship is an unincorporated business owned by one person, and there is no legal difference between the two. To set one up, all you need are the correct licenses and permits for your business, and that varies depending on which industry you are in and where in the country you live.

Most businesses require some sort of business license, perhaps a zoning permit, signage license, and so on. It’s as well to get this sorted out from the start as not having the correct permits will only lead to trouble later on.

You may also want to register a name for your business. This is known as a trade name, fictitious name, assumed name, or “doing business as” (DBA) name and must be original. Having a name for your business doesn’t make it separate from you in any way. You receive all the profits from the business and are liable for any taxes due and any debts it builds.

While many sole proprietorships stay that way, others evolve into partnerships, LLCs, and corporations as business growth and change demand.

What are the advantages and disadvantages of a sole proprietorship?

Advantages

• Simple and economical to set up – A sole proprietorship doesn’t need the complex legal setup time and costs incurred by a more complicated business arrangement.
• You are in control – The direction the business takes is entirely down to the owner who has no partner or board of directors that need to be consulted.
• Straightforward tax situation – For tax purposes, you and the business are one entity, making filing a tax return much easier than any other form of business organization. According to the U.S. Small Business Administration (SBA), for a sole proprietorship, “The tax rates are also the lowest of the business structures.”

Disadvantages

• Liabilities – The owner is liable to all losses, debts, and obligations of the business, including any that result from the actions of its employees. If the business gets sued and loses the case, the owner is liable for everything awarded by the court.
• Everything is down to the owner – Yes, you have full control, but this also means that you have to bear all the responsibilities of running the business.
• Finding finance can be difficult – Sole proprietors often find it more difficult than other small businesses to raise extra cash. A sole trader cannot offer stock to outside investors, and many lending institutions are loath to offer loans.

Can a sole proprietor get a business loan?

Yes. Obtaining any type of business loan can be a challenge for businesses, and that is no different for a sole proprietor. There are many banks and alternative lenders willing to lend money to successful sole proprietorships. Most loan providers, particularly traditional banks, will require quite stringent qualifications for them to lend money to a sole proprietor, but there are alternative loan companies that are more flexible in their requirements. That is good news for those business owners that have not got clean credit scores or have not been in business for very long.

What can sole proprietor business loans be used for?

There are many things a sole proprietor might use capital for. Among them are:

• Expansion: All businesses need to grow, and many need extra funding to achieve this.

• Marketing: Whatever the size of your business, marketing and advertising are vital if your business is to compete. Today that strategy must involve SEO, social media, as well as more traditional outlets, and many business owners don’t have the expertise or time to devote to this aspect of running their company. Often, outsourcing is the best option.

• Inventory purchase: Finding money to buy inventory can be hard for small businesses. Retail and wholesale companies need to move quickly if they are to keep pace with what’s hot in an ever-changing marketplace. Finance can mean you get the inventory you want while retaining the working capital you need to run the business.

• Boosting cash flow: Even the best-run businesses can suffer cash flow problems, and some forms of finance, such as a business line of credit, can help smooth this out.

• Extra staff: Getting the right talent is important if you are to provide a good customer experience. You need bright people with the right skill set when you need to increase your workforce, and finance can enable that, especially if you need the cash for a contractor.

• Machinery: In many business sectors having up to date machinery can be the difference between success and failure. Machinery and equipment finance can be an option for a sole proprietor.

• Property: Few people have enough capital of their own to finance real estate and building purchases. A business loan is often the only way a small business can buy bigger premises when they want to upscale.

What are my options for financing sole proprietorships?

Bank Loans

Bank loans are the traditional form of finance for sole proprietors. You borrow a lump sum that you pay back, plus interest, in regular installments over the term of the loan. Though difficult to qualify for, bank term loans offer low interest and generous terms.

SBA Loans

The SBA doesn’t offer loans itself but works in tandem with its approved lending partners. They guarantee the greater part of every loan, making  SBA loans popular with lenders. They are also good for the borrowers, with low interest rates and long terms available. Their most popular programs include the 7(a), 504, and the microloans.

Business Line of Credit

A line of credit operates much like a credit card. The lender agrees to a maximum amount you can borrow, which you dip into as often as you like as long as you remain within your limit. You make regular repayments and, as you do, so that money is available to borrow once more. The benefits are that it is quick to organize, very flexible, and you only pay interest on the amount you actually borrow. The downside is that it can be an expensive way to finance a business.

Term Loans

Online lenders are plentiful and much easier to work with than banks. They often offer new products that may be more attuned to your business than standard forms of finance. They can be a good investment source for sole proprietors that are finding other providers reluctant to lend them cash.

How do I apply for a PPP loan as a sole proprietor?

During the COVID-19 pandemic, the SBA is offering the Paycheck Protection Program or PPP loan. All small and medium-sized enterprises can apply, including sole proprietorships. Once you have decided which lender you will be using, you have to fill in the SBA’s PPP loan application, which is actually reasonably concise and straightforward. Your lender will require specific documentation, but you should have the following available:

• Tax documents
• Government-issued identification
• Organizational documents
• If you have any employees, you will also need W-2s and payroll documentation.

The SBA has a Lender Match tool to help you to find a suitable lender.

How to Qualify for a Sole Proprietor Business Loan

What you need to qualify for a sole proprietor business loan varies with the lender and the sort of financing you require. You should have the documents listed above in the PPP section as a minimum. Be sure to ask the lender exactly what they require from you before you begin an application. It should go without saying that a good credit score and credit history and the longer your business has been profitable will make offers of finance more likely.

For those who are finding that securing finance from traditional sources is challenging, newer alternative lenders may offer a solution. Failing that, you could consider crowdfunding, peer-to-peer lending, and angel investors.

How to Apply for a Sole Proprietor Business Loan

Again, that will depend on the lender you choose. SBA and term loans will likely have the most drawn-out application processes. Online lenders tend to use much more streamlined procedures, together with fast approval rates and funding speed.

Lines of credit also tend to be easy and quick to organize.

A sole proprietor may find it more difficult to get a loan than other sorts of business, but there is no need to despair. There are lenders that are happy to lend money to sole traders; you just might have to do a little research to find one that is the right fit for your business.

PrimeRates can make the whole process of finding finance for a sole proprietorship easy. Simply fill in our application form and we’ll offer you a list of suitable lenders with no impact to your credit score. Pick the best, finalize the deal, and you will often receive your funding in just days or even hours after agreeing to the terms. Click here to get started.