Can you get a business loan or funding for sole proprietorship?

Tue | December 2021

Establishing a business as a sole proprietor has its cons and pros. If your business is a sole proprietorship, you should keep in mind the ups and downs of a business cycle. Most importantly, you should be ready to shield your business from any downturns lurking down the road. But how? With business funding options!

This 2022 one of your priorities should be creating sustainable new revenue streams that will generate additional cash flow during fast and slow business cycles. We’re talking about having enough cash to finance marketing campaigns, investing in equipment you can pay off quickly, or creating new offerings and services that meet your customers' needs.

Can a sole proprietor get a loan?

It might not sound cheerful, but small businesses – especially sole proprietorships - should prepare for the next downturn when times are good. The smaller your business, the more it may be impacted by slow economic cycles. The smart way to get ready is to look for the fastest possible access to funding and start your financial safety net today.

Accessing funding can feel like everything but a breeze for most sole proprietors. Banks might prefer lending money to big businesses instead. We don’t mean to put you in the spotlight here, but if you’re opting for traditional funding, your ability to get approved will depend on your credit history, business profitability, and ability to come up with collateral. But- don’t sweat it. Here comes that silver lining of hope.

Some business owners look for an easier and faster way to get working capital, such as alternative sources. These are primarily concerned with your current business revenues and are far more flexible in their approval requirements than banks and credit unions.

Business loans and funding options for a sole proprietorship

1. Short-term loans

Short-term loans are easier to qualify for than longer-term business loans. Eligibility varies depending on the bank, location, and available loan programs. In general, you may be able to get a short-term loan if you’ve been in business for about a year, have a FICO score of at least 600, and make $50,000 or more in annual revenues. In comparison, for a medium-term loan, you need at least a year in business, a 600+ credit score, and about $100,000+ in annual revenue.

You need to pay back a short-term loan in under a year, which is why it’s called a short-term. Most banks will ask for collateral to secure a business loan. Collateral can include real estate, inventory, cash, goods, and equipment. Learn more about short-term loan options and some basic qualifications!

2. Small Business Administration 7(a) loan guaranty program

The Small Business Administration (SBA) guarantees types of 7(a) loans, paying up to 85% of the loan if you default. The loan is provided through an SBA-approved lender, almost always a bank or credit union. The qualification requirements are strict – the SBA (unsurprisingly) wants to ensure you won’t default. Don’t apply unless you have at least two years in business and a minimum 640+ credit score. A FICO score of 720 or higher is the sweet spot.

The SBA has several other requirements, too; the most important is that you must have a US-based, for-profit business in an eligible industry. Non-profit companies aren’t suitable for SBA loans; for complete details, look at the SBA’s eligibility questionnaire for standard 7(a). If you qualify for an SBA loan, you’ll benefit from low-interest rates and extended repayment terms (seven years for working capital, ten years for an equipment loan, and 25 for real estate purchases).

3. Lines of credit

A line of credit gives your business a cash cushion since you have pre-approved access to a specific amount of money you can draw from as needed. There are two types of credit lines: fixed and revolving. If you get a fixed loan, you have one-time access to the funds. With a revolving line of credit, you pay your balance, and the amount resets.

You may qualify for an unsecured line of credit if you have an excellent credit history. Secured lines of credit are also available, but you will likely need to put down collateral worth at least as much as the loan you hope to secure.

4. Personal loans

Since banks rarely approve traditional loans for sole proprietors, a personal loan may be your only option if you want to work only with mainstream funding options. Getting a personal loan means you won’t need to submit a detailed business plan. Also, this typically means that you won’t be able to get as much money as you would if you applied for a business loan or other alternative funding options. And if you can’t pay the loan back by the agreed terms, your credit score will be damaged. Consider that you may have to make good on loan by selling or surrendering personal assets.

5. Alternative business funding

Alternative funding sources offer products specifically designed to meet even the most minor business needs. Business owners don’t need perfect credit scores to qualify for this type of funding.

Merchant cash advances now adapt to how much revenue a business makes. A merchant cash advance is an advance against a business’s expected future income. It is a way for a company to get a lump sum of cash and pay it back by an automated withdrawal of a set percentage of a business transaction.

Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.