Capital options for sole proprietors

8 min read
Nellie Akalp

It’s not surprising that most startups rely on their own resources (personal savings, family and friends) to fund their businesses. And even after the startup stage, the capital options don’t get much better, especially for sole proprietors. Sole proprietorships can’t sell stock in their businesses, which limits investor prospects. Applying for a bank loan is a possibility but without substantial collateral, the chances of approval are low.

As money continues to be tight, more and more small business owners are on the hunt for capital. Here are capital options for sole proprietors.

Disclaimer: This content should not be construed as legal or financial advice. Always consult an attorney or financial advisor regarding your specific legal or financial situation. 

Small business disaster relief

If your business was lucky enough to secure some of the disaster relief funding from the CARES Act, congratulations!

According to the U.S. Treasury, nearly five million small businesses received loans from the SBA’s Paycheck Protection Program (PPP). The $20 billion authorized by Congress for the SBA’s Economic Injury Disaster Loan (EIDL) advances have been dispersed.

Both the PPP and EIDL advance loans are forgivable (if used for payroll and business expenses) but are no longer available.

However, it’s still possible to receive funding from the regular EIDL, which is a long-term direct loan program from the SBA.

The loan provides for six months of working capital at 3.75% APR fixed (2.75% APR for nonprofits) with terms of 30 years. Collateral is required for loans over $25,000 and personal guarantees are only required for loans exceeding $200,000.

The first payment is deferred for one year. Applicants can complete and submit SBA Form 1201 Borrower Payments on

The following are common reasons EIDL applications are denied:

  • Unsatisfactory credit history
  • Unverifiable information
  • Ineligible non-US citizen status
  • Ineligible business activity
  • Unsubstantiated economic injury
  • Character reasons (e.g. convicted of a felony)
  • Failure to respond if asked for additional information

Related: How to help ensure Paycheck Protection Program loan forgiveness

SBA-guaranteed loans

The SBA does not lend money directly to sole proprietors and other small business owners; instead, it partners with lenders to guarantee loans.

The advantage is SBA-guaranteed loans generally offer competitive rates and require less collateral.

Sole proprietors can use SBA-guaranteed loans for working capital needs such as seasonal financing, export loans, revolving credit and business debt refinancing.

Also, the funds can be used for fixed assets such as furniture, real estate, machinery, equipment, construction and remodeling.

Eligibility requirements are minimal. The business must be a for-profit organization physically located in the U.S., and the owner must show a personal investment of time and money into the business and an attempt to get funding on their own.

The SBA has several different kinds of loans available for small businesses.

Their Lender Match program helps you find the best loan for your particular needs. With the Lender Match free online tool, applicants answer a few questions about their businesses and get matched up with lenders.

Types of SBA-guaranteed loans include:

  • Standard 7(a) loans are the primary type of SBA loan. Max loan: $5 million
  • 7(a) Small Loan. Max loan: $350,000
  • SBA Express (The SBA Express program features an accelerated turnaround time for SBA review. The SBA will respond to your application within 36 hours.) Max loan: $350,000
  • Export Express (for businesses involved in exporting). Max loan: $500,000
  • International Trade loans for expanding export sales. Max loan: $5 million
  • Veterans Advantage loans with reduced fees for veterans, reservists and National Guard members and their spouses
  • CAPLines, an umbrella program that helps small businesses meet their short-term and cyclical working-capital needs.

In addition, the SBA has two pilot loan programs:

  • Community Advantage is a loan program that assists small businesses in underserved markets. Max loan: $250,000
  • Express Bridge allows SBA Express lenders to provide quick financing to small businesses located in declared disaster areas. Express Bridge loans are intended to be interim loans. Businesses use these funds for disaster-related purposes while they apply and wait for long-term financing.

Related: How to get a small business loan

Local government capital options for sole proprietors

Currently, many cities and counties are willing to loan or grant money to local businesses to keep them from afloat in today’s slower pandemic-affected economy.

