Sole trader business loans are available to businesses owned and run by self-employed individuals. Unlike limited companies, sole traders are not required to maintain financial statements, which can make it more difficult for them to access funding through traditional lenders.
Fortunately, the array of options for sole trader business loans is increasing. A sole trader loan can be secured against both personal and business assets or, alternatively, there are unsecured business loans for sole traders, with no collateral necessary. Learn about the different types of sole trader business loans in our guide below.
Can a Sole Trader Get a Business Loan?
The answer is YES, but it's likely to be more expensive than for corporations. Sole traders can certainly qualify for a business loan but finding an appropriate lender to borrow money from is generally harder than it is for limited companies - particularly on an unsecured basis for sole traders. Why is it more difficult for sole traders? This is due to a few factors; sole traders typically generate less income (which can make it difficult to qualify for sizable loans to boost growth), they are perceived as ‘high risk’ when compared to other business types, and many traditional lenders will refuse to lend on the basis of transaction data from bank statements alone.
Applying for a Sole Trader Loan
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Sole trader loan requirements aren’t much different to that for limited companies. The fact that banks don’t differentiate between sole trader loans and limited company loans is actually one of the major stumbling blocks preventing sole traders from accessing finance. They expect sole traders to be able to provide a comprehensive suite of financial statements in order to qualify for a loan. Banks will thoroughly investigate your finances with a fine tooth comb just to look for the smallest details to deny their services.
BUT – some online lenders have made the process of qualifying for sole trader business loans much easier. They are actually actively targeting microbusinesses, and mum and pap shops, of which many are sole traders.
With those online lenders, for loan sums under $100,000, usually no financial statements are required, just access to your bank statements. The three major requirements are typically:
To have a registered ABN (something all sole traders should have)
A minimum time your business has been trading (usually somewhere between 6 months and 1 year depending on the online lender)
A minimum monthly or annual turnover. This can vary from lender-to-lender but you’ll find some who are happy to lend to businesses turning over a minimum of $50,000 per annum
As a sole trader, you will have to apply for an ABN, but this is a hassle-free and quick process. To do this, more information is available from the Australian Business Register and the Australian Tax Office.
In 2021-22 sole proprietors had the largest net growth of any type of legal organisation, increasing by 90,239 businesses, or 12.7% to 798,209 in total. – Source
Best Sole Trader Financing
Amongst our top rated lenders, these are the ones which are most geared towards financing sole traders and businesses with no employees.
Australia’s Sole-Trader and Micro-Business Sector
Australia’s sole trader and micro-companies sector is on fire. This article from the Australian mentions that the number of people whose title is managing director has grown by 39% between Feb and August of 2020. This extreme amount of new micro-businesses opening up during the same year as the worst pandemic in a century means that there’s a constant requirement for financing. This trend has continued into 2022, with a 2.0% or 50,057 increase in the number of businesses through Q1.
With the advancement of technology, a sole trader or a micro-business can mean a lot of things. It’s a far more diverse definition than before. A business owner doesn’t necessarily have to hire many employees to get rather sophisticated jobs done. While the majority of Australian sole businesses are small local businesses, some of them are operating internationally with worldwide facing online businesses or stores.
When you apply for a sole trader business loan you can use the funds for any business use-case, just like a limited company applying for the same type of loan.
These are the most common reasons to borrow money as a sole trader or micro-business in Australia:
Borrowing money to invest in business growth is another common use case but we would not recommend using the online lenders listed in this guide for this purpose. We believe it’s better to apply for a bank loan, or better yet – raise money through equity, than to borrow for expansion from high interest lenders.
Types of Sole Trader Business Loans
Using a loan to purchase a business asset is an easy way to secure a loan and improve your chances of approval. Asset finance could be for commercial property, machinery or equipment.
Remember, if you are unable to repay the amount financed, the asset, whether this be a company car or piece of manufacturing equipment, will be sold to pay for what you owe. If you’re heavily reliant on this business asset, it could be potentially disastrous if you were to lose it, so only borrow what you know you can afford to repay.
