Who finances a sole trader business?

Sole proprietorships are the most common type of business in the UK, as in 2020, more than 59% of private-sector companies were sole traders. Even during the pandemic, sole traders grew by over 100,000 as new businesses opened. So how are all these sole traders financing their venture? This article will look at funding for sole traders by diving into the following areas:

• What is a sole trader?
• Who finances a sole trader business?
• What are the financing options for a sole trader?

A sole trader is a simple business structure, where usually one person owns and operates the business on their own. They can have employees, but the majority of sole proprietorships do not. 

Sole traders can keep 100% of their profits but are also fully responsible for any business debt. 

It’s a straightforward structure to manage, which requires less financial reporting than a limited company structure.

Typically, the owner of a sole trader business will fund the venture. They may use their savings or borrow from friends and family to get the company off the ground when starting up. This avoids the sole trader getting into debt early in the business’ life, and many owners might choose to bootstrap their company as a result.

Bootstrapping is the method of funding your business with funds you already have – not looking for an outside source to provide a cash injection. So, instead of finding funding for certain projects, you simply wait until you have saved enough to pay for it. Many business owners will do this for as long as possible, as it allows you to grow the business without taking on projects that are too big or difficult to manage due to your size or resources.

There are other types of financing available to sole traders who are either looking to start a business or those who are more established and want to grow. 

Understanding what you need the finance for and what you can afford to pay back will help you make the right decision about what financing options are the best fit for your company.

A small business loan is a very common type of finance for a sole trader. You’ll pay back a set amount of money over a specified time period through monthly instalments. These can be secured or unsecured:

• Secured: the loan is backed up by a valuable business asset as “security” (usually called collateral), potentially your business premises or a vehicle. If you fail to repay the loan, the lender can then seize the asset as repayment.
• Unsecured: this type of loan requires no collateral, but lenders may ask you to sign a guarantee where you will be personally liable for the debt or use a guarantor who will take on the debt if you can’t.

Flexible finance facilities are available that allow you to dip in when needed, and you only pay the interest when you use funds — very similar to how an overdraft would work on a personal bank account.

Business credit cards give you the flexibility to access cash as and when you need it. They have the added benefit of building up a good business credit score when used properly.

Sole traders can use invoice financing to ease cash flow issues. For example, if a client has not paid an invoice on time or you need the money quicker than they can provide it, an invoice finance lender will give you the total of the invoice, and you pay it back with interest. 

You can apply for a start-up loan through HMRC for up to £25,000 if you have been trading for less than two years. However, this is unlike a business loan, as it is an unsecured personal loan. 

This means you will be personally liable for the debt and credit score consequences, and you won’t use an asset to be your security in the event you can’t repay the loan. You can pay back over 1-5 years, and it has a fixed 6% interest rate. You can find out more on HMRC.

A recently developed source of funding available to small businesses is crowdfunding. Using platforms like Kickstarter, SeedInvest or Indiegogo, new business owners can share their business plan and ideas to generate funding from potential customers or other investors. 

There is no guarantee of success with this method, but it could be good for creating awareness before you start trading.

A grant is a lump sum given to a business for a specific purpose. This purpose can be simply for starting up the business or for research objectives. Grants are commonly government-backed but can be from a private company or public organisation.

Grants do not have to be paid back to the donating organisation, unlike business loans. They can range from small totals (up to £1,000) to large (up to £100,000 or more), depending on the purpose and type of grant. 

You can find a massive list of funding support on the government website, but private organisations may also offer to fund small businesses, so do your research.

To be eligible for a grant, your business will have to qualify against specific criteria. Because grants are not repaid and are essentially “free” money, competition is fierce, and your application must be incredibly persuasive.

Financial management can be stressful and time-consuming when you’re a sole trader who works alone — that’s why thousands of business owners use the Countingup app to make managing their financial admin easier. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

These features could save your hours of admin and let you get back to doing what you do best — running your business.

Find out more here.