Lending is a Rollercoaster - Here's How to Get A Business Loan for Sole Traders

Finding a business loan can be a bit of a rollercoaster and it's not always easy to stay on board.  But, as with any other form of lending, there are some things you can do to make the process smoother.

In this article, we'll take a look at what you need to know about how loans can help your sole trader business grow.

Why You Should Consider Business Loans for Sole Traders?

Designed to help businesses improve readily available cash, a business loan can be a great option for a quick cash flow injection.

As you already know, cash flow is vital for all businesses and without adequate cash flow your business is likely to suffer.

Loans can be used for general business overheads, marketing or equipment purchases but can be used for any justified business use. 

Whatever the purpose, there are many lenders who can help, but knowing which one is best suited for your requirements can be difficult.

Many lenders will give an overview of their business loans eligibility to help you determine whether it is worth applying with them.

Different Lenders for Different Businesses

Lenders will have a target market in mind, this includes;

  • Type of business
  • Trading time
  • Financial Status
  • Loan purpose

Some lenders will specialise in certain market sectors such as funding for solicitors or loan purposes, such as tax finance or asset finance.

Types of Lenders

The main source of finance available to sole traders are traditional high street banks, challenger banks, peer-to-peer and specialist finance houses.

Traditional high street bank loans can be a great source of finance with low rates and long terms.  However, many sole traders have struggled to be approved as their lending criteria tends to be stricter than alternative lenders.

Peer-to-peer (P2P) and alternative lenders are another option you may want to consider.  P2P lenders tend to have more relaxed eligibility criteria than traditional banks and are the go to for a large number of businesses.

Rates will vary a lot more with alternative lenders than traditional banks, so it is important to do your research before applying.  The interest rate you receive can be determined by a number of factors, including the strength of your business in terms of accounts, bank statements/cash flow and search information, as well as other things.

Business loan rates will vary a lot between lenders and when researching, it may be tempting to compare their representative interest rates as a deciding factor on who you should apply with.

However, this is not always a good comparison because your cost of borrowing may well be different to the rates advertised.

Representative rates are achieved by 51% of applicants, the remaining 49% will probably be offered a higher rate.  You will not know the exact rate you will get until you apply.

The total cost of the loan will depend on your personal APR and any additional fees.  Your specific APR will depend on your financial status, amount and repayment period of the loan.

Another factor to remember is how will the loan benefit your business.  In most circumstances this can outweigh what the interest rate is.

How Do I Get a Business Loan?

The first step in getting a business loan is to find a suitable lender and then apply.

You will need to assess

  • Rates/Interest – How much will the finance facility cost you in full
  • Fees – What fees are involved
  • Loan amounts – How much funding does your business need
  • Repayment schedules – Short term business loans or long terms
  • Impact on financial health – Will the loan have a positive impact on long term health
  • What are the funds going to be used for and how can this benefit your business

You'll need to fill out an application form and submit the required documents such as business bank statements, accounts, management information and forms of identification.  You may also need to supply further information such as copies of contracts that may be relevant to the loan your business requires.

After you have supplied all the required information all you need to do is wait for a decision. It is important to keep on top of any requests for additional information from the lender to make sure there are no delays with the application and decisions.

You should do your research and find a lender that's right for you, one that offers loans with rates that are competitive and more importantly one that specialises in dealing with sole traders.  It may be beneficial to deal with a broker rather than a lender directly, as the broker may be able to guide you through the process.

The process is relatively straightforward, and many lenders typically will give decisions and release funds within 48 hours, providing you supply all required document when requested.  It’s important to remember that this process can take longer in some cases.

What Are The Different Types of Business Loans?

There are a wide range of loans available to you as a sole trade on a secured or unsecured basis.

Secured loans will use your personal assets (mainly property) as collateral for the loan, unsecured do not use your personal assets as collateral.

The most popular loans for sole traders are:

  • Income Tax Loans
  • Cashflow Loans
  • Asset Finance
  • Invoice Finance

What Are Income Tax Loans for Sole Traders?

Income tax loans are a great way to spread the cost of your tax bills and are available over 3 months to 1 year terms.  Having fixed monthly payments can help you manage your cash flow more effectively and more importantly pay your tax bill on time and in full.

You can even get a tax loan a whole month after the bill is due and even if you have already it.  The amount can either be paid directly to HMRC or to you bank account.  Some lenders will insist on paying HMRC directly on your behalf.

You usually will need to provide your HMRC tax bill prior to the funds being drawn down.

What Are Cash Flow Loans for Sole Traders?

Cashflow loans are useful if you are experiencing low cash flow and are available from 3 months to 5 year terms with no maximum loan amounts (subject to credit status and full underwriting).

If you are experiencing a shortfall in its working capital, maybe due to seasonal trading or other overheads using up your cash reserves, then a cash flow loan may be a good option to consider.

What is Asset Finance for Sole Traders?

Asset finance is used to purchase new assets or to refinance existing ones. It is a great tool to grow your business by spreading the cost of new assets purchases or generate cash from ones you already own.

There are a range of type of asset finance

  • Asset Refinance
  • HP
  • Lease Finance
  • Operating Lease

Asset finance can be used on both new and second hand goods and depending on the type of asset can be spread over up to 7 years (usually 5 years max for most assets).  You can even apply up to 3 months after you have purchased the asset – this is known and sale and leaseback/hpback.

If you are refinancing existing assets, you need to be aware that you can only finance the current market value and not what you originally paid for them.

What is Invoice Finance for Sole Traders?

Invoice Finance is used release cash from outstanding invoices.  If your clients are taking too long to pay their invoices, then invoice finance can be a useful tool to help improve your cash flow.  The 2 main types of invoice finance are Invoice Discounting and Factoring.  Factoring is when a business sells its invoices to a third party and then the factoring company control the sales ledger and collects the debts.  Invoice discounting is an alternative way of drawing money against your invoices.  However, the business retains control over the administration of your sales ledger.

You can generally finance up to 90% of the total invoice amount and pay a fee to the lender for each invoice you finance.

Applying for invoice finance is very straightforward.  You generally need to be a UK trading business and have at least 1 set of accounts, in most cases.  However, new start companies can use invoice finance.

In simple terms the process is as follows:

  • You raise invoices and send to client and lender
  • Lender pays you up to 90% of invoice total
  • Clients pays and lender deducts fees
  • You receive remaining balance

Sole traders have many options when it comes to business loans, providing you know who to apply with and what they can be used for.

If you are struggling to find the right lender or need help in applying for a cost effective loan, then we can help you find the right product for you and your business.


Updated: July 29, 2022