It can be hard for sole traders to get finance. Banks and other lenders look at individual business operators as relatively high-risk entities. If you're a sole trader starting up a new business, getting finance can be even harder as you probably won't have a lot of financial documents to demonstrate the strength of your business. This guide will take you through the types of loans available to sole traders and how to compare loans to find the right one for you.
How can a business loan help me?
If you're a sole trader, a business loan can help you do the following:
Expert overview: 3 things you should know about getting a business loan as a sole trader
Getting a business loan as a sole trader may be a bit trickier but you still have multiple loan options including overdrafts, lines of credit and invoice financing
To bolster your application as a sole trader include as much as you can in the application: a business plan, financial forecasts and details of your experience in the industry.
Banks generally require security but most alternative business lenders do not.
Capify Unsecured Business Loan Offer
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Capify Unsecured Business Loan Offer
Apply for up to $300,000 from Capify, enjoy a simple application process and with same-day approval you can have your funds within 24 hours.
There are many financing options available for businesses. As a sole trader, you’ll need to take into account your business and personal finances when deciding on the best loan type.
Loan type
Amount
Features and Repayment
Pros and Cons
Business overdraft
$10,000- $100,000,000
Linked to an existing business account
Available once other funds are exhausted
Unsecured loan
Variable interest rates
Ongoing account, minimum repayments required
Unsecured loan
Useful when your funds run low
Can only access funds once other accounts are depleted
Requires an existing bank account
Line of credit
$10,000- $100,000,000
A credit line gives you quick access to cash
Only pay interest on money you spend
Options for ongoing or fixed terms (1-5 years)
Regular, minimum repayments on your balance
Less risk and cost than a large loan
Access cash quickly
Requires good credit history
Term loan
$10,000- $500,000
Borrow a single lump sum and pay it back
Fixed or variable interest rates
Regular fixed loan repayments
Stable loan with no surprises
Can provide your business with a large amount of cash
Lack of flexibility
Borrowing a large amount of money brings higher risks
Unsecured cash loan
$1,000- $100,000
Get cash quickly without requiring security
Fees and higher interest rates typically apply
Good for small, temporary cash flow shortages
Usually approved quickly
Can be expensive
Unsecured loans expose your business to risk if you can’t pay
Invoice financing
Typically 80% of the invoice amount
Use your unpaid invoices as collateral for a loan
Get quick access to cash
Fees and interests apply
A reasonably low-risk option for an established trader
Not really an option for new businesses
The type of loan you choose will obviously depend on your business needs. If you’ve been a sole trader for a long time, you likely understand your needs very well. For sole traders starting new ventures, this can be harder to evaluate. Do as much research as possible and don’t be afraid to reach out to experts or successful self-employed business people for advice.
Sarah’s landscaping service
Sarah is a sole trader who designs boutique gardens for wealthy homeowners and small businesses across Melbourne. Sarah employs a part-time assistant and hires landscapers on a project-by-project basis.
Finance needs
A large hotel chain has contracted Sarah to design and build a courtyard garden for a new hotel property. This is a much bigger job than her usual projects. Sarah realises she needs at least $60,000 to hire more labourers and rent equipment.
Sarah's choice: A term loan
With a good idea of her costs and safe in the knowledge that her client is large and very stable, Sarah opts for a term loan from a bank. She is able to negotiate a fixed repayment plan with a lower interest rate.
Can sole traders take out personal loans for their businesses?
As a sole trader, you might have the option of taking out a personal loan rather than a business loan. There are various reasons why you might opt for a personal loan, but it’s important to know the differences between the two.
Personal loans
Easy application. Apply using your personal credit history.
Flexibility. You can use funds from a personal loan for business or personal expenses.
Business loans
Stricter lending guidelines. You’ll generally have to provide financial documents related to your business.
Strict spending rules. You cannot use a business loan for personal expenses.
What do I need to consider before applying for a loan?
There’s a lot to consider when applying for a business loan. The more knowledge you have about your own business plans, expenses and cash flow, the better equipped you’ll be to get the right loan. Your loan choice depends on whether you’re an established sole trader or starting a brand-new business.
As an established business owner, you’ll need to consider the following:
Financials. As an established business, you should have records highlighting your profits and losses and at least two years of tax returns to show your lender. The state of your accounts has a big impact on your loan options.
Cash flow. How much cash will your business have on hand in the coming months? Do you have personal funds you can use if you’re short? If you’re facing a (hopefully) brief and temporary cash shortage, you might not have to consider a large term loan.
