Accessing finance

Five Types of Loans for Sole Traders

16 December 2019
3 minute read

Alex Woods

As a sole trader, it’s more than likely that you’ll need to take out a loan at some point. 

However, this prospect can be daunting and you may assume that there are only limited options available to you. But nowadays there are several different ways that you can get funding. The key here is making sure you do your research so that you can find a lender that suits your background and circumstances.

With this in mind, here are some of your options:

Unsecured loan
As a sole trader, you can get an unsecured loan from a bank for anything between £1,000 and £500,000. These types of loans are considered riskier for the lender which means they’re often shorter term loans with higher rates. Unlike a secured loan, an unsecured loan does not require any secured assets or collateral against the loan. Instead, you’re likely to be asked for a personal guarantee. A personal guarantee means signing a legally binding document that holds you personally liable for your loan repayments and making sure the money is paid back in full to the lender. 

A Business Cash Advance
A Business Cash Advance is a flexible option for sole traders who need a quick injection of funds. You can borrow between £2,500 to £30,000 at one fixed cost with no APR or penalty fees. It works by taking a pre-agreed percentage of your card takings which means you only pay back the funds when your customers pay you. To apply, you’ll need to have been trading for over four months and be taking £2,500 a month in card takings. You can visit the Liberis website to see if you’re eligible!

Peer-to-peer lending
Instead of going to the banks, sole traders can turn to peer-to-peer lending. This works by borrowing an amount of funds from a pool of people. This is often facilitated by platforms that act as marketplaces bringing lenders and borrowers together. Lenders do not gain any shares in your business but they do receive interest from the money they have invested. It’s one of the riskier options for both lenders and borrowers – you can also expect higher interest rates and a fee to use the platform.

Equity-based crowdfunding
Equity-based crowdfunding also works by borrowing funds from a pool of people. The difference here is that each lender will invest in exchange for shares in your business. This means that they’ll take partial ownership of your company and will make a profit when it does well. This is an attractive option for many sole traders but it does mean giving up partial ownership of your business and sourcing this type of funding can take longer than a traditional loan.

Government Start Up Loan
Unlike a business loan, a government-backed Start Up Loan is an unsecured personal loan. Sole traders can borrow between £500 and £25,000 to help grow their business. To apply for the loan, you need to live in the UK, be over 18 and have been trading for less than 24 months. The loan can be repaid over a period of 1 to 5 years with a fixed interest rate of 6% per year – and there’s no application fee. 

So now you have an idea of the types of funding available to you, it’s time to choose the option that’s best for your business!

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