If you are a sole trader, getting finance can be difficult and requires you to show that you can repay what you have borrowed.
To give you a clearer picture of what’s available and what lenders are looking for, we’ll take a closer look at finance options for self-employed borrowers and business funding for sole traders.
Challenges for sole traders looking for a business loan
Having your own business and operating as a sole trader can be challenging, especially in the early days. Besides completing your day-to-day work, you have to oversee all aspects of the business, including marketing, staffing, customer service, purchasing and bookkeeping.
Unfortunately, many lenders can view sole traders as carrying additional risk because income may fluctuate and financial records are often less straightforward than PAYG employment.
What lenders look for when considering business loans for sole traders
In general, when deciding whether to provide a loan, lenders assess what is commonly known as the five Cs: character, collateral, capacity, capital and conditions.
Character
When considering business loans for sole traders, lenders assess your financial history including savings, loan repayments, years in business and your credit score.
They examine your ability to repay debts on time, the stability of your income and cash flow, your savings history and whether there have been defaults, bankruptcies or legal action.
If you’re unsure where you stand, understanding how your credit score can affect borrowing power can be helpful before applying.
Collateral
Collateral includes assets that can secure a business loan in case of default. Examples include residential or commercial property, land, vehicles and other assets.
Lenders consider how suitable those assets are as security, including value, condition and how quickly they could be sold if required.
You should consider the value and liquidity of your assets before applying for a business loan.
Collateral only applies to secured lending. Unsecured loans generally do not require security, however borrowing limits and rates may differ.
Capacity
When determining your ability to repay, lenders assess income, existing debt, living expenses and dependants.
Before applying, consider how stable your revenue is and whether your business could comfortably continue repayments if circumstances changed.
Capital
When assessing capital, lenders look at your overall financial position including assets and liabilities.
This may include assets such as trucks, farm equipment, machinery, property or business vehicles.
Conditions
Conditions include repayment schedules, interest rates, fees and any lender requirements that apply throughout the loan term.
As a sole trader, consider whether you can comfortably meet these obligations before proceeding.
Types of business loans for sole traders
Before exploring loan products, it’s useful to understand the two broad categories they generally fall under: secured and unsecured lending.
Secured loans
With a secured business loan, the borrower pledges an asset as collateral. This can include property, machinery, equipment finance assets or business vehicles.
If repayments cannot be maintained, those assets may be used to recover the debt.
Unsecured loans
With unsecured loans you do not pledge assets as security. However, personal guarantees may still apply.
Now let’s look at some of the common funding types available.
Bank term loan
This is often one of the harder loan types for sole traders to obtain.
Getting a term loan generally requires extensive documentation and approvals can sometimes take several weeks.
That said, lending options have evolved significantly and brokers can often access alternatives outside traditional banking channels.
Business line of credit
A business line of credit provides access to a predetermined amount of funds where interest is only paid on what is used.
Lenders generally require security and financial statements, and will typically assess your credit profile.
Business overdraft
If you’ve been operating for a while and have a good credit history, a business overdraft may be easier to access.
Business overdrafts allow you to draw on funds as needed and only pay interest on what you use.
However, one of the limitations of business overdrafts is that facilities can sometimes be reviewed or changed by the lender.
Invoice finance
With invoice finance, businesses can access funding against unpaid invoices.
For established sole traders with a substantial accounts receivable balance, it can provide access to working capital.
Unsecured business loans
Unsecured business loans have become a popular option for sole traders because application processes are often faster and require less documentation.
They can also help overcome short-term funding gaps or cash flow challenges.
For more information, call 1300 736 780 or get a quote online. Our team can assist with a range of funding solutions including truck finance, farm equipment finance, business vehicle finance, aviation finance and more.
