What does Sole Proprietor mean?
Being a sole proprietor means you are the only owner of your business. You and your business are considered one entity, meaning you have complete control over decision-making. As a sole proprietor, you’re personally responsible for all financial obligations and debts of the business. Running your own business comes with more freedom and responsibility.
Sole proprietors have the freedom to make decisions without consulting others, allowing for quick action. They bear all the profits but also shoulder all losses and liabilities alone. They are responsible for fulfilling all legal and financial obligations related to the business.
Unlike other business structures like corporations or partnerships, sole proprietorships do not involve separate legal entities from their owners. This means the owner is personally liable for any debts or legal actions against the business. Moreover, taxation is more straightforward as profits from the business are reported on the owner’s individual tax return.
Types of sole proprietorships can include:
- Freelance businesses
- Independent contractors
- Small retail shops
- Online businesses
- Home-based businesses
- Tutors
- Photographers
- Housekeepers
- Plumbers
Can Sole Proprietors get Small Business Loans?
Yes, getting small business financing is possible if you’re self-employed. However, sole proprietors face some challenges when getting approved for business loans.
Qualifying for Loans
Since sole proprietors are personally responsible for all aspects of their business, including debts and liabilities, lenders may view them as riskier borrowers. Many sole proprietors lack a separate business credit score, which means lenders place more emphasis on personal credit when making lending decisions. This can make it more difficult for sole proprietors to qualify for traditional business loans, as lenders may hesitate to extend credit to a business that is not legally separate from its owner.
Also, sole proprietors may struggle to provide the documentation and financial history lenders require, as their business finances are often closely intertwined with their personal finances. As a result, sole proprietors may need to explore alternative lending options, such as microloans or lines of credit, to secure the funding they need for their business.
Financial Preparation
When seeking business loans, sole proprietors should be ready to furnish comprehensive financial records and a robust business plan. These documents demonstrate creditworthiness and the ability to repay the loan. A business plan, tax returns, financial statements, and legal documents are commonly required to apply for a business loan. Alternative lenders often offer minimal documentation requirements for sole proprietors seeking loans.
You should be prepared with the following documents:
- Business plan
- Tax returns
- Business bank statements
- Personal bank statements
- Profit and loss statements
- Balance sheets
- Business licenses and permits (if applicable)
- Financial projections
- Credit reports
Role of Personal Credit & Credit Scores
Personal credit plays a crucial role in small business loans for sole proprietors, especially when they don’t have an established business credit history. Since sole proprietors are personally responsible for their business debts, lenders often rely on the owner’s personal credit score and history to assess the risk of lending to the business.
A strong personal credit score can increase the chances of approval for a small business loan and may lead to more favorable terms and lower interest rates. On the other hand, a poor personal credit score can make it difficult for sole proprietors to secure financing for their business ventures. Therefore, maintaining a healthy personal credit profile is essential for sole proprietors seeking small business loans.
What are the types of Loans available for Self-Employed Business Owners?
Here are the primary sources of sole proprietor business loans.
Traditional Lenders
Business loans for sole proprietors from traditional lenders like banks and credit unions are typically available in term loans, lines of credit, and Small Business Administration (SBA) loans. Bank term loans and lines of credit are common financing options that offer fixed rates and terms for sole proprietors.
Traditional bank loans typically carry the lowest interest rates, but they are more challenging to qualify for. The credit score requirements for a business loan as a sole proprietor vary by lender, but can range from 640 to 720 or higher.
Traditional Lender Pros & Cons
Pros:
- Lower interest rates compared to alternative lenders.
- Established reputation and credibility.
- Access to a wide range of loan products and services.
- Potential for larger loan amounts.
Cons:
- Stricter eligibility requirements and documentation.
- Longer approval process.
- Limited flexibility in loan terms.
- May require collateral or personal guarantees.
Alternative Business Lenders
Business loans for sole proprietors from alternative business lenders can offer various benefits. These lenders often have more flexible lending criteria, making it easier for sole proprietors to qualify for a loan. Additionally, the application process is usually quicker and more streamlined, allowing entrepreneurs to access the funds they need more rapidly.