For example, the County of Los Angeles and the City of Los Angeles jointly created the LA Regional COVID-19 Recovery Fund which offers loans and capital options to sole proprietors, small businesses and nonprofits.

Similarly, the New York Forward Loan Fund (NYFLF) is a new economic recovery loan program aimed at supporting New York State small businesses, nonprofits and small landlords as they reopen after the COVID-19 shutdown.

The NYFLF targets the state’s small businesses with 20 or fewer full-time employees and specifically supports businesses and organizations that face upfront expenses to comply with new guidelines as they reopen.

Check for local funding resources in your area by contacting your city or county’s business development office.

Fintech loans

The term fintech (financial technology) refers to companies that use advanced technology to improve financial decision-making, such as offering loans, lines of credit, etc.

The loans are typically shorter-term with higher interest rates than banks offer as they don’t necessarily require collateral such as property for security.

Fintech loans are usually unsecured but a fintech lender will take personal guarantees from the sole proprietor.

Terms range from three months to three years and are usually under $100,000.

Most small business owners use fintech lenders for a quick infusion of capital to purchase equipment or inventory, pay bills and manage cash flow.

Some top fintech lenders include BlueVine, Fundbox, OnDeck and PayPal.

Sole proprietors: Increase your capital options by incorporating

While it is possible to find startup and growth funding as a sole proprietor, most lenders prefer (or even require) businesses to incorporate to be eligible for loans.

Lenders like to see that business and personal finances are separate and incorporating your business is a great way to accomplish this.

Sole proprietors assume personal liability for their businesses.

So if debts become unmanageable or an unhappy customer wants to take you to court, your personal assets are at risk.

When you incorporate or form a Limited Liability Corporation (LLC), the company carries the liability rather than the owner.

Plus, corporations and LLCs have other requirements banks like to see such as a Federal Tax ID number, state registration and a business bank account. Those businesses also have the ability to offer stock. All of these factors make these businesses a better investment for lenders.

Choosing to incorporate or form an LLC is a decision you should discuss with your attorney and accountant, however, here are some basics on both entities.

Both LLCs and corporations are formed by filing forms with the state, although the specific paperwork required and costs vary by state.

  • In most states, the official document to form an LLC is called “Articles of Organization” and to incorporate, you file “Articles of Incorporation.”
  • Owners of a corporation are called shareholders, and in an LLC, they are called members.
  • Both entity types must follow the conditions detailed in their internal management documents that document essential aspects of operating the business. Corporations have bylaws and LLCs have Operating Agreements.
  • As stated above, both structures may limit the owners’ liability.
  • The corporation pays taxes separately from the owners/shareholders and then the shareholders are taxed on the dividends distributed (which results in double taxation).
  • The LLC’s income is passed on to the members and reported on the members’ individual tax returns and are subject to self-employment taxes (Social Security and Medicare taxes).
  • Both structures can elect S Corp status. In that case, only shareholders’/members’ salaries—not profit distributions—are subject to self-employment taxes.
  • Corporations may sell shares of company stock to raise capital.
  • LLCs are not permitted to issue stock. LLCs may generate financial investment in the business by selling ownership shares in the company. These shares may be subject to additional restrictions.
  • LLCs and corporations have perpetual existence, which means the business exists even if members or shareholders leave the business or pass away.
  • By default, an LLC’s profits and losses are divided among the members according to their percentage of ownership interests (unless the LLC gets IRS approval for a different division).
  • A corporation’s profits may be reinvested in the business (with limits), or a portion may be paid as dividends to shareholders.
  • LLCs may have either its members or hired managers handle the company’s day-to-day responsibilities.
  • Corporations must have a board of directors to establish policies and oversee the business. Plus they must have regular meetings and keep minutes.
  • Both LLCs and corporations must file an annual report with the state.

Related: Sole proprietorship? LLC? S-Corp? Know your business entity options

Incorporating or forming an LLC takes time and money, but if you want to improve your business’s credibility and your chances for investment/lender approval, it’s the smart route to pursue.