Loans for Sole Proprietors: Explore Your Options and Learn How to Apply When You Are Self-Employed

Business Guides

Jacques Famy Jr
Review By Todd Millman

What Does It Mean to be a Sole Proprietor?

A Sole proprietorship is defined as a single person, individually owned, unincorporated business that is NOT incorporated or formed as an LLC, limited partnership, C Corporation, S Corporation, Partnership or Trust/Estate. As the sole business owner, you enjoy the simplicity of having full authority and ownership over your business decisions. This means you are personally liable for the business’s debts, losses, and liabilities because there is no legal distinction between the business owner and the business – a defining characteristic of the proprietorship business model. Maintaining complete ownership, sole proprietors are non-registered businesses that typically operate under a trade name “DBA” (doing business as), although the legal entity is the business owner’s actual name. For instance, John Smith dba Smith's Auto Repair.

Most businesses can operate as a sole proprietor which is ideal for professions that generally do not entail complex organizational structures or the necessity for multiple owners, such as:

  • Truck Drivers
  • Freelance workers like writers, bloggers, illustrators, graphic designers
  • Seamstresses
  • Artists
  • Housekeepers
  • Bookkeepers
  • Business Consultants

For freelancers, the sole proprietorship business structure is beneficial, minimizing the legalities involved in operations. As for tax considerations, the simplicity continues – sole proprietorships' income is reported on personal tax returns with just one most recent year of personal tax returns needed, sidestepping the complications of corporate tax returns. It's also important to note that equity financing, which involves giving up a portion of business ownership, is not typically an avenue for sole proprietors who wish to maintain complete ownership and control over their business.

What Are Sole Proprietorship Pros and Cons

There are both advantages and disadvantages to forming a sole proprietorship over incorporating or forming a LLC, limited partnership, C Corporation, S Corporation, Partnership or Trust/Estate.

Pros of sole proprietorships

  • No need to file a separate business tax return.
  • Simple process to set up with little to no fees or legal entity to form using the help of an attorney or legal filing service
  • No need to file a separate business tax return. The simplicity of starting a sole proprietorship is a highly appreciated benefit; the process is straightforward, often requiring little to no fees, and there's no complicated legal entity to establish, which can be done without the assistance of an attorney or legal filing service.
  • Tax filing for a sole proprietorship is simple as there are no corporate business taxes, no annual filings, or reports. Just a Form 1040 with a Schedule C is needed, streamlining tax preparation and potentially trimming down costs for tax reporting.
  • Given the cost-effectiveness of its operation, a sole proprietorship can be a more economical choice compared to other business entities, making it a practical decision for entrepreneurs keeping an eye on expenses.
  • Sole Proprietors enjoy unrivaled control over decision-making since they are not entangled with partners, members, or other owners when it comes to business activities. This autonomy in decision-making can be particularly empowering.

Cons of sole proprietorships

Sole proprietors do not receive the protections that Corporations, LLC’s, Partnerships and Trust/Estates offer. Incurring personal liability, they come face-to-face with risks where personal assets may be at stake in settling business debts if the business encounters financial hurdles. -One potential drawback of a sole proprietor loan is the personal liability for debt, which means personal assets could be at risk if the business fails to repay the loan. This contrasts with the limited liability company structure, which can shield personal assets from business liabilities.

  • Loss of tax withholding benefits of corporations and LLC’s as a sole proprietor is another downside. Unlike other business structures that can take advantage of various tax benefits, a sole proprietor is often subject to different tax liabilities, which may reduce financial efficiency.
  • Sole proprietors often struggle with acquiring business bank accounts and obtaining business loans and lines of credit as well as other financing products, due to stringent eligibility criteria focusing on personal creditworthiness. -Flexible eligibility criteria set by online lenders and microlenders, however, may offer a lifeline to those with limited credit histories, as they consider a more holistic range of qualifying factors.
  • Sole proprietors are indeed individuals that can be exposed to business interruption or extinction if the sole proprietor falls ill or dies, putting the business's continuity at risk without proper succession planning. This survival risk is unique to sole proprietorships, as corporations and partnerships usually have measures to continue operations beyond an individual's involvement.

What Are Your Options for Sole Proprietorship Loans?

Sole proprietors can find many of the same business financing products that corporations, LLC’s and partnerships may find. The following are the most common business loans and financing options for sole proprietorships.

