Being a sole proprietor allows you to carry out daily business activities at your own discretion. However, running a sole proprietorship business requires constant capital requirements, which you may find difficult to meet.
In such situations, you can resort to obtaining a business loan. Sole proprietors can typically apply for open-ended business loans, allowing them to use the funds for any business-related expenses. These can include making rent and salary payments, managing working capital, branching out into different goods or pursuits, investing in new machinery or equipment, promoting and publicising the business, etc.
How do you obtain a business loan as a sole proprietor?
All kinds of businesses, even sole proprietorships, are financed by business loans. Thus, you can apply for a business loan as a sole proprietor to launch your company or to meet the working capital requirements of your business.
Following these points may help you obtain a business loan easily:
- Create an in-detail business plan
Describe the contents of a written business plan to the lender when approaching them for a business loan. It can be simple or complex. It gives your lender more faith that you have a well-thought-out plan for carrying out your business idea.
Your plan should include the following: an explanation of your business idea, people hired, current business financials, applicable financial projections, and so on. These sections will all demonstrate to the lender how you plan to return the loan.
- Check credit score
Even if your business is newly established and has not yet generated a credit score, check your credit score. This way, you could obtain a smaller amount from the lender; however, it would be at a slightly higher interest rate.
After a while, you may be able to generate a good credit score for your business and then obtain a sizable business loan at lower rates.
- Submit all necessary documents.
Rejection may result from incomplete or inaccurate documentation submitted. Therefore, download or pick up the document checklist in person from your lending institution before applying.
Lenders typically request documentation such as business plans, prior balance sheets and profit and loss accounts, identity verification, and lease agreements for offices or shops.
Benefits of Obtaining a Business Loan
Obtaining a business loan to fund your day-to-day financial needs for the business has the following benefits:
- Minimal documentation
One advantage of business loans is that obtaining them doesn’t require much paperwork. Certain clients can obtain loans for anything from working capital requirements to expansion needs without any kind of security, collateral, or guarantee. Certain banks will also provide doorstep services.
- Helps maintain ownership
You may consider obtaining funding from outside investors to grow your company. Nevertheless, there are risks associated with this investment path. Unlike loans, which only require the repayment of the principal amount, investments require a sizable equity investment in your company and the EMI.
You may reduce your stake to a minority, depending on the number of investors you partner with. This can be problematic because you won’t have as much control over the decision, particularly if you need to make a big one for your small business. Rather, all a small business loan requires of you is timely repayment of your EMI.
- Cash flow management
A sole proprietorship might not always have a healthy cash flow, particularly if it is a young company or runs a seasonal enterprise. This may cause you to accumulate debts and unpaid salaries over a year and not have enough money to pay them off. In such situations, a small business loan can help you immediately by stabilising your cash flow during difficult times.
- Flexible repayment tenure
You can decide how long the loan will last. You can apply for a one-year business loan if you need to borrow money quickly to cover working capital costs. You can take out a longer-term loan, say for four years, if you want it to help you grow your company.
Summing Up
Business finance can be used for various purposes, such as branching out into new markets, investing in equipment, and more. However, before obtaining a collateral-free business loan, consider weighing all available options in the market and choosing the one that best suits your business’ financial needs.