Financing Your Sole Proprietorship

Finding capital as a sole proprietor will depend on your credit score, your personal investment in the company, your business plan, personal connections, and friends and family. There are different forms of financing available to meet your business needs.

Financial Issues for Sole Proprietors

  • You may face difficulty raising capital from investors because you cannot sell shares of the business.
  • A sole proprietorship gives too much power to the owner, making it difficult for investors to set safeguards for their investment.
  • An owner generally relies on his or her own savings; funding is limited.
  • There is unlimited liability for all business debts or other obligations—your personal assets are at risk.
  • There are not any financial reporting requirements.

Sole proprietors do not have special financial reporting requirements unless they apply for a loan through a bank, the Small Business Administration, or a specialized lender. When seeking a business loan, sole proprietors fill out forms showing their assets and liabilities and a profit and loss statement. Depending on the loan amount, you may have to add a complete business plan.

Financing For Your Business At-A-Glance

Financing as a Start-Up 

SBAExpress & 7(a) Loan Program: The SBA guarantees a portion of the loan to the bank. Loans can be term loans or lines of credit.  

SBA 504 Programs: This program provides financing for long-term, major fixed assets at a fixed rate.Commercial Loans· 

Term Loans (Long-Term or Short-Term): These are loans that have a fixed interest rate (although some loans offer variable rates).  

Lines of Credit: Under this arrangement, you can make use of monies up to a maximum amount set by the bank. You pay interest only on the amount that you use.

Equipment Leasing: Either the bank or the equipment manufacturer will lend you money to lease equipment. The loan term is usually tied to the term of the lease.

Letter of Credit (LOC): An LOC is a guarantee of payment upon proof that the contract terms have been met.

Other Financing Options 

Factoring refers to getting a short-term loan based on the financial strength of your accounts receivable.

Purchase Order Financing is one of the most expensive (for the borrower) and risky (for the lender) forms of financing. This type of financing is used for clients who need funds to purchase the raw material to fulfill an order.

Home Equity Line of Credit is an open-ended credit line secured by a second deed on your house.

Types of Investors

Venture Capitalists: Venture Capitalists raise money from investors to invest in a portfolio of privately held companies. Sole proprietors will find it difficult to receive capital from venture capitalists if they do not incorporate.

Angel Investors: These are high-net-worth individuals who invest in early-stage companies. These individuals are usually former entrepreneurs who are looking to invest as well as provide their expertise. These individuals normally ask for a formal business structure (i.e., an LLC or corporation) before investing in a company.

Friends and Family: Your dentist, doctor, financial advisor, a friend who inherited money, or a rich uncle are all possible investors.