Positive cashflow is the key to running a successful sole proprietor business. Without cash or available credit, business grinds to a halt. By the time this occurs, personal lines of credit such as credit cards are normally exhausted. Faced with increasing business and low cashflow you now realize the need to obtain financing in order to successfully meet your goals.
Financial institutions understand that around 73% of businesses in the United States are sole proprietors. Currently, there are more than 25.5 million solo entrepreneurs operating in the United States. Due to the size of this demographic, business lenders have designed a wide range of financing options to help these companies to grow and prosper. There is a caveat, however. Traditional bank or credit union loans are more difficult to get with a sole proprietorship even with years of operation.
Thankfully, there are several alternative financing options for those with good credit, those establishing credit, and those with questionable credit.
Let’s dig in.
Table of Contents
- Sole Proprietor Business Loans
- Established Sole Proprietors
- Start-Up Loans for Sole Proprietors
- Bank Line-of-Credit
- SBA Loans
- Online Business Loans for a Sole Proprietor
- Personal loans for Sole Proprietors
- Invoice Financing/Factoring
- Inventory Financing
- Merchant Cash Advances for Sole Proprietors
- Choose Your Financing Based on Need
Sole Proprietor Business Loans
Bank-issued business loans for a sole proprietor are the ideal solution for commercial financing. Interest rates are normally low and payment terms can last years. This allows you to pay it back while growing the business. Fixed monthly payments are easier and less stressful. Bank loans for sole proprietors range from a few thousand to tens of thousands of dollars. To qualify, you must have an exceptional credit rating.
Short-term financing normally must be paid within 18 months. These loan types are generally used for operating expenses such as paying suppliers, stocking up on inventory, meeting payroll, or purchasing office equipment.
Long-term loans can be extended for several years. This type of financing may be needed for rental space, vehicles, equipment, or business expansion. These purchases take longer to generate a return-on-investment therefore requiring additional time to pay it off.
Established Sole Proprietors
It’s easier to secure a B2B bank loan if you’ve been in operations for several years. Operating an established business provides you with a history of earnings, profit or loss, and tax returns needed to secure financing. You’ll also have a history of cash flows that allow the loan officer to project future cash flow needed to pay the debt.
Established entrepreneurs will still likely require collateral as security in case of default. Both personal and business assets can be used as collateral for the loan. Posting collateral can increase your loan amount and reduce the interest rate. The downside is that the assets will be lost should you default on the loan, so be careful of using personal assets as security.
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Start-Up Loans for Sole Proprietors
Newly established sole proprietorships are faced with even more challenges than their more established brethren. They have no business history that the financier can use to ensure payment of the loan. You’ll need a strong personal credit score to even get a meeting with a loan officer. If you have assets that can be used for collateral, then you’ll have a better chance to secure a bank loan.
In addition to collateral, the start-up business owner needs a solid business plan. The business plan should be professionally done and include financial statement estimates for several years going forward. A competitor analysis is required and should detail how you are going to claim their market share as your own. Include a resume in your loan package detailing your work experience skills and how they’ll contribute to your business success. Even with collateral and documentation, you still may not qualify for a loan from a traditional financial institution.
A bank or credit union line-of-credit is similar to term loans. The financial institution agrees to set up a revolving loan that can be accessed when needed and paid back when business picks up. This provides the business owner a ready pool of funds that are easily accessible.
This type of sole proprietor financing has the same challenges as bank loans described above. Established businesses will find access to a bank line-of-credit is easier than a start-up. If you have good credit and collateral, this may be an option for you. Don’t be discouraged if you don’t meet the qualifications for bank financing. There are still options on the table that’ll meet your financing needs.
If you’re unsuccessful in obtaining a bank loan for your business, you can turn to the government-backed Small Business Administration (SBA). You can only qualify for an SBA-backed loan if you’ve been turned down by traditional lending sources. The federal government knows that small businesses are the engine of the economy and have designed a lending system to keep that economy humming along.
The SBA doesn’t provide sole proprietor loans directly but acts as a surety to lenders by guaranteeing between 75% to 85% of the loan. This guarantee reduces the risk to the lender thereby enabling it to make loans to sole proprietors for start-ups or business expansions they ordinarily wouldn’t make.
This doesn’t mean that the SBA automatically approves loans to its partner lending institutions. You still need to prove that your business idea will produce the income needed to pay back the loan. For established businesses, it means two or more years of financial statements and an acceptable credit score. For start-ups, it means a detailed business plan and an acceptable personal credit rating.
It can take several months to be approved for an SBA-backed business loan. If your cashflow needs are more urgent, you may qualify for short-term financing that can tide you over while waiting for approval.
Online Business Loans for a Sole Proprietor
Alternative financing options arose to meet the needs of sole proprietors without the hassle of dealing with traditional lenders. If you are a start-up, trying to establish credit, or have a poor credit rating, then alternative financing from a private lender may be for you. It’s often easier to secure a loan and funds can be available within a few days.
Personal loans for Sole Proprietors
Business owners with a credit score of 680 or higher may find it easier to apply for a personal loan. This is particularly true for start-up sole proprietorships but may still be an option for established businesses who can’t find other sources of financing. Remember, however, that because your business is an extension of you personally, your personal assets and credit rating may become exposed in the case of default.
Business owners with poor credit of around 580 or less will find it difficult to get a personal loan from traditional lenders. But don’t let that deter you. There are alternative online financing options that will provide the funds necessary to follow your dreams. Sure, you’re going to pay a higher interest rate. But if your idea is solid, you’ll be able to cover the payments. Remember that business interest expense is deductible on your tax return.
If your sole proprietorship is established and you invoice customers with extended payment terms, you may find invoice factoring to be a solution to your cash flow needs. This type of financing pays you around 75% to 80% of the invoices value. Your customer then pays the factoring firm to settle the debt. It’s one of the more expensive business financing options but may become a necessity to keep your business growing.
Inventory financing is an option if you carry a lot of stock like a seasonal retail or wholesaler business. For example, if you need to purchase inventory in the spring to be prepared for the summer season, then you may find yourself short of operating funds. By using the purchased inventory as collateral, you can borrow the working capital needed to operate the business. You then pay back the loan as you sell the inventory.
Merchant Cash Advances for Sole Proprietors
Established sole proprietors that have an urgent need for operating funds may find Merchant Cash Advances an ideal solution. Similar to invoice factoring, Merchant Cash Advances are based on future earnings. Loan approval can take as little as 24 hours with funds deposited into your bank account in a few days.
The documents required for a cash advance are normally just credit card and bank statements showing the income generated by your business. Once your historical income is established, the lender will calculate the maximum advance available. The advance is paid back as a percentage of your future credit card receipts and bank deposits. There are normally no restrictions on how you spend the proceeds so you can use it as working capital or to expand your business.
Choose Your Financing Based on Need
There are several options available to obtain business loans for a sole proprietor. As a business owner, you must assess your cashflow needs to make the appropriate decision. If you need the cash in a few months time, have an established business and a solid credit rating, then bank or SBA loans are the place to start. If you’re not qualified, then move down the list to negotiate alternative financing. If you’re a start-up and have a poor credit rating, you may find alternative financing online to be the most feasible choice. If you’re cashflow needs are urgent, you’ll find that Merchant Cash Advances can put money into your bank account within a couple of days.