Alternative business lenders may also be more willing to consider the individual circumstances of the business owner rather than relying solely on credit scores and financial statements. Online lenders typically have less stringent qualification requirements compared to traditional bank loans.
However, there are also drawbacks to consider. Alternative lenders typically charge higher interest rates and fees, which can increase the overall cost of borrowing. Additionally, the loan terms may not be as favorable as those that traditional lenders offer, potentially creating a more significant financial burden for the sole proprietor in the long run.
Alternative Lender Pros & Cons
Pros:
- Easier access to funding compared to traditional banks.
- More flexible lending criteria.
- Faster approval process.
- They are more willing to work with businesses that have less established credit history.
Cons:
- Higher interest rates and fees.
- Limited regulatory oversight compared to traditional banks.
- Limited range of financial products and services compared to traditional banks.
What are the Best Small Business Loans for Sole Proprietors?
Here is our list of the best small business loans for sole proprietors. These loans are available through our lender network, and the features listed are specific to those lenders. Other lenders may vary.
Business Term Loan
- Max Amount: $10k – $10 million
- Factor Rates: Starting at 1-4% p/mo
- Term: 3 months – 5 years
- Funding Speed: 1 – 3 business days
Business term loans are a common form of financing for self-employed individuals. Qualifications for these loans typically include a strong personal credit score, a solid business plan, and evidence of consistent revenue and profitability. Lenders may also require collateral to secure the loan. These can come as short-term or long-term business loans.
Business owners can use business term loan funds to invest in equipment, expand their business, cover operational expenses, or even consolidate debt. These funds can provide the capital needed to grow and improve their business.
Business Line of Credit
- Max Amount: $1k – $1 million
- Factor Rates: Starting at 1% p/mo
- Term: Up to 36 months
- Funding Speed: 1 – 3 business days
A business line of credit is a flexible financing option where businesses can borrow funds up to a specific credit limit. It provides access to capital for short-term needs, such as managing cash flow, purchasing inventory, or covering unexpected expenses. Unlike a traditional loan, a line of credit allows businesses to borrow, repay, and borrow again, making it a convenient and cost-effective financial tool for small and medium-sized businesses. You only pay interest on the funds you use from your line of credit.
SBA Loans
- Max Amount: $50k – $5.5 million
- Interest Rates: Starting at Prime + 2.75%
- Term: 10 – 25 years
- Funding Speed: Several weeks
Sole proprietors can benefit from SBA loans, which are designed to provide financial assistance to small businesses. These loans can be used for various purposes, such as starting a new business, expanding an existing one, or covering operational expenses. Your sole proprietorship must be a for-profit business to qualify for SBA loans.
SBA loans for sole proprietors typically offer competitive interest rates and flexible repayment terms, making them an attractive option for entrepreneurs looking to secure funding for their ventures. SBA-guaranteed loans also have extended loan repayment terms. Additionally, SBA loans often require less collateral than traditional bank loans, making them more accessible to sole proprietors.
Equipment Financing
- Max Amount: Up to $10 million per piece of equipment.
- Factor Rates: Starting at Prime + 3.5%.
- Term: 1 – 10 years.
- Funding Speed: 3 – 10 business days.
Sole proprietors often face challenges when buying the necessary equipment to run their businesses. Equipment financing can provide a solution by allowing them to acquire the required tools and machinery without a significant upfront cost. Equipment loans can help sole proprietors preserve their working capital and maintain cash flow while still investing in the equipment needed to grow and succeed in their business endeavors.
Merchant Cash Advance
- Max Amount: $5k – $5 million
- Factor Rates: Starting at 1-6% p/mo
- Term: 3 – 24 months
- Funding Speed: 1 – 2 business days
Merchant cash advances can be a valuable funding source for sole proprietors needing quick capital. This type of financing allows business owners to receive a lump sum in exchange for a percentage of their future credit card sales. Receiving a merchant cash advance requires businesses to pledge future sales in exchange for a lump sum of cash up front.
