Can a Sole Proprietor Get a Business Loan?

Alternative Small Business Funding

Whenever the word ‘business’ is mentioned, most people immediately get images of busy offices, teams in meetings, and groups of people working like a well-oiled machine to keep customers happy. But what about the sole proprietors of this world? What if the extent of your business is you working with a laptop in your home office?

In our opinion, all businesses are equal and deserve access to financial resources. However, we appreciate that your financing options perhaps aren’t as expansive compared to other forms of business. For example, you may struggle when looking for a sole proprietor business loan. Today, we want to explore the idea behind sole proprietors, why you might consider this business formation, and how you can get around common financing problems. In the latter case, we’ll explore alternative financing, bad credit loans, and other forms of alternative funding.

What’s a Sole Proprietor?

As the name suggests, a sole proprietor is any business run by one person. If you start a business with this model, you will be responsible for everything within your business. For example, this includes accounting, taxes, marketing, sales, and product development. When it comes to tax, you and the business are considered the same entity through the eyes of the IRS. Therefore, the business’s income is also your income. Any money that the business makes enters your bank account and you’re taxed accordingly.

How does a sole proprietor differ from other business structures? Well, other forms include:

• Partnership
• Not-for-profit
• LLC (limited liability company)
• Corporation

By far, partnerships and sole proprietorships are the easiest to create and manage. You don’t need as much paperwork, you don’t need to go through the same business registration procedures, and you can take all the profits as the sole owner of the business.

With this in mind, we’re now getting into the territory of explaining the benefits and drawbacks of the business structure.

Benefits of a Sole Proprietor Business Structure

What are the benefits of exploring this business model compared to others?

Taxes

We’ve hinted at this already, but one of the biggest benefits of this business structure is the tax advantages. If you classify your business in this way, it isn’t considered a separate legal entity. Therefore, any income made by the business is essentially your own personal income. When tax season comes around, you’ll just file the business taxes alongside your personal taxes.

While this might sound confusing at first, you’ll soon realize when starting the process that it’s simple - much easier than tax procedures for corporations and LLCs. Not only is tax easier for sole proprietorships, but the Small Business Administration also says that the rates are lower for this business structure.

To begin, you’ll need the Schedule C tax form while also filing a 1040 tax form. Depending on your earnings, you may also need to file Schedule SE to calculate unemployment tax. If you’re struggling with this process, feel free to contact a financial professional or buddy up with another sole proprietor with experience in the field.

Easy and Stress-Free

Another reason to choose a sole proprietorship for your business is that it’s the easiest to create and manage. As a sole trader, you don’t have to worry about many government regulations, and you tend to have more flexibility compared to other business structures. What’s more, the fees are also smaller or non-existent for sole proprietors.

Unemployment Insurance

As the final benefit, you probably won’t have to worry about unemployment taxes. Since you’re the only worker and this tax applies to businesses with employees, it won’t apply to your situation. According to recent statistics, around 3.5 million sole proprietors are registered in the United States and only 25% hire other workers in some capacity. If you do hire other workers in your sole proprietor business, we recommend contacting a financial professional to get tailored advice.

Drawbacks of a Sole Proprietor Business Structure

On the other hand, you will need to keep the following drawbacks in mind while launching your business and considering business structures.

Authority and Credibility

Sadly, some sole traders don’t get the respect, recognition, or credibility that they deserve simply because of the business structure that they’ve chosen. Customers, suppliers, and investors may not take the business seriously when it’s registered as a sole proprietorship. For some reason, many people seek a different business simply because they believe that it’s more reliable.

If you choose this business structure, you’ll need to work hard to make your business more legitimate and fight for credibility. Not only can you do this through different financing options, but you can also use social media and other marketing strategies to demand credibility and respect.

Liabilities

In the benefits section, we mentioned that the business is tied to the individual in relation to tax issues. Well, the same is also true for liability issues, and this has caused many problems for sole traders in the past. For example, let’s say that you gave a customer food poisoning, and they decide to sue. In this case, your personal assets are in danger.

On the other hand, other business structures are considered separate legal entities. Therefore, any customers who sue are doing so against the business rather than the individual. While business assets are in danger, your personal assets are protected.

Access to Finance

Finally, another drawback for a sole proprietor is access to finance. Especially for those with bad credit, it’s difficult to get a sole proprietor business loan. Banks aren’t willing to take risks and it’s a struggle to get your business off the ground. Normally, banks and other lenders like to secure loans against business assets. As a sole proprietor, you’re not likely to have any of these assets.

To put an end to all the doom and gloom, we’re here today to tell you that you have options. As you’re about to see, some alternative funding options could help your business whenever you need them. While some are designed to help in the early stages of the business, others help with running costs.

Types of Financing for Sole Proprietors

In the second half of this comprehensive guide, we’ve got an extensive list of funding options for sole proprietors. While some will apply to your circumstances, others might not be the best option. Consequently, we recommend reading through all the suggestions and assessing the best for your position. As mentioned, we’ll also include some alternative financing options since these are often useful for sole traders.

Qualifying for a Business Loan

In the title of this guide, we posed the question of whether a sole proprietor can get a business loan. With this, it makes sense to discuss this option first. As we’ll see in this guide, many different types of business loans exist. While some opt for an SBA loan or a line of credit, others choose the more traditional route of a bank loan.

Before we talk about these options, however, there are some things that you can do to boost your chances of success. After submitting an application, it’s natural to feel overwhelmed and nervous. If you want all this effort to lead to something positive, pay attention to the following tips:

• Read the requirements of the lender carefully and understand that you’ll need to meet them to succeed. Does the lender ask for a specific credit score? Do they ask for three years of experience in the industry? Do they ask for specific documentation to supplement your application? If you fail to meet the basic requirements, your application will go through the shredder before you can say ‘please let me borrow some money’.

