Everything You Need To Know:
Sole Trader Business Loan Sources Of Finance For A Sole Trader
Unfortunately for sole traders, it can be difficult to find sources of business finance due to the fact you don’t have to submit paperwork of business details online via Companies House. Many lenders and banks will choose not to lend based on bank statements alone, and sole traders are often viewed as higher risk.
According to the Federation of Small Businesses, in 2018 it was recorded that there were 3.4 million sole proprietorships, and 4.3 million non-employing businesses operating in the UK. At SME Loans, we believe it vital to recognise the importance of sole trader businesses in the economy. Because of this we are committed to providing easy access to funding for sole traders.
Can A Sole Trader Get A Business Loan?
Yes, sole traders can qualify for business loans but finding an appropriate lender to borrow the money from can be harder than it is for limited companies. This is because sole traders are perceived as high risk, and many lenders refuse to lend on the basis of bank statements alone.
Unsecured Sole Trader Loans
Sole traders can apply for finance through SME Loans using our simple online application form. Our unsecured sole trader business loans are the ideal solution for short-term lending, offering access to funding between £1,000 and £500,000.
As a sole trader it’s likely that you’ll be asked by the lender you’re matched to for a personal guarantee. Lenders use personal guarantees for higher risk borrowers as a form of security.
A personal guarantee is a legally binding document that agrees that if your sole trader business defaults on loan repayments, you as the sole trader will be personally liable for repaying the loaned money to the lender.
Crowdfunding for Sole Traders
Crowdfunding is another way that sole traders can raise funds for their businesses. According to Company Bug, in 2016 crowdfunding provided 15% of total startup and venture-stage equity investments in the UK, and it continues to grow.
Crowdfunding platforms like Crowdfunder enable sole traders to pitch their business ideas and efforts to a pool of potential investors who can choose to support through donations.
Under the umbrella term of crowdfunding, there are different types of investment available.
Debt-based Crowdfunding / Peer to Peer (P2P)
Debt-based crowdfunding, also known as peer to peer lending function similarly to loans, except that you are lending the money from a pool of people. These platforms operate like marketplaces and bring together those who need loans with lenders.
Lenders / investors gain no physical reward or share in the sole trader’s business, but instead receive interest from the business on the money invested. It’s important to note that this funding option is a riskier one:
- Interest rates are typically far higher
- Platforms often charge fees to use their sites
- A poor credit score can impact your ability to receive debt-based funding
Equity crowdfunding on the other hand, is the process where people make an investment in exchange for shares in the sole trader’s business. As a sole trader, the investor takes partial ownership of the company and can then profit off the company doing well in the future. Despite providing a source of funding for sole traders, it comes with its disadvantages:
- There’s a lot of competition when attracting potential investors
- Sole trader gets forced to give up partial ownership of the business
- Sourcing enough funding from investors can take longer than other sources of finance
- Equity crowdfunding platforms typically charge monthly fees or success fees when matched with investors
Apply For A Sole Trader Loan Sole Trader Expenses
Sole traders incur running costs when managing their businesses. Luckily, a number of these costs can be claimed as business expenses, referred to as ‘allowable expenses’ and means that the business owner can pay less income tax and make more of a profit.
Income received by your business – allowable expenses incurred = profit
HMRC’s rules are complex and strict when it comes to claimed expenses, so in order to account for your expenses properly, you need to keep thorough and accurate records of everything being spent. Sole traders are legally bound to keep these records for minimum of 6 years.
Similar to limited companies, sole traders are able to claim back expenses incurred that relate directly to their business. As expected, expenses can only be claimed if they are ‘wholly and exclusively’ incurred in the performance of your business duties.
Sole traders should remember not to mix business with personal, as dual purpose claims are unlikely to be expected.
As a sole trader you can claim your expenses when you file your annual Self Assessment.
Costs that can be claimed as allowable expenses:
Office costs: claim items you’d normally use for less than 2 years, eg: stationary
Travel costs: covers expenses such as vehicle insurance, repairs and servicing, fuel and parking, vehicle license fees, train bus air and taxi fares, hotel rooms
Clothing expenses: includes uniforms, protective clothing needed for work, costumes needed for the business
Staff costs: employee salaries, bonuses, pensions, benefits and agency fees
Things that are bought to sell on: stock, raw materials and direct costs from producing goods
Financial costs such as insurance or bank charges
Business premises costs: heating, lighting, business rates
Advertising for marketing
SME Loans Funding Solution For Sole Traders
Are You Eligible For A Sole Trader Loan?
For sole traders, our simple requirements are as follows:
- Registered and trading in the UK
- Actively trading for 6 months
- Sole trader is over the age of 18
There’s no need to be intimidated by SME Loans application process, we’re on hand to guide you through it. If you want to find out more about whether your microbusiness is eligible to apply for finance, please get in touch at 020 3475 9213.
Our Application Process
Step 1: Complete our 1-2-page online application form. As well as being asked for your personal information, we will also want to understand more about your sole trader business, including how much funding your seeking and how you plan to use your loan.
Step 2: Within hours of submitting your application form you will be matched by us to the most suitable lender for your sole trader business, and you will receive the lender’s full terms of agreement regarding your sole trader loan.
Step 3: Once you have carefully read through the lender’s terms, you will need to sign and agree to them. After the agreement has been returned to your lender, the loan amount will be deposited to your account within just 48 hours.
Excluded business types:
- Chemical manufacture
- Banking and money transfer services
Register As A Sole Trader With HMRC What Is A Sole Trader Business?
A sole trader business is a type of business entity where the business is owned and run by one person. Also known as sole proprietorship, if you run your own business you work for yourself and fall under the category of self-employed.
As the head of your business, you are wholly liable for the successes and/or failures your sole trader business makes. Whilst being a sole trader comes with big responsibilities, it has several attractive benefits. Including the advantage of being able to take home 100% of the profit your business makes after tax.
Once you decide to go into business by yourself and become self-employed, you will need to register your sole trader business with HM Revenue & Customs.
Do I Need To Register As A Sole Trader?
In comparison to setting up a limited company, registering as a sole trader is relatively easy. There is little to no paperwork and you can benefit from your business affairs remaining private.
You will first need to decide on a name for your business. HMRC states that you can trade under your own name or another, however you cannot:
- Include Ltd, limited, limited liability partnership, LLP, public limited company or PLC in the name
- Use the same name as an existing trademark
- Be offensive in the name you choose
Top Tip: Register your business name as a trademark to prevent others from trading under it. The Intellectual Property Office has published a trade marks manual to help you apply and register your sole trader business' trademark.
When setting up your sole trader business, you’ll need to register for Self Assessment and file a tax return annually at the end of the tax year (5th April).
Did You Know? Self Assessment is a system that HMRC uses to collect income tax. After registering as a sole trader, you can expect to receive a letter in April explaining when and how to complete your first self-assessment form.
Once registered, an online account for your business’ Self Assessment will be set up with your Unique Tax Reference number, which you will use for all correspondence with HMRC.
Other responsibilities for sole trader businesses include:
- Paying income tax on your profits and National Insurance Contributions
- Keeping records of both your business’ sales and expenses
- Registering for VAT if your business turnover is greater than £85,000
How Much Tax Do You Pay As A Sole Trader?
Sole traders pay income tax that is based on their business profits. The amount paid is calculated from the Self Assessment tax return that is required to be submitted annually. Sole traders must pay their National Insurance Contributions (NIC), a flat rate Class 2 which equates to £2.95 per week (2018 / 2019).
If your sole trader business’ annual profits exceed £8,424 then you are also required to pay Class 4 which is 9% of your profits a year.