As a sole proprietor, how can you take advantage of the booming business cycle we’re now in, and shield yourself from any downturns that may be lurking down the road? Think about creating sustainable new revenue streams that will generate additional cash flow during fast and slow business cycles. That could include more marketing, investing in equipment that you can pay off in a reasonably short time, or creating new offerings and services that meet the needs of your customers now.
It sounds pessimistic, but small businesses – especially sole proprietorships - should prepare for the next downturn when times are good. The smaller your business, the more you can be impacted by a few slow quarters. So, you may want to look for the fastest possible access to funding to start capitalizing on today’s opportunities to build your business and your financial safety net.
Accessing funding isn’t easy for most sole proprietors. Banks tend to want to loan money to big businesses. Your ability to get approved will depend on your credit history, business profitability and ability to come up with collateral. You will probably find it easier – and faster – to apply for funding from alternative sources. These are primarily concerned with your current business revenues and are far more flexible in their approval requirements than banks and credit unions.
Options for funding a sole proprietorship
Short term loans – if you have a strong credit history and collateral
Short-term loans are easier to qualify for than longer term ones. Eligibility varies depending on the bank, your location, and available loan programs, but in general you may be able to get a short-term loan if you’ve been in business for about a year, have a personal credit score of 550+ and make $50,000 or more in annual revenues. In comparison, for a medium-term loan, you need at least a year in business, a 600+ credit score and about $100,000+ in annual revenue.
You need to pay back a short-term loan in under a year, which is why it’s called short term. Most banks will want collateral to secure a business loan, typically enough to cover the loan in full. Collateral can include real estate, inventory, cash, or equipment, and will be valued according to what the bank expects to be able to get for the collateral in a sale, not the collateral’s actual value.
SBA-guaranteed loans – if you have excellent credit and lots of patience
The Small Business Administration (SBA) guarantees these loans, paying up to 85% of the loan if you default. The loan itself is provided through an SBA-approved lender, almost always a bank or credit union. The qualification requirements are strict – the SBA (unsurprisingly) wants to make sure you won’t default. Don’t bother applying unless you have at least 2 years in business, minimum 640+ credit score (700+ is the sweet spot) and $100,000+ annual revenue.
The SBA has several other requirements too, among the most important is that you must have a US-based, for-profit business in an eligible industry. Non-profit businesses aren’t eligible for SBA loans, For complete details, look at the SBA’s eligibility questionnaire. If you qualify for an SBA loan, you’ll benefit from low interest rates and extended repayment terms (seven years for working capital, 10 years for equipment loans, 25 for real estate purchases).
Lines of Credit - for people with a strong credit history or significant collateral
A line of credit gives your business a cash cushion, since you have pre-approved access to a specific amount of money that you can draw from as needed. There are two types of credit lines: fixed and revolving. If you get a fixed loan, you have one-time access to the funds. With a revolving line of credit, you pay your balance and the amount resets.
If you have an excellent credit history, you may qualify for an unsecured line of credit. Secured lines of credit are also available, but you will likely need to put down collateral that’s worth at least as much as the loan you hope to secure.
Personal loans - for new sole proprietors with excellent personal credit.
Since banks rarely approve traditional loans for sole proprietors, a personal loan may be your only option if you want to work only with mainstream lenders. Getting a personal loan means you won’t need to submit a detailed business plan, but you typically won’t be able to get as much money as you would if you applied for a business loan. And if you can’t pay the loan back in accordance to the agreed terms, your personal credit will be badly damaged, and you may have to make good on the loan by selling or surrendering personal assets.
Alternative Funding – fast access to funds, flexible approvals
Alternative funders offer products specifically designed to meet even the smallest business’ needs. And you don’t have to have perfect – or even good – credit to qualify. Most alternative funding focuses on your ability to pay back the funds now, as opposed to your past credit history.
One of the most attractive options in this space are merchant cash advances. Until recently, merchant cash advances were available to small businesses such as stores or restaurants that were paid primarily by credit or debit card. Funders were paid back directly from payment card receipts. But you no longer need to be a “merchant” to get a merchant cash advance, if you have a business bank account you may qualify.
How to find funding for your sole proprietorship
You could spend a lot of time searching Google for alternative lenders, or you could skip the hassle and find an alternative lender by working with One Park Financial.
One Park Financial has a network of dozens of alternative funders and works to help owners of small and mid-sized businesses access the funding that meets their needs. Visit oneparkfinancial.com or call 855.218.8819 and connect with a funding expert to discover the options that make sense for you and your business.