Understanding Business Loans for Sole Traders

Business owner looking at business loans for sole traders

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Key Takeaway Table

Key Point Description
Definition
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.
Uses for business loans
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.
Business loan options for sole traders
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.
Loan requirements for sole traders
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.

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?

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:

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.

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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.

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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.

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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.

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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.

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