Business Loans for Sole Traders: Ultimate Guide
What’s a sole trader loan and how does it work?
Let's start from the beginning. A sole trader is a person who is the exclusive owner of their business. Personal loans can provide essential capital that can help you invest in equipment, manage cash flow fluctuations, and cover day-to-day expenses.
When you're a sole trader, you're your own boss, with no partners or formal company structure. This means you're taking complete responsibility for every aspect of your business – including its finances. If you need money to purchase a vehicle, tools, equipment, or stock, you might not want to dip into your personal savings to fund these business-related purchases.
Sole traders should separate their business finances from their personal finances, which is where sole trader business loans come in.
Read more: How To Get a Business Loan
Types of business loans for sole traders
There's a wide variety of loan options available to sole traders in Australia. Understanding the different types can help you choose the one that best suits your specific business needs:
Term loans (secured and unsecured)
Term loans provide a lump sum that you repay over a set period with regular payments. These can be either:
Secured loans: These require you to nominate an asset (such as property, equipment, or inventory) as collateral. If you can't repay the loan, the lender can sell the asset to recover their money. Secured loans typically offer lower interest rates due to the reduced risk for lenders.
Unsecured loans: These don't require collateral but generally come with higher interest rates to offset the increased risk for lenders. Short-term unsecured business loans are easier to access and are often offered by online lenders who are experienced in working with sole traders. Many people also take unsecured personal loans as a quick and efficient way to get the money they need for their business, as they can use the money as they wish.
Read more: Unsecured Vs Secured Personal Loans
Line of credit
A line of credit gives you access to a predetermined amount of funds that you can draw from as needed. You only pay interest on the amount you actually use, not the total credit limit. For example, you might have a $50,000 credit facility but only need to use $10,000.
While it's possible to get a line of credit on an unsecured basis, lenders may ask for property or equity in property as security for large credit limit.
Business overdraft
A business overdraft provides access to additional funds beyond your bank account balance, helping to manage temporary cash flow fluctuations. Sole traders are not always required to maintain a separate business bank account and may use a personal account with an overdraft facility.
Eligibility for a business overdraft depends on factors such as business tenure and credit history. A strong credit profile may improve the likelihood of approval, making it a potential financing option for sole traders. An overdraft should be used for short term cash flow deficiencies and not for longer term cash needs because an overdraft can be withdrawn by the lender.
Credit cards
Business credit cards offer a convenient way to handle short-term financing needs. When you use a credit card, you're effectively "borrowing" money for up to 55 days before you either pay it back or start accruing interest.
Credit cards typically require less documentation than other loan types, making them potentially easier for sole traders to access. Most offer an interest-free period (typically 30-55 days) for new purchases, and some provide welcome offers with interest-free purchases for up to a year.
However, be very sure you know how credit cards work before you go for that option. For example, you should know that interest rates can be higher than standard business loans – possibly exceeding 20%.
Factoring
Factoring is an agreement between the business and the finance provider whereby the finance provider pays the business a percentage of the money owed to the business for goods sold or services provided and the finance provider collects the full amount from the customer. Buy now pay later (BNPL) is a form of factoring.
Asset finance
Asset finance is specifically designed to help you purchase business assets such as equipment, machinery, or vehicles. The asset itself serves as security for the loan, which can improve your chances of approval.
Remember that if you're unable to repay the loan, the asset will be sold to cover what you owe. If your business heavily relies on this asset, losing it could potentially be disastrous, so only borrow what you know you can afford to repay.
Chattel mortgage
A chattel mortgage, also known as a small business car loan, is one of the most popular sources of business vehicle finance for sole traders in Australia. If you plan to use the vehicle for business purposes at least 50% of the time, you should have no issues qualifying for this type of loan.
Personal loans for business use
While you might not have initially considered a personal loan for your business needs, it can sometimes be easier to qualify for as a self-employed sole trader. Since you're personally liable for repaying any finance your business takes on anyway, using a personal loan doesn't leave you worse off in terms of liability.
This can also reduce the pressure of ensuring every dollar is used strictly for business expenses. If you're a new sole trader with less than 6 months of trading history, a personal loan might be the best option for accessing funds.
Meet Credit24 and get your loan now
If you need a straightforward financing option for your sole trader business, Credit24 provides a flexible alternative to traditional business loans. While classified as a personal loan, it can be used for business purposes without the extensive documentation often required for business financing.
With Credit24, you can:
Up to $10,000 in funding
Enjoy a quick and simplified application process
Avoid the complex paperwork associated with traditional business loans
Benefit from a flexible but fixed repayment calendar upfront, protecting you from unwelcome surprises
Such an easy and quick process makes Credit24 an excellent option for sole traders who need rapid access to funds without navigating the often complex requirements of conventional business financing. Plus, it’ll be easy for you to plan your repayments ahead, as you’ll get a fixed interest rate and a fixed schedule.
How to get a business sole trader loan
If you're ready to apply for a sole trader loan, here's a step-by-step guide to help you through the process:
1. Prepare your business documents
Having the right paperwork ready can significantly speed up the approval process. For traditional business loans, you might need:
A detailed business plan
Financial statements
Tax returns
Proof of income
Your ABN (Australian Business Number)
However, with online lenders like Credit24, you can often apply for a personal loan for business use with minimal documentation.
2. Check your credit score
A good credit score increases your chances of loan approval and may help you secure better interest rates. Before applying, check your credit report for any errors and, if necessary, take steps to improve that same credit score.