This option can be attractive for sole proprietors as it provides access to funds without requiring a strong credit history or extensive business financials. However, it’s essential to carefully consider the terms and fees associated with merchant cash advances before committing to this type of financing.
What are the qualifications for a Small Business Loan when Self-Employed?
Here are the average minimum requirements for small business loans in our lender network based on other approved businesses.
Business Term Loan
- Annual Revenue: $75k+
- Minimum Credit Score: 550+
- Time in Business: 6+ months
Business Line of Credit
- Annual Revenue: $200k+
- Minimum Credit Score: 625+
- Time in Business: 6+ months
SBA Loans
- Annual Revenue: $360k+
- Minimum Credit Score: 650+
- Time in Business: 2+ years
Note: Sole proprietors may benefit more from SBA Microloans, which have less stringent requirements.
Equipment Financing
- Annual Revenue: $250k+
- Minimum Credit Score: 600+
- Time in Business: 1+ years
Merchant Cash Advance
- Annual Revenue: $120k+
- Minimum Credit Score: 550+
- Time in Business: 4+ months
What are the advantages and disadvantages of Sole Proprietorship Business Loans?
Small business loans for sole proprietors can provide essential funding for growth and expansion. However, it’s crucial for sole proprietors to carefully consider the associated risks and ensure that they have a solid repayment plan.
Advantages of Sole Proprietor Loans
Sole proprietor loans offer a simplified application process, making it easier for small business owners to access essential funding. With these loans, sole proprietors fully control business decisions without consulting partners or shareholders.
Disadvantages of Sole Proprietor Loans
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. Sole proprietors may have limited access to more significant loan amounts compared to companies with multiple owners or more established entities.
Sole Proprietor Business Loan Pros & Cons
Pros:
- Access to necessary funds for business growth and operations.
- It can help improve credit score with timely repayments.
- Flexibility in how the business uses the funds.
- Potential for business expansion and increased profitability.
Cons:
- Personal liability for the loan, putting personal assets at risk.
- Difficulty in obtaining large loan amounts without a strong business credit history.
- Higher interest rates and fees compared to loans for larger businesses.
- Limited access to specific government loan programs and benefits available to larger businesses.
How to Apply for a Small Business Loan as a Sole Proprietor:
You can apply directly to a lender of your choosing or complete our one-page application to apply to our lender network. Follow these steps to apply.
Step 1: Choose the Right Product
The first step is choosing the right product for your needs and goals. This should require a decent amount of research, as each product is designed for different financial circumstances and cash flow cycles.
Step 2: Gather Your Documents
Here are the documents required for each type of business loan.
Business Term Loan
- Driver’s license
- Voided check from your business checking account
- Bank statements from the past three months
Business Line of Credit
- Driver’s license
- Voided business check
- Bank statements from the past three months
SBA Loan
- Driver’s license
- Business license or certificate
- Voided business check
- Bank statements from the past three months (length of history varies)
- Credit report/Statement of personal credit history
- Credit card processing statements (length of history varies)
- Personal tax returns from the past three years
- Business tax returns from the past three years
- Business Plan (Not in all cases)
- Personal financial statement
- List of real estate owned
- Debt schedule
- Deeds/Title/Ownership documentation for any collateral/security
- Current Profit & Loss Statements and Balance Sheet Year-to-Date
- A/R and A/P Reports
- Lease/Rent documentation
Equipment Financing
- Driver’s license
- Voided business check
- Bank statements from the past three months
- Invoice for equipment
Merchant Cash Advance
- Driver’s license
- Voided business check
- Bank statements from the past three months
- Credit card processing statements from the past three months
Step 3: Fill Out Application
You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.
Step 4: Speak to a Representative
Once you apply, a representative will contact you to explain the repayment structure, rates, and terms of your available options. This way, you won’t have to worry about surprises or hidden fees during repayment.