A chattel mortgage, or small business car loan, is one of the most popular sources of business vehicle finance – it is commonplace in Australia and something sole traders should take advantage of. Providing you plan to use the car for business purposes at least 50% of the time, there should be no issues in qualifying for a small business car loan.
Term Loan (Unsecured or Secured for Sole Traders)
A long term loan is probably the most difficult type of loan for a sole trader to get. Usually offered by banks, they will want to see a long trading history, with financial statements dating back many years.
Short-term small unsecured business loans are easier to access and are offered by online lenders who have experience in working with sole traders. Under a term loan you will make regular payments for the term of the loan so there are no surprises about what you will pay and when you will pay it – these will be either daily, weekly or monthly, depending on duration of the loan and what you agree with the lender upfront.
Business Line of Credit
With a business line of credit, you only pay interest on the funds you draw from the line of credit. This means you may have a total line of credit facility of $50,000 but you may only need to utilise, say $10,000, of this at a time. However, an annual fee or regular minimum repayment is usually required – lenders will want to see the borrower utilising the facility, otherwise they would prefer to allocate the capital elsewhere.
It’s possible to get a business line of credit on an unsecured basis but lenders may ask for property or equity in property as security.
As a sole trader, you’re not required to have a separate business bank account. You may even run your business from a personal account which already has an overdraft. Though, if you do have a separate business bank account and have been in business for a while, with a strong credit history, then a business overdraft is one of the easiest business loans for sole traders to obtain. If you can secure your overdraft then you’ll likely be eligible for a higher amount and GetCapital even has a unique product which acts as a business overdraft and plugs into your existing bank account.
Business Credit Cards
Business credit cards are an easy solution for short-term financing needs. Less documentation is required when applying for a credit card, so this can make it a better option for sole traders. It does however mean more emphasis is placed on your credit score.
Most credit cards offer an interest-free period (typically 30-55 days) for new purchases, and some will even provide a welcoming offer which grants a year of interest free purchases. In these instances, it can be a cost-effective way to meet short-term cash flow needs. The issue of course is when interest starts to build up – this can easily be over 20%.
Personal Loans vs Business Loans for Sole Traders
Going down the personal loan route is perhaps not what you had in mind but if you know that as a self-employed sole trader you need an injection of cash, then it might be easier to qualify for a personal loan. As a sole trader you are personally liable to repay any finance your business takes on anyway, so in this sense, taking a personal loan leaves you no worse off. It would also reduce the pressure of ensuring every dollar of your loan was utilised on business expenses. The same would apply for personal credit cards. Personal loans, however, may have higher interest rates.
If it’s new sole trader loans you’re seeking then going down the personal loan route could be the best option – particularly if you’re unable to demonstrate at least 6 months of trading. You can learn more about startup funding.
Ultimately, getting a loan as a sole trader should be no different to that of a small business which is registered as a limited company. That does mean that sole trader loans typically require more documentation than a personal loan but the interest rates could be lower.
In this scenario, having bad credit will impact your chances of attaining a business loan more so than being a sole trader. Provided you are seeking a loan amount relevant to your cash flow, being a sole trader should not impair your chances any more than being a limited company – certainly not with an online lender anyway.
For detailed information about obtaining small business loans with bad credit you can view our dedicated bad credit business loans page.
Max Funding is one commercial lender who is used to working with both sole traders and bad credit companies. Importantly, there is NO credit check for pre-approval. So you can get an idea of whether you are likely to be approved of finance before completing a full application. Credit history is usually checked during final verification when you have decided to proceed after pre-approval. The applicant also has no obligation to proceed with the application before the signing of any agreements.
OnDeck has a free business credit score check service with no obligations to seek finance from them later down the line. Understanding your credit score will help you to understand if you meet a lender’s minimum credit score requirements and improve your chances of approval.