Remember that for sole traders, lenders will look at your personal credit history since there's no legal separation between you and your business.
3. Explore loan options
Research different funding sources to find the best fit for your business needs:
Traditional banks
Government-backed loans
Peer-to-peer lending platforms
Online lenders like Credit24
Online lenders often provide faster approval times and more flexible criteria, making them particularly suitable for sole traders. With Credit24, you can receive funds quickly in your account and use them for your business needs without the strict requirements of traditional business loans.
4. Compare loan terms
When evaluating loan options, consider:
Interest rates
Repayment periods
Fees and charges (establishment fees, ongoing fees, early repayment fees)
Loan amounts and whether they meet your needs
Flexibility in repayment options
To make accurate comparisons, look at the Annual Percentage Rate (APR), which includes all fees and provides a better view of the total cost than just the interest rate.
5. Apply for the loan
Once you've chosen a lender, submit your application with all required documents. Be prepared to provide additional information if requested.
With online lenders like Credit24, the application process is streamlined and can typically be completed in minutes. Many offer pre-approval, allowing you to know whether you're likely to be funded before a formal credit check is conducted.
6. Consider security
Decide whether a secured or unsecured loan is right for your situation:
Secured loans (using assets as collateral) often offer better terms and lower interest rates
Unsecured loans don't require collateral but may have higher interest rates to offset the lender's increased risk
7. Explore government programs
Check for government-backed loan schemes or grants specifically designed for small businesses and sole traders:
While the coronavirus SME Recovery Loan Scheme ended on June 30, 2022, other state-specific and national grants may be available..
The Australian government offers various resources to help sole traders navigate business complexities, including cash flow management, tax obligations, and growth planning.
How sole trader loans can be used
Sole trader loans offer flexibility in how you can use the funds to support and grow your business. Here are some common ways sole traders utilize business loans:
Working capital
Business loans can serve as vital working capital, helping you cover day-to-day operational expenses, manage cash flow fluctuations during slower periods, and pay for inventory or supplies needed to fulfill customer orders. This financial support bridges gaps in your cash flow, ensuring your business runs smoothly even when facing temporary challenges.
Equipment purchase or lease
For many sole traders, equipment and tools are essential to delivering products or services. Loans can fund the purchase of new machinery to improve efficiency, upgrade existing equipment to enhance productivity, or lease necessary tools when buying isn't feasible. With the right equipment, you can significantly boost your productivity and service quality, maintaining a competitive edge in your market.
Business expansion
When your business is ready for expansion, a loan provides the necessary capital to open new locations, hire additional staff to handle increased demand, or amplify your marketing efforts to attract new customers. These expansion initiatives can generate future returns that more than offset the cost of borrowing.
Refinancing existing debt
Managing existing debt becomes easier with refinancing options that allow you to consolidate multiple obligations into one manageable loan, potentially secure better interest rates, and simplify your financial management with a single payment. This approach can reduce your overall debt burden while improving your cash flow situation.
Renovation or relocation
Your physical space impacts both customer impressions and operational efficiency, making loans for renovation or relocation valuable investments. Whether you're improving your current premises, moving to a more strategic location, or setting up a home office to reduce overhead costs, the right environment can enhance your business performance.
Professional development
Professional development remains crucial for staying relevant in any industry. Financing can fund training courses to enhance your skills, attendance at industry conferences for networking and learning opportunities, or investments in certifications that allow you to command higher rates and expand your service offerings.
Technology upgrades
Today's industry landscape is fast paced, and therefore technology upgrades are non-negotiable for most businesses. Loans can help you invest in new software or hardware to streamline operations, improve cybersecurity measures to protect sensitive information, or develop an online presence through websites and e-commerce platforms to reach customers digitally.
Seasonal preparation
Many businesses experience seasonal patterns that require financial planning. Loans can help you stock up for busy periods to maximize sales opportunities, cover expenses during predictably slow seasons, or prepare for seasonal fluctuations with adequate resources, ensuring year-round stability.
Emergency funds
Unexpected challenges are inevitable in business. Having access to emergency funds allows you to handle unforeseen expenses or setbacks, recover quickly from equipment breakdowns or disruptions, and maintain operations during difficult periods. This financial safety net can mean the difference between a temporary setback and a business-ending crisis.
Before applying for any loan, it's important to understand that specific terms and conditions may affect how you can use the funds. Some lenders impose restrictions on loan usage, so always clarify these details upfront to ensure the financing solution aligns with your intended purpose
Bottom line
Obtaining a loan as a sole trader in Australia is quite accessible nowadays, thanks to the variety of options beyond traditional banks. Whether you need a revolving credit line or financing for specific assets like equipment or vehicles, there are numerous solutions available to match your unique business circumstances.
The key is finding a lender that aligns with your business’s needs.
Online lenders like Credit24 offer personal loans that you can use for business reasons, with very easy application processes and faster approval times, making them particularly well-suited for sole traders who need quick access to funds without too much paperwork.
Remember that the "best" sole trader loan isn't necessarily the one with the lowest interest rate – it's the one that best fits your needs and repayment capabilities, which go beyond the interest rate.
By understanding the different types of loans available and carefully considering your specific requirements, you can make an informed decision that supports your business growth and financial health.
Whether you're just starting out or looking to take your established sole trader business to the next level, the right financing solution is out there to help you achieve your goals.
