Every business, from the largest corporation down to a one-person operation, needs capital to operate and grow. Capital can help a business pay its expenses, purchase real estate, or take advantage of opportunities for expansion.
When you’re running a small business as a sole proprietor, you may not have access to the same kind of cash that a larger business may, so you might consider financing as a way to get that capital. Luckily, there are different types of small business loans available for sole proprietors that may be able to help you get access to cash when you need it.
Keep reading to learn more on what sole proprietorships are, different types of business loans offered to sole proprietors, how to qualify for a business loan, and more.
What Are Sole Proprietorships?
A sole proprietorship is a business structure where a single individual owns and operates the business. It is the simplest and most common form of business, often used by freelancers, independent contractors, or small business owners.
In a sole proprietorship, there is no legal distinction between the owner and the business, meaning the owner is personally responsible for all debts and liabilities. The owner retains full control of decision-making and profits, but also assumes all risks.
Sole proprietorships are easy to set up, with fewer regulatory requirements and lower costs compared to other business structures, like corporations or partnerships.
Pros and Cons of Sole Proprietorships
Before we look at small business loans for sole proprietors, let’s briefly explore some benefits and drawbacks to running your business as a sole proprietorship.
| Pros | Cons |
|---|---|
| Requires no paperwork or fees (beyond business permits you may need) | Your personal assets could be seized if your business can’t pay its debts |
| You can file your business profits and loss on your personal taxes | Investors may not want to work with a sole proprietor |
| You have full control over business decisions | The continuation of the business is solely up to you |
Now let’s look at loans typically available for sole proprietors so you can decide which is right for you.
Recommended: Sole Proprietorship vs LLC: How to Choose
SBA Loans
SBA loans for sole proprietors are offered by a variety of lending institutions. The most popular is the 7(a) program, which can be secured for up to $5 million depending on your qualifications. Interest rates vary by lender, and terms range between five and 25 years. Typically, these loans can be more difficult than some other options to qualify for.
Online Lenders
Online lenders offer different types of small business loans, including short- and long-term business loans, equipment financing, business lines of credit, merchant cash advances, SBA loans, and invoice factoring. Online lenders typically have less stringent qualification requirements and fast funding times.
Bank Loans
Banks and credit unions offer sole proprietor loans, though they may be harder to qualify for than SBA loans, especially if your credit score is under 700. Rates and terms vary by lender.
Lines of Credit
Another funding option for sole proprietors is a business line of credit. While loans provide you with a lump sum of capital all at once, a line of credit gives you access to a certain amount decided by the lender. You pay interest only on the amount you’ve drawn out. Rates and terms vary by lender.
Business Loan Alternatives
Loans and lines of credit like those listed above aren’t your only options for getting capital as a sole proprietor. Here are a few business loan alternatives to consider:
Business Credit Cards
Business credit cards can allow you to make purchases for your company when you need to, even if you don’t have cash on hand. If you don’t have good enough credit for a business loan, having a credit card and paying your bill on time is one way to help you build a positive credit record for your business. Further down the road, you might be able to qualify for other financing options.
Recommended: What Is the Minimum Credit Score for a Business Loan?
Crowdfunding
Crowdfunding is another option for getting access to capital, with the added benefit that you might not need to pay the money back. A company can set up a campaign on one of several crowdfunding sites to raise money for a new product line, for example. Anyone can donate to your project, and you don’t have to pay that money back. You may, however, be required to offer perks, like products or t-shirts to those who donate.
Applying for a Business Loan for a Sole Proprietor
If you’re considering applying for a business loan as a sole proprietor, start by understanding what each particular lender you’re interested in requires for the application process.
Some lenders list the specific credit scores you need to have to qualify, as well as how long you need to have been in business. Others do not. But with a little research online, you may find other websites that tell you what a particular bank requires, even if the bank’s website doesn’t.
Documentation Needed to Apply
Before applying, get your business documents and information in order so you can streamline the process. You’ll typically need to provide the following documents:
1. Business Plan: A business plan is an outline of your business strategy, financial projections, and how the loan will be used.
2. Personal and Business Tax Returns: Lenders often request 2-3 years of both personal and business tax returns to assess financial stability.
3. Financial Statements: This includes profit and loss statements, balance sheets, and cash flow statements.
4. Bank Statements: The lender usually wants the last 3-6 months of business and personal bank statements.
5. Legal Documents: Legal documents include business licenses, articles of incorporation, contracts, leases, and any other relevant legal papers.
6. Personal and Business Credit Reports: These assess your creditworthiness and payment history.
7. Collateral Documentation: If applying for a secured loan, documents showing ownership of collateral, like real estate or equipment, will be needed.
Reviewing Lender Offers
When looking for a small business loan for a sole proprietorship, it’s always best to shop around to find the best rate and terms for your situation. Many lenders offer the opportunity to prequalify, meaning that you can provide a few details about yourself and your business to see if you’d be eligible for financing. This should not impact your credit, and it can help you identify which lender offers the best terms.
Before applying, it’s a good idea to check your credit scores and see where they stand. It’s very helpful to have a business credit score established. If not, your personal credit score can be referred to.
The Takeaway
Taking out a small business loan for a sole proprietor can give you access to the capital your business needs to thrive. There are a variety of funding types available, and with so many options, it’s just a matter of choosing the one that best fits your business’ needs.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Can sole proprietors get SBA loans?
Yes. SBA loans are open to all types of business structures, including sole proprietorships. Eligibility typically depends on creditworthiness, business viability, and the ability to repay the loan.
What credit score do you need to get a business loan as a sole proprietor?
The credit score requirements will vary from one lender to another. As an example, an SBA loan for a sole proprietor might require a credit score of at least 640.
What are the benefits of being a sole proprietor?
There are many benefits to running your business as a sole proprietor. These include simplified taxes, retaining control of decision-making, and no complicated paperwork or fees to file.
Is getting a loan as a sole proprietor difficult?
Getting a loan as a sole proprietor can be challenging since approval depends on personal credit, income, and collateral. However, alternative lenders and SBA-backed loans can help improve access to financing options.
Photo credit: iStock/laddawan punna
SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
SOSMB-Q324-039