How to Get a Loan as a Sole Trader
Online lenders build their application process with busy sole traders in mind. In most cases, it should take no longer than 10 minutes to apply and a pre-approval is possible so you’ll know whether you’re likely to be funded ahead of a credit check. Just follow these easy steps for your online application:
Step 1: Complete an online application form. As well as being asked for your personal information, lenders will want to learn more about your sole trader business and how much funding it is you’re seeking.
Step 2: Depending on the lender you choose, you may receive a pre-approval instantly.
Step 3: Within hours of submitting your application form, an online lender is likely to have reviewed your application. Be on hand to provide any further details as necessary.
Step 4: If successful, be sure to read the T&C’s of the lender you choose to apply with. After you’ve reviewed the agreement and signed this online, the loan amount should be deposited to your account within 24 hours.
The process to apply for sole trader business loans with just one online lender is actually not so difficult – the issue lies when you need to repeat this process on multiple occasions if you are rejected. This would also be damaging to your credit score if you reach the stage that a credit check is conducted in each of your applications. To cut through the fat and improve your chances of approval there is a better option.
Use a Business Loan Marketplace
Applying with a business loan marketplace, such as Lend.com.au, can remove a lot of hassle, especially if your business is deemed to be ‘high risk’. Simply complete information on your business, including the fact you are a sole trader, upload your bank statements and define the type of finance it is you’re seeking. Lend will then match your business profile to only the most relevant lenders who have a higher likelihood of approving your application – you’ll then be able to view these lenders from your Lend dashboard. The more information you can provide, the better Lend can match you with appropriate lenders. Lend works with a host of providers who have experience issuing business loans for sole traders with bad credit.
How to Compare Business Loans for Sole Traders
When comparing business loans, it’s important to consider not just the interest rates, but also the fees, loan terms, and loan amounts. Each of these factors can significantly affect the overall cost of the loan and whether it’s a good fit for your business. If you can, compare the APR across various sole trader loans – calculated on an annualised basis and including all fees, this provides a more like-for-like comparison on costs than just comparing the interest rate on a loan.
Beyond simply the cost of the loan, you’ll also want to consider the turnaround time and eligibility criteria of the lender, as well as any specific loan features which may prove beneficial. This could include the ability to make early repayments without penalty, redraw facilities, or the option to top up the loan amount if needed.
Remember, the ‘best’ sole trader loan isn’t always the one with the lowest interest rate – it’s the one that best aligns with your business needs and repayment capabilities.
Sole Trader Loans Australia – Government Support
The Australian Government provided a number of support measures to help sole traders withstand the impacts of coronavirus.
You may have been eligible for cheaper credit under the coronavirus SME Recovery Loan Scheme, however, this scheme was brought to an end on 30 June 2022. Under the scheme, the Government guaranteed 50% of new loans issued by participating lenders to sole traders. Unfortunately, it’s now business-as-usual for sole traders and the greatest chance of approval will be through a non-bank specialist SME lender.
Despite the covid-specific measures coming to an end, there are various sole trader and small business grants available throughout Australia – some state specific and others operating nationally.
Moreover, the government also offers advice and resources to help sole traders navigate the complexities of running a business. This includes information on managing cash flow, understanding tax obligations, and planning for growth. By leveraging these resources and support measures, sole traders can improve efficiency and focus on the important tasks that count the most.
Loans for Sole Traders – Final Take
Obtaining a loan as a sole trader can be challenging if you only have your bank in mind and don’t know where else to go. Fortunately, there are now various ways through which you can get a loan as a sole proprietor.
Whether it’s a revolving credit line or you’re looking to finance a particular asset like business equipment or a car, there are more financing options than ever open to you as a sole trader. The key lies in using the right discernment to find a lender that suits your background and requirements.
If time is of the essence a business loan marketplace should be your first port of call – if you have the time, be sure to conduct extensive research so you know the most appropriate sole trader business loans for your needs. The lenders listed in this guide – who have an extensive track record of issuing sole trader loans – are a good place to start.