Let’s start with the basics—a sole proprietorship is a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity.
It differs from an LLC in that an LLC is a legally separate entity from the owner, and the owner isn’t personally liable for the business’s obligations.
It’s also slightly different from an independent contractor who doesn’t have to track their own expenses, receiving instead 1099 forms (non-employment income) from the businesses they contract with, instead of a 1040 form (employment income).
In simple terms:
Sole Proprietorship = A one-person, unincorporated business.
It’s ideal for anyone who only needs themselves (and maybe one more employee) to successfully operate, such as:
One-person accounting businesses
When it comes to getting financing, a sole proprietorship is a catch-22: the business’s revenues and financial liabilities are indistinguishable from yours. That means any impact on the business’s creditworthiness will directly affect your own.
Being a sole proprietorship can make getting a loan a long, difficult process—unless you understand all your financing options. Let’s dig in.
Started Working for Yourself, Now What?
Get the ultimate guide to running a sole proprietorship here.
What Are Your Options for Sole Proprietorship Financing?
You should spend time looking at your business plan and goals, then carefully consider which financing option is best for you at this point.
Too many times sole proprietors find themselves in cash flow problems because they haven’t done the proper research into small business financing. This creates stress and fear, and pressures them to work with anyone who will give them quick cash.
For your business to succeed, you need funding that’ll allow you to grow, not just owe. This means you need to know what’s available to you and which option will lead to long-term success.
1. Term Loans
A term loan is what most people consider a ‘traditional loan’. The lender provides a lump sum payment on which it charges a rate of interest (fixed or floating). You, the borrower, must repay the loan according to a predetermined repayment schedule (for instance, equal monthly installments for 7 years).
These business loans are usually not tied to any specific purpose—such as buying equipment or paying staff salaries. That means you are free to use the borrowed amount for the business’s short-term and long-term goals.
Note that you may be required to provide collateral to secure the loan.
2. SBA Microloans
SBA-guaranteed loans can be a great sole proprietorship loan option. Although they are typically more difficult to qualify for, they do offer low rates, favorable terms, and other benefits.
What is an SBA loan? These are loans provided by private lenders but backed by the Small Business Administration (SBA). The SBA guarantees up to 80% of the loan amount, which means you can benefit from lower interest rates and longer repayment periods.
From PPP loans and microloans to economic injury disaster loans and debt consolidation, SBA loan programs come in many different forms.
There is a catch though: time.
SBA loans are notoriously slow to get approved (60-90 days on average) and a lot of businesses don’t make the cut (because of the strict program requirements). However, if you’re willing to wait, this is an excellent business loan option.
If you need help navigating the ins and outs of SBA loans, you should work with a lender like Credibly to point you in the right direction.
3. Business Line of Credit
A business line of credit is a flexible business loan that allows you to borrow up to a certain amount, or credit limit, to cover short-term requirements.
When you get a business line of credit, you’re able to access some or all that money as you need it.
After you fully pay off a portion you’ve used, the full amount of your line of credit is available for you to use again.
Although business lines of credit do operate very similarly to credit cards, they are not the same thing. Credit cards typically have higher interest rates and, in many cases, a line of credit does not have a mandatory monthly payment structure.
4. Invoice Factoring
Invoice factoring is a form of small business financing where a business sells its invoices to a factoring company in exchange for upfront cash.
When the invoice amount is paid by the customer, the remaining balance is paid to the business owner, minus a fee.
Invoice factoring allows you to receive the working capital you need to cover business expenses and plan for the future, without taking on the periodic fixed payments associated with a term loan.
This financing option is basically an ‘advance’ on pending invoices, and a great way to solve cash flow problems in the short term.
5. Merchant Cash Advance
A merchant cash advance is a form of business financing in which a lump sum of funding is given to a business in exchange for an agreed-upon percentage of future revenues or credit card sales.
NOTE: A merchant cash advance is not a loan.
With a cash advance you and the lender work out an acceptable schedule for transfer, based on your revenue—this is called the remittance.
This remittance is then transferred to the lender, based on a pre-arranged amount—which is automatically deducted from your credit card or bank account.
Shorter durations and smaller regular remittance amounts than business term loans
The amount of remittance you pay depends on the revenue your business brings in (so you’re not paying more than you can afford to)
Ideal for small business owners who have fluctuating revenue (seasonal spikes)
In order to maximize your chances for getting funded, you need to look at it from the lender’s point of view.
Banks, credit unions, and approved lenders can be hesitant to give a business loan to a sole proprietor because you assume all the risk of your business.
A lender assumes the risk for your loan. They want to see that you’ve been responsible with your finances up to this point. You can prove this by demonstrating a sustainable business model and plans for the future.
Lenders will typically look at:
Personal and business credit scores
Profit/loss and cash flow statements
Bank statements from the previous 2-3 months
Tax returns for the previous two years
Finding and applying for a sole proprietor loan can seem daunting.
That’s where loan experts (like the ones at Credibly) can help sole proprietors and small business owners like yourself navigate the waters, and help you avoid mistakes that reduce your chances of getting funding.
Crucial Tip Before You Get Sole Proprietorship Funding
One of the most important things to remember when you’re applying for business loans and financing is your liability as a sole proprietor.
Unlike an incorporated business, there is no line between your personal finances and your business finances.
You and your business are equally liable for any debts incurred by the business. In a way, that means taking on a sole proprietorship loan is like taking on a personal loan.
Helping Owners Like You Get a Sole Proprietorship Loan
At Credibly, we know that a small business is much more than just a profit and loss sheet or a credit score. Access to small business loans and business financing shouldn’t be restricted to just those who can show a long business history or a leather folio with a sleek business plan.