Business costs. You should have a clear idea of your fixed operating costs. Factor these into your estimates for the future and work out how much you need to borrow.
Security. You might be able to use a personal residential property or even your business itself as security.
Debts and assets. Debts may limit what you can borrow, but you can use assets, such as invoices or purchase orders, as collateral to secure finance.
If you’re starting a new venture, you’ll face challenges getting financing. But don’t despair. You’ll need the following to apply for a loan:
Business plan. A detailed, clear business plan is very reassuring to a lender. You shouldn’t think of becoming a sole trader without one. Be sure to include an analysis of your competition, your future plans and cash-flow predictions.
Security. Lacking a business history, having some form of security, such as cash assets or a residential property, improves your chances of getting a loan.
Personal credit history. Having a good personal credit history is a positive sign for potential lenders.
Skills and experience. Your career experiences and skills are another metric by which lenders can assess the strength of your proposed business. Fix up your résumé and, if needed, brush up on the qualifications or skills essential to your trade.
Cost estimates. Try to estimate what your business costs will be. You need to compare existing businesses and do your research.
What financial documents do I need to submit to a lender?
If you’re a sole trader and you’re looking for a loan, there are several important documents that will help your loan application. These include the following:
Tax returns. Having several years’ worth of tax returns gives lenders a much clearer idea of how your business looks.
Balance sheet. This simple financial statement sums up the total of your assets, liabilities and capital.
Profit and loss statement. Usually covering a fixed period or quarter, this statement measures your profits and losses by taking your gross profit (the balance of the cost of goods and the amount you sold them for) and subtracting your operating expenses.
Cash-flow statement. This statement accounts for all the money coming in and out of your business. This includes all purchases and expenses plus all money from sales, loans and investments.
What if I don’t have financial documents?
If you’re starting up a new business and can’t provide documentation, you will find it much harder to get a loan from a bank. You may need to opt for a personal loan or an unsecured cash loan. Sole traders starting new ventures may need to consider a loan from an online lender. These lenders often have less stringent requirements for business loans. It might also be worth looking for alternative funding sources, such as government grants for startups or angel investors.
What should I look at when comparing business loans?
Repayments. Look at how much you will need to pay back each month (if it’s a monthly repayment loan) and work out how much you will pay over the life of the loan. Evaluate your profits, losses and expenses as accurately as possible and work out how much you can afford to repay.
Flexibility. Having the flexibility to pay back a loan in different ways is attractive for some sole traders. Knowing you can extend a loan’s terms or negotiate further funds is also an important consideration.
Interest rates. Consider if the interest rate is fixed or variable and calculate how much you’ll pay in interest over the loan period. Locking in a fixed rate is better for stable planning but a variable rate can go down as well as up.
Loan terms. The length of a loan is an important consideration. A one-year loan might be useful if your business has landed a major, long-term project. But if you need cash to just cover a shortage for the month, you’ll want something with a shorter term.
Fees. In addition to repayments and interest rates, many lenders charge establishing fees and ongoing account fees.
I have a few more questions about getting a business loan as a sole trader
Having a bad credit history can make it harder to get a loan. This is especially true if you’re a sole trader who’s trying to start a new business. You may need to consider the following options:
Accepting a higher interest rate
Borrowing from alternative lenders with looser lending rules
Many lenders will only provide business loans to Australian citizens or permanent residents. Temporary residents, who may only be in Australia for a few years on specific visa types, should look for lenders who don’t have this restriction. Alternatively, temporary residents can look at the many types of personal loans they may be eligible for. Learn more about personal loans for temporary residents here.
Being a recipient of Centrelink payments won’t stop you from getting a business loan. There will be challenges, and you’ll obviously need to have a great business plan. Get the full run-down on business loans for Centrelink recipients here.
If your business is struggling and you cannot repay a loan, there are several things you can do:
Try to reduce your overhead and bring in more income.
Talk to your lender and try to refinance or renegotiate the terms of the loan.
If you’ve taken out a personal loan, you can apply for a hardship variation.
Sell your car, home or other assets to pay off the loan.
Declare bankruptcy.
Credit cards can be a good way to finance your business. Business credit cards function like personal credit cards but you can only use them for business expenses. You can use them for business expenses up to a certain limit and pay off what you spend with interest. Business credit cards won’t suit every type of sole trader and they often have plenty of fees attached. Find out more about business credit cards.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over five years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at The Lizzies. Elizabeth has found writing about innovations in financial services to be her passion (which has surprised no one more than herself).
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