When starting a business, one major decision is to select your business’s structure. The most common structure is a sole proprietorship. Many start a business as sole traders because it requires fewer legal formalities and paperwork.
While that’s the case, securing funds to fund your sole trader business might take a lot of work. Unlike corporations, sole trader businesses can’t sell shares to obtain capital. So, you’ll primarily rely on your resources to get your business and manage daily operations.
Apart from savings, there are many other financing options for sole traders. They include the following:
-
Applying for business loans
Applying for business loans for sole traders is one of the easiest ways to raise money to fund a business. It involves approaching financial institutions to borrow money. The amount borrowed should be repaid to the lender, plus any accrued interest based on the agreed rate.
Many lending institutions will require you to have a business plan, and they’ll also check to see if your credit score is good. Once satisfied with your application, a lender will disburse the amount you’ve borrowed into your bank account.
There are several types of business loans for sole traders. The first one is a secured loan. This requires you to provide collateral as security for the loan, which can be your house, a motor vehicle, or any other assets. If you default on paying the loan, the asset you used to secure it will be taken away from you by the lender.
The other type is an unsecured business loan. This option requires no collateral, but the amount you qualify for will majorly depend on your creditworthiness. According to lenders, unsecured loans are riskier than secured. So, most of them will require you to have a high credit score to approve your loan application.
There are many options when it comes to business loans, and these range from traditional banks to online platforms. Many banks have already established reputations, and you can trust them. However, it may take ages for your loan application to be approved. On the other hand, some online lending services aren’t genuine. But the right one will approve your loan quickly.
-
Finding startup loans
Startup loans are another excellent financing option for sole traders. This is a type of personal loan offered by the government to entrepreneurs who want to start a venture. The state provides this financing option to encourage people to get into business, eventually leading to economic development.
Once your application is approved, you’ll enjoy free business mentorship programs for at least one year. This helps you to use the loan in the most appropriate projects and make informed business decisions.
You can also consider raising funds to launch your sole proprietorship business.
-
Seeking financial assistance from relatives and friends
If you’re looking for a flexible way to raise capital to start a sole trader business, seeking financial aid from friends and family members could be ideal. Although this option can attract some interest, it can be much lower than bank loans and other financing options.
And in some cases, people close to you may lend you money at a zero-interest rate, and they only want to see you succeed. Besides, others will allow you the freedom to decide when to repay the money, giving your business enough grace period to start generating sales and profits.
However, you must be careful when funding your sole trader business through financial aid from family and friends. If your business fails to take off the ground and can’t repay the money, it can hurt your relationships. But you can avoid this risk by working hard to ensure your business succeeds. In other words, take this option seriously as you’d other financing options like a bank loan.
-
Finding grants for sole traders
Grants can be a great way to finance your venture. It’s the most cost-effective way to raise funds for sole proprietorships. It involves seeking financial aid from the government.
One benefit of a government grant is that it isn’t a loan, so you won’t have to repay it. It can also boost your business’s reputation. If people learn that the government is funding your business, they’ll likely trust you. As such, you’ll build a reputable brand and attract more customers.
On the other hand, the grant application process can be time-consuming. Furthermore, many entrepreneurs want free money to launch their businesses. Therefore, this option is very competitive, and there’s no guarantee that your application will be approved.
But you can plan well and have a successful grant application. First, you must ensure your business or project benefits society. The government provides grants to businesses to improve the lives of its citizens. So, you must ensure you meet this qualification.
Apart from that, ensure you check your eligibility. There are many grants on offer every year. Ensure you apply for those you qualify for. Otherwise, you’ll be wasting your time and energy. Additionally, you must apply for government grants on time. As said earlier, grants are very competitive, and a delay will reduce your chances of succeeding.
-
Venture capital
Venture capital is a form of business financing where companies or individuals invest in a startup company. They can provide capital for your sole trader business in exchange for ownership. This means you must be ready to surrender a percentage of the company’s shareholding to outsiders.
So, after some time, your business will no longer be a sole proprietorship but will change into something else, like a corporation or limited liability company. But still, it can be an excellent financing option to take your sole trader business off the ground.
Takeaway
You may face many challenges when starting and running a sole proprietorship business. And one of them needs more capital. Most people getting into sole trader businesses utilize their savings or dispose of their assets to finance their operations. But as you’ve seen in this article, there are several other financing options for sole traders. Ensure you choose the most suitable for your needs.
