What you need to know about getting a business loan as a sole trader

Starting a business is no easy feat – it takes time, effort, and money to get the ball rolling. One way to get the finances you need for your business venture (without dipping into your savings) is to apply for a business loan.

Key points

• Sole traders can apply for business loans
• There are different types of loans – secured and unsecured
• Business overdrafts may be a solution if you just need some flexibility

Business loans can help sole traders get financial support in the beginning stages of their business or to keep their business going and growing. Yet these types of loans can be just as complex as their personal loan counterpart.

This article explains what you need to know to help with your loan application as a sole trader, so you can run your new venture with confidence.

What are sole trader business loans?

While most people think there are different types of loans for larger businesses and sole traders, both types of businesses can access the same types of loans.

Sole traders may be able to apply for secured or unsecured loans. Unsure what that means? A secured loan is where business owners can offer an asset as security on the loan. For example, you might buy a delivery vehicle for your business, which can be sold by the bank to repay the loan if needed.

By contrast, an unsecured loan is when a business owner doesn’t offer an asset to secure the loan. This is type of loan is often higher risk for the bank, which is why there’s a likelihood of higher interest rates.

Business overdrafts

Another type of financial support for sole traders is a business overdraft. While the general concept is similar to a business loan, a business overdraft is a flexible cash flow solution that supports businesses in the short-term. For example, if a clothing boutique ran out of a best-selling jumper, they might tap into their business overdraft to purchase more stock.

Unlike business loans, overdrafts don’t have set repayment commitments, which allows business owners to pay back their loan when they have the funds to do so. In terms of fees and interest rates, you will typically pay an annual fee for the total limit you’re approved for. But you won’t have to pay interest on the total amount – you will only pay interest on the amount you use.

How do business loans work?

In its simplest form, a business loan is when a bank lends your business money for the purposes of funding your business.

How much the bank lends to you usually depends on some key factors, including:

• loan term – how long you have to repay the bank for the loan
• if the loan is secured or unsecured
• variable or fixed rate – a variable rate is when the interest rate may fluctuate during the term loan; a fixed rate is where the interest rate is the same throughout the fixed portion of the loan term.

Is it hard to get a business loan?

Only if you're unprepared. If you’ve come up with a business plan, secured an ABN and need to apply for a loan to get things started or to keep them moving, there are some things you need to consider to be well-equipped for the loan application process.

As a starting point, you should determine why you want the loan to begin with. The ‘why’ is one of the first questions a bank will ask you, so having your ‘why’ ready to go can help you explain your needs to the bank more clearly. For example, if a person wanted to start up their own food truck, they might tell the bank that they need the funding to purchase a food truck and the equipment for their business.

Another example is that a business owner might need to cover an unexpected cost to keep their business afloat. In this case, they might tell the bank what happened and show that they can pay back the loan over time.

Having the relevant paperwork ready can help speed up the approval process. Collate your key financial documents, such as your bank statements, so that you can back up your case for a business loan with tangible evidence and show that you’re capable of repaying back the loan within the loan term.

A detailed business plan can demonstrate that your business can have the capacity to grow enough to pay back the loan. If you want to write your own business plan, then you can use the ANZ Business plan template (PDF) to get started.

Can you just use a personal loan as a sole trader?

While you could potentially use a personal loan for business purposes as a sole trader, it is important that you consider all the options and seek professional advice to help you make the best choice for yourself and your budding business. Depending on your circumstances, you may be able to get a better interest rate or more flexible terms – so speak to the experts and source an option that is right for you.

In the early stages of business ownership, the more you can research, prepare and plan for how your business will operate, the better off you’re likely to be in the long run.

Next steps

If you’re ready to take the next step and apply for a business loan, then check out our article about the six steps you can take to prepare for business lending. And if you need further support to get your business off the ground, ANZ offers several business loans that suit businesses of different sizes, structures and maturity.

Book in a free financial check-in and an ANZ expert will be in touch to help you wade through the jargon and get lending-ready and off the ground before you know it.