• Research several lenders and different business loan types because not all loans are designed for every business. As well as finding the best path, it also provides backup options should one go wrong.

• Take advantage of lenders that enable businesses to prequalify. Here, you’ll enter some basic information and learn whether you qualify for a loan without it affecting your credit.

• Before doing anything, get a credit report and assess your position. By understanding your current position, you’ll quickly learn what sort of loan or alternative financing option you can expect to get. Also, question errors on your credit report because this is a great way to increase your score immediately.

At this stage, there’s nothing left to do except uncover the best funding options for sole proprietors.

1. Bank Loan

If you can qualify for a bank loan, we recommend exploring this route first (assuming you’re not in a rush for the funds). Although you may have to wait while your application is processed, bank loans typically have the best interest rates and favorable terms for sole traders. However, the potential drawback is that you’ll need to pass through stringent financial and personal checks before obtaining the funds.

2. SBA Loans

With SBA loans, we reach the first of the options with which the South Florida Funding Group excels. If you’re considering any form of alternative funding, we urge you to reach out to our fantastic, passionate team for help.

Rather than a loan from the Small Business Administration, this is a loan that the SBA backs to help businesses get much-needed finances. With the SBA securing a large percentage of the loan, you only need to secure a smaller section. Unfortunately, qualification is still troublesome for some businesses.

While on this topic, we should also mention SBA microloans since these have value for sole proprietors. Rather than borrowing up to $5 million, the available amount through standard SBA loans, you can borrow up to $50,000 with a microloan. You’ll need to choose an SBA-approved lender, but it’s a great way to obtain small amounts of money for equipment and other demands.

According to the SBA, the average loan amount is just $14,000. If you choose an SBA microloan, you will need to provide personal collateral. Therefore, you need to be confident of repayment otherwise you’ll lose this personal asset. On the other hand, the rates are competitive, and you can pay the amount back over up to six years.

3. Business Lines of Credit

Alternatively, those looking for alternative funding for day-to-day running costs as a sole proprietor should consider business lines of credit. If you have a credit card, you know exactly how this will work. Essentially, you have an account with access to funds. Whenever you need to dip into the funds, you’ll use this account before then paying it back over time.

Instead of a single loan, this acts much like a credit card as it provides access to funds whenever required. So long as you keep paying off the account when required, you won’t be inundated with interest payments. For example, you might dip into the funds to pay for equipment or inventory. Since this isn’t a single-use loan, you can keep accessing the funds for as long as you need.

4. Short-Term Business Loans

Depending on the lender, you might find that some offer short-term business loans based on other requirements than just your credit score and report. However, you will need to repay the loan within a shorter period compared to traditional business loans. While some ask for repayments within one year, others are as short as a few months. Also, be aware that interest rates could be higher with a short-term business loan because the lender doesn’t have as long to make a profit.

5. Crowdfunding

If large lenders aren’t playing ball, maybe you’ll generate funds from smaller sources. With crowdfunding, you start raising funds from everyday people. Although your funds can be split between hundreds of people, you may not need to pay the loan back. Instead, you offer perks to your lenders such as free products or other benefits.

6. Equipment Leasing and Financing

We’ve seen some great alternative financing options for those with bad credit in this guide, and another potential option comes in two parts:

• Leasing - As the name suggests, this is where you borrow equipment from the manufacturer. Depending on the contract, you’ll keep the equipment for the fixed term while making monthly payments. So long as you keep making these payments, you’ll retain the equipment for your small business.

• Financing - This time, you’re essentially splitting the cost of the equipment over the period of the contract. You’ll make monthly payments, but you’ll own the equipment at the end of the contract (something that doesn’t happen with leasing).

If you need an important piece of equipment for your sole proprietor business, we highly recommend considering leasing or financing. As advanced methods of alternative funding, they allow you access to equipment without having to find the full cost upfront. Remember, you’ll only own the equipment through financing. If you lease the equipment, you won’t own the equipment at any point in the contract.

7. Merchant Cash Advance

If you’re looking for working capital, another route through the South Florida Funding Group is a merchant cash advance. As the name suggests, this is where you receive an advance on your income. Depending on the circumstances, you could receive your funds within a few days after approval within 48 hours.

Choose the amount you need, promise a percentage of future income to the lender, and use the funds as you wish. If you know that good times are around the corner and you just need to bridge the gap, an MCA is a fantastic option.

8. Family and Friends

At first, you might wince at this suggestion and keep scrolling. Yet, you may be surprised by the willingness of friends and family to lend money to your venture. When borrowing from loved ones, you don’t need to worry about lengthy application processes, the nervous anticipation after submitting an application form, or huge interest rates.

Typically, you’ll enjoy favorable terms because these people love you and are inspired by your journey. If you’re to maintain positive relationships, we recommend drawing up a contract so that everybody is on the right page. Ensure that this contract includes amounts, dates, repayment terms, and other details.

Alternative Funding with South Florida Funding Group

As a sole proprietor, funding is difficult. Especially with bad credit, you might struggle to get a traditional sole proprietor business loan. Fortunately, we’re in a world where alternative financing is common. After contacting the South Florida Funding Group, you’ll get the help you need to access the right alternative funding for your business. Just because you are alone in your business doesn’t mean that you shouldn’t be taken seriously.

In this post-pandemic world, you need solutions that help your business to grow, and the South Florida Funding Group has experience in this field. Why not reach out to our friendly, helpful professionals today?