1. Business Term Loans

Business term loans are loans with fixed rates, fixed terms, and fixed payments that do not fluctuate, offering durations from 6 months to 3 years. These are ideal solutions catering to various financing needs, such as business expansion, equipment purchases—including machinery—renovations and long-term investments in the business. With loan repayment terms potentially extending up to 5 years, entrepreneurs can effectively plan their budgets around predictable loan costs. Moreover, securing a business term loan can be a strategic move for purchase inventory needs, especially to prepare for seasonal demands or to leverage bulk purchase savings.

  • Fixed rates, terms, and payments
  • Terms range from 6 months to 3 years (in some cases up to 5 years)
  • Interest rates starting at 11%
  • Simple and straightforward application process (approvals in a day)
  • Funding available in 24 hours
  • Suitable for buying inventory or managing cash flow during slow periods

2. Business Line of Credit

A Business line of Credit is a credit facility that functions similarly to a credit card, offering revolving access to funds with a credit line available on demand up to a credit limit determined at application and activation. When considering options, remember that collateral options play a crucial role as they may secure the line of credit and influence the terms offered. With a credit line, you can draw funds as needed and only pay interest on the amount utilized, providing substantial cash flow management flexibility. This is a fantastic product for achieving financial agility, enabling you to make quick purchases as required.

  • Revolving line of credit
  • Draw funds on demand up to a credit limit
  • Access to funds by app or online request
  • Rates starting at 1% per month simple interest
  • Amortization usually 12 months but can be extended up to 18, 24, or 36 months
  • Application process and approval in as little as 1-day, subject to providing acceptable collateral options and meeting the lender’s criteria
  • Renewals typically every 12, 18, 24, or 36 months

3. SBA Loans

SBA loans are designed and provided by the government-backed Small Business Administration. These financial instruments are a cornerstone in the small business lending landscape, giving entrepreneurs access to essential capital. Among such options, the SBA microloans program stands out for businesses seeking smaller funding amounts. SBA loans are very popular with business owners due to the low rates, extended terms, and affordable payments. While the eligibility requirements for lenders can be stringent, they facilitate a range of business needs from startups to expansions.

The lending process for SBA loans, including microloans, is comprehensive, requiring a voluminous amount of paperwork and adherence to strict credit standards for approval. Potential borrowers should be prepared for:

  • SBA Loans as either term loans or CAPLines (Credit Asset Promissory Lines)
  • Interest Rates starting at 10%
  • Terms range from 2 to 10 years, with options extending up to 25 years in certain cases
  • A comprehensive application process that can take weeks, sometimes months, for approval
  • Significant paperwork required for approval
  • Strict credit standards that must be met to qualify for funding

4. Short Term Business Loans

Short-Term business loans are defined as business loans with duration of 6 to 24 months to repay with fixed rates, terms, and payments. Rates are based off of simple interest or a factor rate. Short term loans offer a quick and simple application process with only a 1-page application and business bank statements for approval (larger amounts may require a Business Tax Return). This form of debt financing can be advantageous for businesses needing immediate funds without the rigidity of long-term lending terms.

  • Simple 1-page application and bank statements required in application process
  • Same day approval and funding available
  • Rates starting at 11%
  • Terms from 6 to 24 months
  • Fixed rates, terms, and payments

5. Merchant Cash Advance

A merchant cash advance, also known as a purchase of future receivables at a discount, is a business funding option for those businesses who cannot get approved for traditional business financing and are willing to pledge future sales receivables to be advanced a lump sum of money now for the business. Merchant cash advances are typically paid back by a percentage of future sales by a set percentage of monthly sales. Repayment fluctuates to future sales so there is no fixed term or time to repay.

  • Flexible repayment process attached to future sales
  • Revenue based business funding
  • Factor rates starting at 1.15%
  • Estimated time to repay ranges from 4 to 18 months
  • No personal guarantee, only a business performance guarantee
  • Repayment not required if sales or revenue ceases.

6. Long Term Business Loans

Long term business loans are considered business loans with durations 5 years or greater. The approval process can be lengthy, often requiring collateral due to the duration of the loans. These loans typically come with fixed rates, terms, and payments, which can be beneficial for budgeting and financial planning. For businesses looking to manage multiple debts more efficiently, debt consolidation might offer a path to simplifying finances by combining existing high-interest obligations into a single loan—potentially with a lower interest rate.

