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sole trader business loans

Sole trader business loans play a big role in the Australian economy, as they make it possible for small businesses to get the funds they need. As a percentage of all businesses, non-employing sole traders account for around 63% of all businesses in Australia. 

For sole traders, finance is a must-have for long-term success and growth. 

But there’s a catch! 

Getting business finance can be tricky, especially if you’re new in business. 

If you’re asking, “Can I get a business loan as a sole trader?” or “How do I get a sole trader business loan?”,  here’s a breakdown of some of the options available. 

Small business loans for sole traders – why they can be a challenge

While you might believe the saying that “Small is beautiful”, not everyone agrees. 

You can have a successful and stable small business, but traditional lenders (mostly banks) have favoured larger businesses. They’re considered to be more stable, usually have assets for collateral (or the owner has collateral such as residential property), have a long credit history and good credit score, and seek larger loans. The time and effort it takes a bank to approve a $1 million loan are not much more than approving a $100,000 loan, so this type of lender will focus on the bigger loan for the larger business. 

Another big roadblock to business loans for sole traders has been the amount of paperwork required. Conventional loans have cumbersome loan applications, which are a headache for small business owners who need to focus on their core business activities. Adding to the pain, it can take weeks to get a decision from the lender. 

Getting business funding is especially challenging if you’re the new kid on the block. In this situation, you don’t have the track record to show you can repay the loan. You need time to build up a credit history to show you’re creditworthy. 

While it might seem grim, there’s no need to freak out because you do have options, even if your business is small and hasn’t been around that long. 

Personal loan 

It’s not recommended, but some sole traders will use a personal loan for business purposes. A personal loan can often be easier to get than a sole trader business loan because it’s based on personal credit history and not that of the business. 

With loan amounts up to $50,000, personal loans might be big enough to meet their business finance needs. Plus, a personal car loan can be used to purchase a vehicle for business use (although, it makes it more complicated for getting tax benefits such as the instant asset write-off and claiming back GST). 

On the downside, the sole trader is personally responsible for making repayments and their personal assets are at risk, including homes and other personal assets, if they are not able to pay. 

If you use a personal loan for business purposes, it also means you’re not building your business credit history and score, which is essential if you seek business finance in the future. 

The verdict? 

It’s not the best solution out of the choices for small sole trader business loans. 

Business line of credit

With a business line of credit, you are given access to a predetermined amount of funds to draw down as you need it. It’s a safety net you can use to cover lumpy cashflow or unexpected expenses.  

You’re only charged interest on what you’re using, making it a flexible way to smooth out cashflow when needed. So if you have a $50,000 line of credit and you’ve drawn $20,000, you’ll only pay interest on the $20,000, not the entire facility. 

Get the full story on how a business line of credit works. 

Business credit cards

You’ve probably heard the story – the highly successful business that was financed by the founder’s credit cards. While it’s inspirational, it’s the exception instead of the rule. Business credit cards can be a short-term solution but are not the way to grow a business. With many business credit cards, you get an interest-free period after making a charge, so it can help with cashflow when making purchases. 

Here’s a more in-depth look at business credit cards.

Invoice finance

Sometimes called ‘invoice discounting’, invoice finance gives you a revolving line of credit based on the value of invoices that customers owe you. In effect, the invoices serve as collateral and lenders loan up to 80% of their value. Some invoice finance providers will assist businesses with a minimum of $10,000 in outstanding invoices, while others focus on larger businesses and have minimums of $500,000 in outstanding invoices. 

Invoice finance only works for businesses that offer invoice payment terms – usually for business-to-business purchases – so it doesn’t apply to retail and hospitality businesses that get paid for immediately. 

Also, the required minimum monthly sales eligibility criteria tends to be high, fees connected to invoice finance can also add up quickly. These can include establishment, interest and due diligence fees. 

Get more information on invoice finance

Unsecured business loans

This type of loan has grown in popularity in recent years with sole traders. Unsecured business loans for sole traders make it possible to get finance without collateral, such as residential property, and don’t have a lengthy application process. In recent years, a new breed of online lenders has simplified the process with quick online applications and funding within 24 hours. 

Instead of relying on collateral, business lenders analyse the business’s finances and ability to make loan repayments. Interest rates depend on the amount of risk for making the loan, so business loans for sole traders with a weaker credit history will come with higher interest rates than loans to businesses with a good credit history. 

So, the answer to the question “Can a sole trader get a business loan?” is a resounding “yes!” Consider the options and their pros and cons before choosing sole trader business finance. 

Find out more about unsecured business loans and the steps for applying. 

  1. ASBFEO: Small Business Counts
The information on this the website is for general educational purposes and not to be taken as financial, tax or legal advice. It doesn’t take your personal circumstances into account, so you should consider whether it applies to you and your specific needs. We recommend you seek professional advice when making legal, financial and tax decisions. We strive to provide accurate, up-to-date information and disclaim liability (except which cannot be legally excluded) for inaccuracies, errors, or omission the result in any losses or damages, caused directly or indirectly, by applying this information. 

Post Author: Michael Gladkoff

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