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Timothy R
By: timothy-ronaldson
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Sole Proprietorship Loans: The Ultimate Guide

Sole proprietorship loans can help you get your company off the ground or finance essential investments to ensure your success.

Here, we’ll break down some basic details so you can access the capital you need to grow your small business.

Do You Need A Business Loan?

 

What Are Sole Proprietor Loans?

A sole proprietorship loan is a business financing product made specifically for entrepreneurs who operate sole props (also called sole traders). They are usually term loans.

Banks and online lenders usually issue loans for sole proprietors.

The terms of a sole proprietor loan will vary depending on the financial institutions, but, compared to other types of loans, they typically have:

Pros And Cons Of Business Loans For Sole Proprietors

There are a few key advantages and disadvantages of a loan for a sole proprietorship. Here we list the most important ones:

Advantages

  • The application process is usually straightforward.
  • You can use them for various business purposes, including equipment purchases, inventory, or working capital.
  • Most lenders have very low requirements.

Disadvantages

  • They typically have higher interest rates than other types of loans. But, again, this is because the lender is taking on more risk by lending to a sole proprietor.
  • A loan for a sole proprietorship tends to have shorter repayment terms. However, this means that the borrower might need to make higher monthly payments.

Funding Options For A Sole Proprietorship

Here are some of the best sole trader loans:

Microloans

Microloans are term loans that you can use to finance most (if not all) of your business needs.

Because they’re for lower amounts of money, it’s easier to qualify for them, and the whole lending process can span just a few days.

These micro-business loans have both pros and cons. Amongst their advantages, they provide cost certainty because they have a set:

  • repayment period
  • interest rate

At Camino Financial, we are an online lender that offers business financing for small business owners.

We offer an easy application process and have friendly repayment terms.

Plus, our minimal requirements make our financing options the best ones for any business owner.

We are different than other lenders. For example, we approve applicants with no previous credit history, accept ITIN (only if you don’t have an SSN), and don’t ask for collateral.

All of our benefits make us one of the best financial institutions for sole proprietors.

Apply Today!

SBA Loans

The Small Business Administration offers loan programs that you can invest in your sole proprietorship.

The most popular government loan is the 7(a) loan. This program provides small business owners with low-interest rates.

The problem with SBA loans is that they can be tough to qualify for.

Bank Loan

You can also get a business loan for sole proprietor through traditional banks.

However, their stringent requirements might make it challenging for a sole prop to receive approval.

And if you do get the loan, you may have to put down significant collateral.

#DidYouKnow
Credit unions are a similar option that tends to have easier-to-meet requirements.

Business Line Of Credit

When looking for sole trader loans, you might stumble upon lines of credit.

These work like credit cards: you have a credit limit that you can use on whatever purchases you need. Also, you only pay interest on the borrowed amount.

However, the repayment terms on a business line of credit are often much shorter than other sole proprietor loans. You may also be very limited on how much you can draw down at one time.

Merchant Cash Advance

With an MCA, the business owner gets a lump sum upfront, but it’s not a loan per se. Instead, the money is an advance of a percentage of their future debit and credit card sales.

Many see merchant cash advances as a viable option because they are easily approved. The problem is that they can be extremely expensive.

How To Get A Loan As A Sole Proprietor

Getting a business loan is a straightforward process. Just follow these steps:

  1. Research several lenders and sole proprietorship business loans. Find the one that makes the most sense for you.
  2. Make sure you meet minimum requirements and see the documents they require.
  3. Apply for the loan. Many lenders offer online applications that you can complete anytime, anywhere.
  4. Upload any supporting documentation the lender might require. For example, some lenders use apps like Plaid to review your business’ cash flow.
  5. Wait for a decision. The lender will review all your information before making a decision.
  6. Sign the business loan contract and receive the funds.
Apply now!

What You Need To Complete A Sole Proprietor Loan Application

When you’re ready to apply for a loan as a sole proprietor, there are a few things you’ll need to do to get started.

Gather financial documents and information about your small business and personal information.

For example, the lender might ask you to share:

  • Tax returns
  • Income statements
  • Balance sheets

Some lenders will also ask you to present a business plan that outlines your business goals and how you plan to achieve them.

At Camino Financial, we won’t require you to write a business plan because we want to help you in the least cumbersome way.

Once you have all this information, you can begin filling out a loan application.

#CaminoTip
Be sure to review the entire application carefully before submitting it. This will ensure that you’ve included all the required information and that your application is complete.

Most Common Sole Proprietorship Loans Uses

There are several ways to use small business loans for sole proprietors.

For Business Expenses

A loan can help you finance things you wouldn’t be able to otherwise. This includes things like:

  • buying inventory
  • paying for marketing or advertising
  • help you get through a slow period

Invest In Your Business

If you need new equipment but don’t have the upfront cash to pay for it, a sole proprietor loan can be a great way to finance the purchase.

This could include anything from office furniture to manufacturing equipment.

#DidYouKnow
There are also specialized business loans for machinery. They’re called equipment loans.

Cover Unexpected Expenses

Unexpected expenses can pop up at any time, so it’s essential to have a financial cushion to cover them.

You can use external financing as a sort of emergency loan to cover these unexpected costs.

Expand Your Business

If you want to grow your business, you can use a business loan to fund expansion efforts.

This could include:

  • opening a new location
  • hiring additional staff

Consolidate Debt

If you have multiple debts with high-interest rates, you may be able to save money by consolidating those debts into a single loan with a lower interest rate.

Using a loan for debt consolidation can free up cash flow to help you grow your business.

Working Capital

If you need additional funds to cover day-to-day expenses, a business loan for a sole proprietor can provide the working capital you need.