  • Fixed Rates, terms, and payments
  • Rates starting at 11%
  • Application process is lengthy, and approval can take a week or more
  • Collateral required
  • Good to Excellent Credit Required

7. Invoice Factoring 

Invoice factoring, also called invoice financing, is an advance on issued invoices by a business to client that have been issued but not yet paid. Invoice factoring companies purchase the invoice at a discount at the time of issuance to the issuing company and take over the collection of that invoice. Unlike traditional loans that require scrutiny of creditworthiness, invoice factoring offers a more accessible option for businesses to maintain their cash flow without the stringent requirements of personal credit history. The difference from the face value of the invoice and the discount is what the invoice financing company earns. This is a great product to accelerate the cash flow of the business for a nominal fee.

  • Factor rates ranging from .5 to 5% of the face value of the issued invoice
  • From 5% up to 25% of the invoice is held as reserves until the invoice is paid
  • Commitments as low as $450,000 per term of invoice funding agreement
  • The credit of the business issuing invoices is not a significant factor in this method, making it distinct from traditional financing options that heavily weigh on creditworthiness.
  • Excellent product to accelerate cash flow

8. Equipment Financing

Equipment financing is the purchase of equipment facilitated through the lending of money, with the vital aspect that the equipment itself serves as collateral. This leveraging can make obtaining a loan more accessible as lenders may be more willing to offer collateral-based loans with favorable terms. Equipment financing is available in the form of either a loan or a lease. Financing terms are typically contingent upon the type of equipment involved and the credit profile of the business borrower.

  • Application process made simple with a straightforward application, bank statements, and the equipment description/invoice
  • Quick decisions, generally ranging from same day up to 24 hours
  • Requirement to offer collateral in the form of the equipment being financed
  • Broad credit spectrum considered, from excellent to poor credit ratings
  • Equipment loans and/or lease rates are determined based on the application details, the specifics of the equipment, and the business's credit history

Business Loan Alternatives for Sole Proprietorships

When traditional business funding products are not available to sole proprietors, there are other ways to obtain money for the business. Let’s explore the business funding alternatives.

1. Personal loans for businesses

A variety of new online personal loan companies have entered the market over the last 10 years that can be a great source of funding for your business. The following are nationally recognized personal loan providers.

  • Lendingclub
  • Sofi
  • Lendingpoint
  • Lightstream
  • Prosper
  • Avant

2. Credit Cards

Credit cards a re a great tool in the toolbox of financing products that can be used by business owners to support their business. Credit cards friendly to sole proprietors include;

  • Capital One
  • Citi
  • Chase
  • Bank of America
  • Discover
  • American Express

3. Self- Funded Business Loans

Sometimes sole proprietors will lend personal funds to their own business to help support cash flow or necessary purchases.

4. Friends and Family

When a sole proprietor needs money for the business and there are no alternatives then friends and family may be an alternative. You must be careful not to jeopardize your relationships for the sake of funding your business so trend carefully when it comes to this option.

How to Qualify and Apply for a Business Loan for a Sole Proprietor?

Depending on the business financing product you choose the qualifications and requirements to apply will vary, but it’s important to prepare. Ensure you are aware of the eligibility requirements specific to sole proprietors to achieve the best rates, terms, and options available BEFORE you apply. Here are the factors you need to consider:

  1. Personal Credit – Your personal credit plays a crucial role in the lender loan application process for most business funding options. It's beneficial to have a well-established credit history of at least three years. Additionally, addressing any issues on your credit report can boost your attractiveness to lenders, considering that business lending for sole proprietors often hinges on personal credit scores.
  2. Business CreditBuilding a robust business credit profile beforehand can significantly sway business lenders when assessing your repayment capability. The depth of credit you have established can have a direct impact on the lender's confidence in your business.
  3. Business Bank Account Cash Flow Management – Effective cash flow management in your business bank account is paramount. Lenders evaluate your financial health by looking at your monthly gross sales, ensuring you maintain at least 10% of that figure in your account. Consistent deposit volume, the average daily balance, and a frequent number of sales deposits are all favorable factors, whereas overdrafts and negative balances can severely impact your eligibility.
  4. Financial Statements – Preparedness with required documentation such as Business Tax Returns and financial statements can expedite the loan application process. Maintain well-organized records and nurture a good relationship with your bookkeeper or accountant to ensure smooth processing.
  5. Business Plan – A thorough business plan that outlines your short-term and long-term strategies demonstrates to lenders and others involved in business lending that you have a clear direction and structured approach to operating your business.