Step 5: Receive Approval
If approved, you’ll hear back from us within 24 hours. Funds for most loans should appear in your bank account anywhere from 24 hours to one week. At the very least, it usually takes 8-12 weeks for SBA Loans to receive funding.
Frequently Asked Questions
Here are the most common questions about sole proprietor business loan options.
How do I compare Small Business Loan Options?
Deciding on the best business loan options depends on various factors, such as your sole proprietorship business structure, funding needs, and business goals.
Here are some crucial considerations when comparing loan options.
Flexibility and Eligibility Criteria
Different lenders offer varying levels of flexibility and eligibility criteria.
- Consider the flexibility of loan terms.
- Evaluate the lender’s requirements for credit score, business history, and revenue.
Interest Rates, Repayment Terms, and Application Process
Evaluating interest rates, repayment terms, and the application process is crucial when considering various loan options.
- Compare interest rates from different lenders.
- Assess repayment terms that align with your business cash flow.
- Simplify the application process by choosing a lender with a streamlined approach.
How long does it take to get approved for a Small Business Loan?
The approval timeline for small business loans can vary depending on factors such as the lender’s process, your creditworthiness, and the completeness of your application. Generally, some lenders can provide approval within a few days, while others might take several weeks.
Can Sole Proprietors with Bad Credit get Business Loans?
Yes, sole proprietors can access bad credit business loans, even with low personal credit scores, often down to the mid‑500s. Their lender network focuses more on the current business performance and revenue trends than just credit history. These loans usually range from $1,000 to $5 million, with factor rates starting around 1%–6% per month, terms from 3 months up to 5 years, and funding in 1–3 business days.
Options like merchant cash advances, revenue‑based financing, invoice factoring, equipment financing, and working capital loans minimize the emphasis on personal credit. For instance, merchant cash advances and RBF approve borrowers primarily based on recent monthly sales, not credit score, while invoice factoring relies on invoices rather than creditworthiness.
Though these loans are quicker and easier to obtain than traditional bank or SBA loans, they typically involve higher costs, shorter terms, and often require a personal guarantee. Some sole proprietors use bad‑credit business loans as bridge funding, building a positive repayment history that may help them qualify for more favorable terms later.
What alternatives to Business Loans do Sole Proprietors have?
Here are common alternatives to traditional small business loans for sole proprietors:
Business Credit Cards: Sole proprietors can utilize business credit cards to manage purchases and build a positive credit record. Business cards offer revolving credit access, rewards, and flexibility, making them ideal for covering short-term or small expenses.
Crowdfunding: Crowdfunding platforms like Kickstarter or Indiegogo let sole proprietors raise capital from supporters or pre‑sell products. Instead of loans, supporters pledge money in exchange for rewards or early access, reducing reliance on debt.
Equity Financing: Equity financing involves selling a percentage of your business in exchange for investment. For sole proprietors, this is less common but possible, especially if you bring in partners or investors willing to take partial ownership.
Grants: Grants are funds that don’t need to be repaid. Many local, state, federal, and nonprofit programs offer small business grants, especially for niche markets, innovation, or underserved business owners. They can provide risk‑free capital if you meet the criteria.
Personal Loans: Personal loans from banks or online lenders can be used to support your business, but this tradeline will be on your personal credit. These loans may be simpler to qualify for than business loans, but come with higher personal risk if your business cannot repay. In general, mixing business and personal funds is not recommended, so use these loans with caution.
All of these alternatives provide different trade‑offs in terms of flexibility, repayment obligation, ownership dilution, and qualification criteria.
Best Business Loans for Sole Proprietors – Final Thoughts
As you navigate the world of small business loans, remember that finding the right fit is like finding the perfect tool for a job – it may take some searching, but when you find the one that fits just right, everything falls into place seamlessly. Now armed with this knowledge, go out there and secure the funding that will propel your business forward.
Contact us if you have more questions about being a sole proprietor or about applying for a small business loan. Our alternative funding experts can help you find the best options for your business goals.