This could include things like:

  • inventory
  • payroll

Other Business Financing Alternatives

There are other non-loan options you can access if you need capital for your business.

Business Credit Cards

An alternative to a sole proprietor loan is to get a commercial credit card and use it to fund your business.

It’s not a small business loan per se, but it can help you finance the business expenses that will help you grow.

The downsides are your credit limit may be low, and the interest rate could be pretty high.

Personal Loan

Using a personal loan for business purposes isn’t always a good idea, but it is possible.

A personal loan is an excellent idea for funding a sole proprietorship because they only rely on your personal credit score, finances, and credit history.

#CaminoTip
If you need sole proprietor loans, use a microloan instead of a personal loan.

Business Grants

Grants are a type of financial aid that gives businesses a lump sum they don’t have to pay back. Government agencies or private foundations often award grants to encourage entrepreneurship and economic development.

Grants can be a great source of funding for businesses, but it’s important to note that they are often highly competitive, and there is no guarantee of receiving one.

Crowdfunding

Many small businesses have turned to crowdfunding to raise money.

You post your needs on a crowdfunding platform, and people contribute to your cause.

You’ll need to market your campaign really well, though. Plus, based on what you described, you could be very limited in how you use the funds.

Angel Investors

Angel investors are individuals who invest in early-stage companies in exchange for equity. In addition, they typically provide seed funding, which is the first round of financing for a startup.

Angel investors often play an active role in their portfolio companies, offering mentorship and advice to entrepreneurs. They may also provide follow-on funding as the startup grows.

These investors typically invest their own money, unlike institutional investors such as venture capitalists.

Friends And Family

Another option is to borrow money from your loved ones.

This is one of the primary sources of financing for many sole proprietorships. Why? Because they often don’t meet the minimum requirements for traditional lenders.

But this option could hurt your relationships if you can’t pay the money back.

#DidYouKnow
Trade credit is also an alternative at your disposal.

What Are Sole Proprietorships?

A sole proprietorship is a business structure that only has one owner. Most solopreneurs have sole proprietorships.

It’s the default structure of new businesses, where there’s no distinction between the business and the owner. In other words, you are personally liable for all the business’s debts and losses, but also the profits.

This structure doesn’t have to register with the state to operate.

#DidYouKnow
Sole proprietors are sometimes also called sole traders.

Pros And Cons Of A Sole Proprietorship

Some of the advantages of a sole proprietorship are:

  • There are no corporate business taxes, no annual filings, or reports.
  • It’s easy to set up and keep records, with a low cost associated with doing so.

Some of the disadvantages are:

  • Some see it as an unprofessional structure, which sometimes makes raising money challenging.
  • There’s also the issue of liability, which makes you personally responsible for everything. This can put your personal assets at risk.

Get A Sole Proprietorship Loan For All Your Business Needs

Traditionally, these businesses don’t have the same revenue as other businesses. That’s why sole proprietor loans aren’t as abundant as other types of capital.

Still, many alternative lenders, such as Camino Financial, are willing to help you with business and personal loans.

Apply for a sole proprietorship business loan today to start growing your business.

Apply For A Loan Now

 

FAQs

Can I get a loan as a sole proprietor?

Yes, you can get loans for sole proprietors. However, you will have limited choices compared to other types of businesses.

Can sole proprietors get an SBA loan?

They can. However, many SBA lenders may not cater to sole proprietors.

Can you get business loans for sole traders or sole props with bad credit?

Yes, you can. Some lenders will accept sole traders with bad credit or no credit at all. However, remember that they might charge high-interest rates or require collateral.

Make sure to research several lenders for the one that best suits your needs.

Can a sole proprietor build business credit?

Yes. If the loan is in the name of the sole proprietorship (and not the business owner), then repayments will go towards building business credit.

Any time you make repayments on loans, it helps you build credit. In addition, timely repayments will build a good credit score if the loan is in the business’s name.

How much does it cost to start a sole proprietorship?

Many sole proprietorships can cost as little as $1,000 to start. While that’s cheap compared to other business structures, that doesn’t include any costs for technology, equipment, or products. That’s why getting sole trader startup loans is a good idea.

What is a sole proprietor loan?

A sole proprietor loan is a type of business loan typically used by businesses owned and operated by a single person.

You can use this type of loan for various purposes (it is often available through banks and other financial institutions) and they can be either secured or unsecured.

How to get approved for a PPP loan as a sole proprietor?

The best way to get approved for a PPP loan is to have a strong credit score and an established business with a good credit history.

You will also need to demonstrate that you have the ability to repay the loan. You can do it by providing documentation of your income and assets or by providing a guarantor who is willing to guarantee the loan on your behalf.

* It’s important to note that the government no longer offers PPP loans.

What credit score do you need to get a business loan as a sole proprietor?

It depends on the type of loan and the lender, but applicants will probably need credit scores of 650+.

What are the benefits of being a sole proprietor?

There are many benefits to being a sole proprietor, including the following:

  • You are your own boss and completely control your business.
  • Getting to keep all of the profits.
  • You can set your hours and work as much or as little as you want.

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

When you’re a sole proprietor, there’s no distinction between business and personal finances.

First, this makes it harder for lenders to assess the risk of self-employed business loans. Second, if you default on the loan, the lender may have a harder time recouping their losses. Finally, sole proprietorships tend to be smaller, which generally seem higher-risk lenders.

Can sole proprietors take out personal loans for their businesses?

The simple answer is yes. However, there is something to keep in mind if you consider this option.

You might need to use your personal assets as collateral for the loan. That means if you can’t repay the loan, the lender could go after your personal belongings (like your house or car) to recoup their losses.

 

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