These types of loans can either be secured or unsecured and are relatively easy to apply for.
What Are Sole Trader Loans?
Sole traders, unlike limited companies, are not permitted to submit information through Companies House, which can make it challenging for them when it comes to gaining additional funding for their business operations, especially through traditional finance and leasing association methods.
A sole trader loan comes in one of two forms, secured and unsecured. The former can be secured against a business or personal assets, whilst unsecured loans for sole traders require no collateral assets.
The majority of sole trader loans span from £1,000 – to £100,000 and feature repayment terms ranging from one – three years.
How Can I Get a Sole Trader Loan?
Most sole trader loans can be applied for online and have been created to suit the busy lifestyles of self-employed people across the country.
First things first, the sole trader will need to fill in an online application form which includes a range of personal information, as well as details of your business. This includes contact details, years in business and turnover.
You will also need to enter how much you wish to borrow. For best results, when it comes to personal loans and sole trader loans, always read the small print.
Once you have submitted your form, you will be contacted by the lender and will receive detailed terms and conditions of the lending options available. If you agree to these terms, you will need to sign the form and return this to the lender.
Once complete, the lending process (providing a few further checks are met) can begin.
How Does a Sole Trader Loan Work?
A sole trader loan works similarly to the majority of loans in existence. First things first, the lender must access the circumstances surrounding your finances and debt consolidation.
This will help them determine whether you’re eligible for borrowing money and whether you have the means to pay back the repayments. To do this, they will need to analyse your business accounts.
As with all loans, there will be an interest rate on the sole trader loan repayments. You’ll usually pay the loan back in monthly instalments over a predetermined period – this can be up to a few years.
How Much Can I Borrow as a Sole Trader?
This varies between lenders; however, the majority tend to lend between three and five times your salary and/or business turnover. Some may even offer more!
The key to securing the best sole trader loan? Shop around! However, it is essential to remember that the final loan amount will heavily depend on your deposit amount, security, and personal circumstances.
Will I Need to Provide Collateral to Secure a Sole Trader Loan?
There are two types of sole trader loans: secured (which require collateral) and unsecured. In certain cases, and this is heavily dependent on your financial circumstances, you will be asked to provide collateral to show you’re eligible to borrow money – especially if you’re high risk.
What Can a Sole Trader Loan Be Used for?
Sole trader loans are in place to assist sole trader business owners with funding. They’re particularly popular with those who find it challenging to sign up for conventional loans, as sole trader business owners can be seen as high-risk candidates.
What Sources of Funding Are Available to Sole Traders?
As a sole trader, you have likely found it a challenge to secure either a long or short-term secured business loan for your company. This is usually down to conventional banks not offering loans for sole traders.
This is when alternative financing options, such as sole trader business loan packages, come into play, particularly those that have been tailored specifically to sole trader businesses.
Unsecured business loans
This type of sole trader loan is much lower risk than others, especially for small business owners. There is no need to secure this loan with assets. The one downside? The interest is often much higher on these types of sole trader business loans.
As a sole trader, retained profits are a great finance source and allow for the ultimate flexibility. They’re an internal fund source as opposed to a personal use loan.
If your business is a profitable one, retained profits are a great option. They work by allowing self-employed business owners to reinvest profits back into their limited company.
Keeping hold of this income means you have the option to spend it elsewhere, such as on business expenses, company expansion, stock, software or paying wages.
This is a flexible style of business funding loan and works by financing against an asset. Yet unlike secured loans, you will officially own the asset when you make the final bank loan repayment.
Secured loans from banks
To be applicable for a secured loan, you must present the lender with an asset or assets. This could be in the shape of property or another asset, such as business equipment or a vehicle.
Securing a loan via collateral gives the lender security. However, it can prove a risk for small business set-ups and medium-sized businesses, especially those unable to make monthly repayments.
Despite this, if you’re low-risk to lenders, you will be privy to lower, more attractive rates of interest and more beneficial terms. To learn more about repayments, take advantage of an online business loan calculator.
Do I Qualify for a Sole Trader Loan?
Providing you fall under the following categories, you can qualify for a loan:
- You are registered in the UK
- You have been trading actively for six months minimum (but usually over a year)
- You are over the age of 18 years.
Businesses that are generally excluded:
- Any business that falls into the drugs, gambling, weapons, banking, chemical manufacture, money transfer or pornography industry.
The Pros and Cons of Sole Trader Loans
There are numerous pros and cons to consider when it comes to loan options, including the following:
- When looking at unsecured loans, one of the key benefits is that you don’t need to put up any collateral to secure the loan. Asides from having quick access to funds, this ensures your business assets remain safe.
- Online application – Applying for self-employed loans is as easy as the click of a button as most are now available through an online portal via a self-assessment form.
- Better chance of approval – numerous lenders means more loan options and a higher chance of being approved by a suitable lender.
- Ensure you’re in control – you can use this cash injection in a way that benefits your business.
- Interest rates that are competitive – when you use a broker, you get access to the best sole trader loans.
- Certain sole trader loans require a personal guarantee, which means your home or other assets could be taken if you don’t repay the loan.
- The limit you can borrow is limited – Self-employed individuals with their own business have a much higher liability than that of a limited company, which means you may not have access to as much as you’d like to borrow.
Can I Get a Sole Trader Loan If I Have a Bad Credit Score?
Even if you have poor credit, you may still be able to get a loan, although it can be more of a challenge to source the right provider. To check your eligibility, take a self-assessment or fill in a loan application form online.
How to Choose the Best Sole Trader Loan for Your Business
If you’re looking into the option of a loan to boost cash flow, there are numerous factors to consider. First things first, do your homework – with so many providers to choose from, it is essential to pick the lender that best suits your needs.
Look for loans aimed at your industry, business size, current funds and repayment options.
Basic Criteria for Business Loans
To understand your needs and risk potential, lenders need to ask questions to learn more about your business purposes and needs. The first question they will likely ask is how long you have been operating. Most lenders prefer the answer to be a minimum of one to two years.
Don’t worry if your company hasn’t quite reached this age; there are options, including the likes of government grants and start-up loans.
Other important considerations include your business yearly profit margins and annual turnover. These are the key factors that showcase insight into the health of your business and your eligibility criteria — which demonstrates your ability to repay a loan and generate cash.
Finally, the majority of lenders consider credit history; this includes both your personal situation and business credit history, including business profits and positive net income. Lenders expect payments from you monthly, which means they’ll want to see an indication of your past activity before granting you a cash injection.
If your company meets these requirements, there is likely a loan available to suit your needs and boost your current cash flow.
Who Provides Sole Trader Loans?
Sole traders have a choice between traditional banks and non-traditional methods, such as bad credit history loans, which are more likely to lend to those with a poor credit history.
What is the difference between a sole trader and a limited company?
The biggest difference between a limited company and a sole trader is that a limited company is its own entity, whilst a sole trader is a self-employed individual working alone.
Does the FCA regulate sole trader loans?
Most business loans available today are unregulated, especially those that lend to limited companies. For sole traders, this is different as some of the options fall within the FCA regulation scope.
The FCA determines that business loans under £25,000 are regulated for sole traders.
Will I need a business bank account to get a sole trader loan?
This is highly dependent on the lender. In most cases, you won’t need a business bank account to indulge in sole trader business loans.
Despite this, it can make things easier, as it helps to separate both business and personal finances. For example, home improvements and utility bills should come out of a different account to company expenses.