What type of loans can I apply for as a sole trader?
There are a number of loans you can apply for as a sole trader. These include:
Type of loan
Loan amounts
Features and repayments
Pros and cons
Business overdraft
Loan amounts will vary based on the lender and your business' financials. You may be able to get an overdraft of up to $750,000.
- Linked to an existing business account - Available once you use up funds in your account - Unsecured loan - Variable interest rates - Ongoing account, minimum repayments required
Unsecured loan
Useful when your funds run low
Can only access funds once other accounts are depleted
Interest rates can be high
Requires an existing bank account
Line of credit
Loan amounts will vary based on the lender and your business' financials. It could go up to $15 million or higher.
- A line of credit allows you to draw cash as and when you need it. - You pay interest only on the money you use, not the entire loan amount. - Regular, minimum repayments on your balance
If you need an ongoing source of credit, this provides credit on a revolving basis.
You pay interest only on what you use.
Interest rates can be high.
With only a minimum repayment expected, you could carry your debt indefinitely.
Secured business loans
Loan amounts vary, with some lenders offering up to $100 million while others don't have maximum borrowing amounts.
- Borrow a large sum of money, using an asset as security. - Fixed or variable interest rates. - Regular loan repayments over a period of time.
Can provide your business with a large amount of cash to use for various business expenses
Lower interest rates as the loan is secured
Your asset can be at risk if you don't meet your repayments.
You'll be taking on a large debt.
Unsecured business loans.
Loan amounts could range up to $1 million, although it varies according to the lender.
- Borrow without security - Faster applications - Higher interest rates than unsecured loans.
Usually approved quickly
A quick source of cash
More expensive than secured loans
Smaller borrowing amounts than secured loans.
Invoice financing.
You could borrow up to 80–90% of your unpaid invoices. Funding up to $150 million may be available.
- Get funding against your unpaid invoices - No asset required as the loan is secured against your unpaid invoices - Get quick access to funding. - Fees apply, with your invoices will pay for the rest of the loan.
You can bridge cash flow shortages by using funds already owed to you.
Not an option for a new business with no invoices, but established businesses can benefit.
Open to bad credit borrowers too.
How do I know which business loan to choose as a sole trader?
If you're not sure what type of loan is right for you, these questions can help narrow down your options:
What do you need the funds for? The purpose of your loan helps you decide what kind of finance you need. If you're purchasing commercial real estate then you could look at a commercial property loan. You would not apply for a line of credit.
Do you need to pay for a large one-off purchase or multiple smaller expenses over time? Most loans provide a lump sum of money. As soon as the funds hit your account you start getting charged interest and have to make repayments. This is useful if you need to purchase one major item. But if you have to cover multiple purchases over time a line of credit might be more suitable because you only pay interest on the amount you spent.
Can you offer security? If you have an asset such as a residential or commercial property you could get a lower interest rate or more favourable loan terms. But you are putting the property at risk if you can't repay the loan down the track.
How do I compare business loans as a sole trader?
Look for a loan with a lower interest rate
A business loan with a lower interest rate saves you money by reducing your interest charges.
Secured business loans have lower rates than unsecured loans.
Watch out for fees
Business loans often come with application or establishment fees charged as a percentage of your loan amount. Monthly fees can also add up and make the loan more expensive.
Factor fees into your comparison and try to find a loan with lower fees.
How much can you borrow?
The amount a sole trader can borrow depends on their business income. But lenders have minimum and maximum loan amounts for their loans.
Check if a loan will let you borrow as much (or as little) as you need before applying.
Compare loan features
Does a business loan let you choose fortnightly or monthly repayments? Does the lender offer fast loan approval? Can you repay the loan early without penalty?
Comparing all of a loan's features gives you a clearer idea of how suitable it is for your business needs.
What can a sole trader use a business loan for?
Lenders require you to use the funds for business purposes and not personal uses. And some lenders may require detailed business plans that show how you will use the funds and how they will generate income.
Sole traders might use a business loan to:
Purchase new equipment, tools or machinery
Purchase a business vehicle
Renovate your business premises
Purchase inventory to supply your business
Cover a shortfall in revenue due to a slowdown or seasonal demand
How do I apply for a sole trader business loan?
As an established sole trader
Financials. You should have records highlighting your profits and losses and at least 2 years of tax returns.
Business credit score. You can unlock lower interest rates with a Good or Excellent business credit score.
