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Sole Proprietor Business Loans

Financing a Sole Proprietorship?

While sole proprietorships, or sole traders, account for 70 percent of all United States business, the only ways to receive funding is through personal resources, such as personal bank accounts, and by seeking out different loan options. Financing options for sole proprietorships tend to be vital when a business owner considers expanding his or her business. There are plenty of traditional bank loan options, which are discussed in greater detail below, but being aware of SBA loans and non-traditional lenders are important. The Small Business Administration is a great source of financing for sole proprietorship businesses because while they do not issue the loans directly, they work with lenders by guaranteeing a portion of the loan; this means that lenders are more willing to approve a loan for a sole proprietorship. Listed below is more information regarding the variety of loan options for sole proprietor business owners.

What Is a Sole Proprietorship?

A sole proprietorship is the simplest way to start your own business, which is why self-employed Americans and the workers they hire account for over 44 million jobs. A sole proprietorship legally has no separate existence from the owner, meaning it is not a legal entity. It is simply a person who owns a business, and who is personally responsible for its debts and associated business fees. This form of business is incredibly popular due to the simplicity and ease of setting it up. To make your business a sole proprietorship, a business owner only needs to register his or her name, secure local licenses, and (if a business owner wants to) create a business or trade name. Every aspect of a sole proprietor business is in the business owners name, even if there is an associated trade name for the business; this includes bank accounts for the business.

When forming a sole proprietorship business, there really is not any formal actions that a sole proprietorship business needs to take, except for obtaining the necessary licenses and permits for your business. These licenses and permits for sole proprietorships vary from state to state, as well as varying depending on the type of industry you are looking to get into. The major difference between a sole proprietorship and a limited liability corporation, partnership or LLC, is that you, the business owner, are entitled to all profits and responsibilities for all of your small business’s debts, losses, and liabilities.

More often than not, small business owners do not even realize that their business is a sole proprietorship, especially with small business owners who use their sole proprietorship business as a second or part-time income. Some businesses that fall under sole proprietorship include bookkeeping services, home healthcare businesses, financial planners, landscapers, freelance writers, computer companies, housecleaning services, tutoring services, virtual administrative assistants, automobile repair shops, and computer repair services. While a lot of these businesses start out as sole proprietorships, not all of them remain sole proprietorships because of the advantages and disadvantages associated with running a sole proprietorship business. Every business varies based on what is best for a business owners’ company.

While this sounds like a great way to run your business, you must remember that there are always going to be time for sole proprietorships to need financing options. Outlined below are the advantages and disadvantages of running a sole proprietorship, as well as why sole proprietorship business owners need to be aware of the different financing options available to them.

Advantages of Being a Sole Proprietorship?

  • Simplicity: As mentioned above, there are plenty of advantages out there for all sole proprietorship businesses, but above all else, the ease and simplicity of being a sole proprietorship is the number one advantage. There are not a ton of government regulations and fees associated with sole proprietorship businesses either.
  • Taxes: Another key advantage for small business owners who classify their business as a sole proprietorship is filing taxes. Since sole proprietorship is not a separate legal entity, the income earned by the business is technically earned by the owner. This means that filing taxes are relatively easy and hassle free since a sole proprietor business owner simply files his or her business taxes with his or her personal taxes. According to the U.S. Small Business Administration, “the tax rates are also the lowest” for the sole proprietorship business structure. Filing taxes for a sole proprietorship begins with filing a Schedule C tax form, along with a standard 1040 tax from. Depending on how much the business makes, the owner of a sole proprietorship may also have to file a Schedule SE with the 1040. The Schedule SE essentially calculates how much unemployment tax is due. While this process is simple for some business owners, not all sole proprietorships understand the interworking’s of filing taxes, but affording an accountant to help is not cheap either! Reviewing financing options can help your business thrive without having to overpay in taxes.
  • Unemployment insurance: Another benefit of owning a sole proprietor business is that as a business owner, you will not have to pay any unemployment taxes for yourself, only for the employees of the small business, however only about one in four of the 3.4 million sole proprietorship businesses employees workers, so not all sole proprietorships will have to deal with this.

Disadvantages of Being a Sole Proprietorship?

  • Liabilities: A major disadvantage that sole proprietorships face is the issue of liability. This means that if something terrible happens (such as sole proprietorships in the child care or food industry) and your small business is sued, your sole proprietorship business could lead to your personal assets being vulnerable. Financing options to help in these tough situations are always an option!
  • Legitimacy: Many sole proprietorships unfortunately face the burden of not being taken seriously at times due to their sole proprietorship status. Utilizing a variety of financing options can help with this aspect in legitimizing a business through other ways. This includes social media, creating and implementing marketing strategies, and so much more.
  • Access to Capital: Another major disadvantage in owning a sole proprietorship small business is the difficulty in raising capital. There are more difficulties in receiving loans due to the natural structure of sole proprietorships; with few or no assets, investors and banks tend to be more hesitant in providing business loans to sole proprietor business owners – but this does not mean being approved for traditional bank loans are impossible! Business owners always need to remember though that traditional bank loans are not the only options available to their businesses.

Financing Options for Sole a Proprietorship

Types Rates Terms Funding
Bank 6-10% 3-7 years 14-30 days
Line of Credit 5-15% 1 – 3 years 7-30 days
Alternative 6-25% 1-5 years 5-7 days
 Cash Advance 1.16-1.55 3-24 months 1-3 days

Sole Proprietor Bank Loans

Bank term loans and/or a lines-of-credit are clearly the superior financing option for all businesses, including sole proprietors. Rates start in the mid single digits and terms can range into the decades.

  • Rates: 5-10%
  • Terms: 1-10 years

Documents a sole prop will need to obtain financing include:

  • Sole-proprietor’s tax returns 
  • Sole-proprietor’s income statements 
  • Sole-proprietor’s balance sheets 
  • Schedule of liabilities 
  • Personal financial statement

Alternative Business Loans

Alternative sole proprietorship loans are the next best options for sole props who can’t obtain traditional financing. What’s nice about alternative loans for sole proprietorships is the fact that funding is easy with minimal documentation required.

  • Rates: 8-25%
  • Terms: 1-5 years

Documents needed for sole proprietorship alternative lending include:

  • Sole proprietorship’s tax returns (2 years)
  • Sole proprietorship’s income statements (year-to-date)
  • Sole proprietorship’s balance sheets (year-to-date)
  • Schedule of liabilities

Sole Proprietor Cash Advance

The easiest way for a sole proprietorship to obtain financing is to get a sole proprietorship cash advance. Cash advances are the sale of the sole prop’s future earnings in exchange for upfront financing. The process is simple (minimal documents) and funding can happen in as little as a day or two.

  • Factor rates: 1.16-1.50
  • Terms: 4-24 months

Documents needed for a sole proprietor cash advance:

  • Application
  • Bank statements and/or credit card statements

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