Getting Approved for Sole Proprietorship Loans: What you need

The following items should be gathered and maintain throughout your business operations as a sole proprietor so you can be prepared. If you need help in maintaining the below items hire a bookkeeper or accountant to assist you in maintaining good records.

  • Business Bank Statements -Online banking monthly management
  • Monthly profit & loss and balance sheets – Monthly review
  • Accounts Receivable and Payable Management – Monthly review
  • Quarterly Profit & Loss, cash flow and balance sheet - Management review with sole proprietor and accountant every quarter.
  • Business Tax Returns- Make sure they are filed in a timely basis and all taxes are paid. 

Crucial Tip’s Before You Get a Sole Proprietorship Loan

  • Be Prepared with Paperwork – Have your paperwork ready and up to date BEFORE you apply for a loan as a sole proprietor. Organize your business bank statements, financial statements, accounts receivable/accounts payable aging reports, invoices, business tax returns and any other relevant paperwork.
  • Credit is King – Always maintain the best credit possible and repair any credit problems or “dings” before you apply if you can.
  • The “Need” matches the “Loan” – Make sure the use of funds for the business works with the terms being offered for the loan for the sole proprietorship. If your buying equipment you may need longer terms to recoup the upfront cost or perhaps you need quick cash to balance the cash flow and short-term loan is in order. Always evaluate the need verses the payback and the payments.
  • Choosing the Lender or Funder – When considering a loan for your sole proprietorship consider the reputation and reviews of who you are working with. Not all lenders are equal. Judge them by the accuracy of the information you are given and the reliability of service. You should only work with lenders who are an advocate and not an adversary. Build quality relationships with lenders and it will payoff I the long run.
  • Compare, Choose and Save – Always obtain multiple offers from various lenders and/or funders to determine the best products, rates and terms. Always get terms in writing with proper disclosures such as terms sheets and/or State disclosures outlining all rates, terms fees and product functions terms and conditions. DO NOT rely on emails or advertisements when choosing products and terms.  

Frequently Asked Questions

Can Sole Proprietors get SBA Loans? Are self-employed SBA loans hard to get?

Yes, sole proprietors are eligible for SBA loans, a valuable resource for small business financing. They will have the same requirements to complete as corporations and LLCs. However, the application process for these lending options can be complex, often necessitating assistance from a qualified SBA loan originator to circumnavigate the detailed forms and extensive documentation requirements needed to secure approval. If the traditional SBA route seems daunting, it might be beneficial to explore other lending options tailored for sole proprietors and small business owners.

What credit score do you need to get a business loan as a Sole Proprietor?

Your credit score, along with your overall personal credit history, will be closely examined by business lenders and funders due to the inherent lender risk associated with sole proprietorships. They will rely on this information to assess the risk of lending to your business, with some products necessitating excellent credit, typically around a 720 or higher FICO score. Conversely, there are options available for those with lower scores, even as low as 500. The better your credit, the more choices you'll have, ensuring favorable terms and a wider range of financial products as a sole proprietor.

Do you offer loans for startups of Sole Proprietorships?

We do not offer loans for start -up sole proprietorships. For enterprising individuals looking to raise capital, exploring small business lending options such as microloans from community development financial institutions (CDFIs) or online platforms could provide the necessary support. You may have to raise capital through alternative means outside of traditional business financing if you are a start-up sole proprietor.

What factors do you consider in your approval process?

  • Industry
  • Time in Business as a Sole Proprietor
  • Personal and Business Credit
  • Cash Flow Management- Business Bank Statements
  • Business Financial Statements
  • Ability to Repay

The Bottom Line

Sole proprietors can definitely acquire business loans and other business financing products, including various proprietorship loan types, if you prepare ahead of time as to what you will need to apply and the condition of your business. Being eligible for a rewards business credit card could also enhance your borrowing power while providing additional perks.

Manage your business bank account, monitor your personal and business credit, keep current with your financial statements, and manage your books monthly, and you will find business funding opportunities such as inventory financing or a line of credit suited to your needs. Work on all parts of your qualifications at all times so when you need to consolidate debts or cover payroll, you can get approved quickly and avoid the risk of default.

Jacques Famy Jr

Small Business Loan Calculators

Calculate your financing costs using our nifty calculators now.