Security. Sole traders can use commercial property to secure a loan. You could use a residential property too.
Debts and assets. Lenders take your existing debts and business assets into account when assessing your application.
As a newer sole trader
If you haven't been operating as a sole trader for very long (under 12 months to 2 years, depending on the lender) you may not quality for a loan. Or you may have to provide extra information in your application.
Business plans. A detailed business plan shows a lender that you're running a serious operation and have a better chance at generating income.
Personal credit history. If your business hasn't built up a credit history yet then a good strong personal credit score can strengthen your application.
Your skills and qualifications. You have a stronger chance of approval if you're a qualified expert in your field, with a degree or trade certification.
What documents do I need to provide when applying?
Every lender requires slightly different documents. This also depends on the type of loan you apply for.
Most lenders require some or all of the following:
Personal identification documents
An ABN
Business tax returns
Profit and loss statements
A cash flow statement
Online lenders often have more flexible requirements than banks. It's important to find out what a lender's business lending criteria are before you submit your application.
What if I don't have enough financial information to get a loan approved?
If you haven't been running a business as a sole trader long enough to have the financial information a lender requires, you have a few options:
Low doc business loans. These loans are designed for self-employed business owners and sole traders who don't have the financial documents and business history to support a regular loan application.
Peer-to-peer business loans have risk-based interest rates and tend to have more flexible eligibility requirements.
Personal loans. In some cases a sole trader can use a standard personal loan to fund their business needs. Just be sure your lender allows you to use the funds for your intended purpose.
How to apply for a small business loan
Start by working out what type of finance you're looking for.
Compare loan options and be sure to look at interest rates, fees and loan features.
Before applying, check that your business meets the lender's eligibility criteria.
Gather the personal, business and financial information you need and submit an application.
Your lender will check your personal or business credit score.
Wait for approval. Some lenders can have the funds in your account within 1 business day.
4 mistakes to avoid when applying for finance as a sole trader
Borrowing more than you can afford to repay. Use a business loan repayment calculator and make sure you understand how much a loan will really cost you. Factor in the cost of fees as well as the interest rate.
Not having consistent income to meet the loan repayments. Sole traders often have inconsistent income. It may be the reason you need finance in the first place. But if your income dips so low that you're unable to meet your repayments, you'll find yourself at risk of default pretty quickly.
Submitting multiple applications. Apply for one loan and one loan only. Multiple applications get flagged on your business credit report and can lower your credit score.
Putting your assets at risk. If you get a secured business loan then it's important to understand what's at stake. Let's say you offer your home as security but then your business hits a bad patch and you can't meet your repayments. Your lender could compel you to sell your home to cover your debt.
Frequently asked questions about sole trader loans
Having a bad credit history can make it harder to get a loan. This is especially the case if you're a sole trader trying to start a new business. You may need to consider the following options:
Paying a higher interest rate on a risk-based loan.
Borrowing from alternative lenders, who may have less strict rules.
You might find it easier to get a personal loan approved rather than a business loan. Especially if you've not been operating as a sole trader for very long.
Business loans usually let you borrow much more but are harder to get. Personal loans can work as a business finance solution if your funding needs are relatively small. And you'll need a decent credit score to get a more competitive interest rate.
Keep in mind that you can claim tax deductions on business loan costs such as fees and interest charges. This is not the case with personal loan costs.
Many lenders will only provide business loans to Australian citizens or permanent residents. But some lenders may consider temporary residents if they tick all the boxes. You may also have to hold a specific type of visa, or not have any restrictions on your visa. While most personal loans can't be used for business reasons, you may want to look into temporary resident personal loans.
This shouldn't stop you from getting a business loan. There will be challenges, and you'll need to have a great business plan. You can read more about business loans for Centrelink recipients here.
If your business is struggling and you cannot repay the loan, there are a number of things you can do:
Contact your lender, they should have a hardship variation in place.
Talk to your lender and try to refinance or renegotiate the terms of your loan
Try to reduce your overheads and bring in more income.
Sell your car or other assets to pay off the loan.
In the worst case scenario, you could declare bankruptcy.
Credit cards can be a good way to finance your business. Business credit cards function like personal credit cards, but you can only use them for business expenses. But while they are flexible, you should keep in mind high interest rates and fees. You can read more about business credit cards here.
Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio
Richard's expertise
Richard has written 554 Finder guides across topics including:
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