How To Gain Financing For A Sole Proprietorship Business

The opportunities that come with owning your own business are immense. Not only do you get to be your own boss, you can also revel in watching your very own business grow and expand, becoming larger and more profitable based on your decisions as time goes on. 

However, owning a business requires a lot of discipline, time, effort, and money. Becoming a sole proprietor of a business is fairly easy, but running one by yourself is not. As a sole proprietor, capital is absolutely essential for your growth and success.

What are sole proprietorship business in Malaysia

As explained in one of our previous articles, sole proprietorships basically means that the owner and the business are one and the same. As such, any income earned through the business can be considered personal income. While this sounds amazing at first, this also means that personal assets and belongings are liable if any outstanding debts need to be paid. 

Sole proprietorships tend to work best as a small operation as getting too large too quickly can make things difficult to manage. These types of businesses also tend to have issues when seeking financing because the company’s earnings and financial obligations are virtually identical to the owner’s.

This means that anything that affects the company’s creditworthiness will also affect the owner. Trying to get  a loan can be time-consuming and challenging if you do not know all your financing options as a sole proprietorship.

What financing options do sole proprietors have?

Term loans

Term loans are essentially the traditional loans that most people should already be familiar with. A lender will offer a lump sum payment for a fixed or floating interest rate. The borrower will be fully responsible for repaying the loan on a predetermined repayment schedule.

Generally, these business loans are not tied to a specific purpose such as purchasing equipment or paying employee salaries. Therefore, you can use the borrowed funds for short-term and long-term business objectives. If the loan is a secured one, you may have to provide some collateral to obtain approval.

Business line of credit

Certain business loans offer more flexibility than others, allowing business owners to borrow up to a predetermined amount, or credit limit, to meet short-term needs. Business lines of credit will grant borrower access to some or all of the funds as needed. After you have fully paid off a portion of your line of credit, the entire amount is available again.

In a sense, business lines of credit work similarly to a credit card. However, credit cards tend to have higher interest rates. Also, a business line of credit does not always follow a monthly payment structure.

Invoice factoring

Invoice factoring is not as widely known as term loans or lines of credit as a form of business financing. It is basically a type of small business financing in which a company sells invoices to a company for cash upfront. When the customer pays the invoice, they pay the remaining balance to the business owner, minus a fee.

Invoice factoring is a decent way to cover business expenses with working capital without incurring fixed monthly payments, unlike with term loans. They are in a way an “advance” on payments and can help to solve short-term cash flow issues.

Merchant cash advances

Speaking of advance payments, a cash advance is a form of business financing that is offered to a company in exchange for an agreed upon percentage of revenues or credit card sales. That being said, merchant cash advances should not be confused with a typical loan.

These cash advances allow a company to agree upon an acceptable transfer schedule based on your revenue, also known as the remittance. They transfer remittance to the lender based on a predetermined amount deducted automatically from a credit card or bank account.

Be aware of your liabilities

As you can see, there are a number of financing options available to SMEs and small businesses under sole proprietorship. The most important thing to take into consideration is the fact that a sole proprietor is completely liable. 

Unlike corporations, sole proprietorships means that there is no difference between the owner and the company. In other words, the owner is the company. This means that all the company’s debts and expenses are the owner’s debts and expenses. If you plan on becoming the sole proprietor of a business, you must be completely aware of all this going forward.

If you wish to know more about the pros and cons of being a sole proprietor, you can check out this article.