Key Takeaway Table
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Definition
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A sole trader is an individual who owns and operates a business as distinct from a company or operating out of a trust. In a sole proprietorship, there is no legal distinction between the business and the individual. The business is considered an extension of the owner, and they are personally responsible for all aspects of the business, including debts and liabilities.
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Uses for business loans
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Sole proprietors can use business loans to help them start, improve, and expand their businesses. Loans can provide startup capital, working capital, emergency funds, business expansion funds, to invest in assets, and more.
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Business loan options for sole traders
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Sole traders can apply for different commercial loans, including business lines of credit, business overdrafts, trade and import finance, invoice finance, equipment finance, and more. Sole traders are also eligible for both secured and unsecured business loans.
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Loan requirements for sole traders
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Loan requirements at banks include tax returns, personal asset position, and may include security. Non-bank lenders will require access to the business bank accounts.
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Being a sole trader is one of the simplest ways to start a business. Many businesses start as one. Once they register an ABN, they can begin trading immediately. Some common examples of sole traders are freelancers, plumbers, electricians, landscapers, private chefs, personal trainers, and photographers, but they can also extend to any kind of business.
How does a sole proprietorship work?
- Ownership: The sole trader is the only business owner with complete control over its operations.
- Legal Structure: Unlike other business structures like partnerships or companies, a sole trader operates as an unincorporated business. This means there is no separate legal entity for the business.
- Liability: The sole trader is personally responsible for all the debts and liabilities of the business.
- Profit and Decision-making: The sole trader retains all the business's profits. They also make all the decisions related to the business without the need for consultation with partners or a board of directors.
- Taxation: Income earned by the sole trader is typically treated as personal income for tax purposes. The business itself does not pay separate income taxes as a company would.
Uses for Business Loans
Sole traders can use business loans for different purposes, typically to start, maintain, improve, and expand their business. Here are some common uses:
- Starting Up: Sole traders need loans to cover the initial costs of starting a business, such as purchasing inventory, equipment, leasing, and more.
- Cash Flow Management: Loans can help sole traders smooth out cash flow problems during periods of uneven income. Loans can also help with any unexpected expenses, like paying for repairs and legal fees.
- Expansion: Sole traders may seek loans to help finance the expansion of the business, whether through opening new locations, expanding their product line, or entering new markets.
- Equipment Purchase: Buying or leasing necessary equipment or machinery is a big expense that a loan can pay off.
- Inventory Purchase: Sole traders can take out loans to finance the purchase of inventory, especially in bulk, to take advantage of discounts and prepare for peak seasons.
- Marketing and Advertising: For sole traders in saturated fields, standing out against a sea of other businesses can be difficult. Loans can help fund marketing campaigns, advertising, and promotional activities to increase brand awareness and attract customers.
- Hiring Staff: Loans can cover hiring new employees, including paying for salaries, training, and benefits.
Business Loan Options for Sole Traders
Here are some of the common types of business loans sole traders can apply for depending on their financial needs:
1. Secured and Unsecured Business Loans
Sole traders can apply for both secured and unsecured loans. Interest rates and fees may differ depending on the lender.
2. Business Overdrafts
Unsecured business overdrafts are revolving lines of credit that business owners can use as a source of short-term funding. Lenders will set a credit limit, and the borrower can draw funds if it’s within the limit. Once the amount is repaid, the limit resets, making it available for borrowing again. Interest is only charged on the borrowed amount and not on the entire limit.
3. Trade and Import Finance
Trade and Import Finance is a line of credit that allows business owners to purchase and import supplies.
4. Invoice Finance
Invoice finance is a great way for business owners to access cash despite late customer payments. Sole traders can access 85% of their invoice amounts within the day it is written. Thus, sole traders can have cash on hand for operational expenses and for undertaking new contracts.
5. Equipment and Asset Finance
Equipment and asset finance is a specific loan for purchasing special equipment and other assets for your business. The assets purchased will serve as the security, so loans can get approved quickly.
Loan Requirements for Sole Traders
Since sole traders are legally the same as their business, the requirements for loan application will focus more on their personal financial and credit standing.
Business Documentation
Sole traders might not need to provide as much documentation related to the business's legal structure since their business and personal finances are not legally separate entities. However, some lenders may ask them to provide a trade licence or registration documents.
Financial Statements
The financial documentation required from sole traders often blends personal and business finances. They may need to submit personal tax returns and personal bank statements.
Credit Checks
Lenders often rely on the personal credit score before making a decision to provide finance. A sole trader's personal credit history plays an important role in the loan approval process as it does for business loans to companies.
Guarantees
Sole traders are personally liable for all business debts, so lenders that provide unsecured or low doc loans will ask for a personal guarantee.
Find the Right Business Loans for Sole Traders
Whether purchasing equipment or managing cash flow, sole traders can benefit greatly from business loans. They can apply for loans from traditional banks and non-traditional lenders, depending on their needs. Need a loan? Talk to an expert today.
