What sole traders need to know about funding their business

Being a sole trader is the fastest and most straightforward way to set yourself up in business. But what does it mean for your ability to raise funding?

If you’re in business for yourself as a sole trader, you may have heard lots of reasons why you should set up as a limited company instead. 

We’re not going to rehash the arguments. Instead, here’s what you need to know about the major funding sources and how to ensure that you get the most out of working for yourself.

Borrowing

Rhys Cunnah, Chief Growth Officer at Swoop says that there are still plenty of borrowing options for sole traders who can still apply for unsecured business loans: 

“As Swoop is FCA regulated, our credit license effectively allows us to access facilities for sole traders from less than £1k with no upward limit. The one thing sole traders miss out on is the startup loan, as for this you have to be a company director. Sole traders are not company directors, because they are classed as a business.”

The word “limited” in “limited company” refers to the limited liability of directors for a company’s debts. As a sole trader, this means you’re personally liable for any debts the business acquires. Rhys says that this may make sole traders more cautious about taking on debt, but there are still different products for which they qualify: 

“Sole traders can use asset finance to cover the cost of the machinery or equipment, get a capital injection with a merchant cash advance or open up a revolving credit facility. If you think that as a sole trader you can’t borrow, you should think again and explore what is out there on the Swoop website.”

Separate from unsecured loans, Stuart Pawelczyk, Head of Commercial Mortgages at Swoop, says that there are opportunities for sole traders to get into the property business. Stuart says: 

“Sole traders can obtain commercial mortgages and business loans secured against property. Swoop works with all types of clients to access funding. Sometimes customers plough head first into buying something in their personal name because they need to act fast to secure an opportunity. However, we always recommend a conversation with one of our Commercial Finance Managers as well as your accountant to make sure you get the deal structure right from the start. Getting it wrong can be costly to unwind or see you paying an unnecessary amount of tax.”

Stuart adds that sole traders should take the time to understand the pros and cons of the various deal structures that are available to them:

“Factors such as term length and flexibility of payments may prove to be as significant to you as the funding structure itself. Support on this front can be provided by Swoop or your accountant. Being aware of the pitfalls and benefits of each structure will enable you to make an informed decision on which way to proceed is best for you and your business.”

The number of properties you own may affect whether you remain a sole trader; Stuart says that when you are ready to make the move, the commercial mortgage team can help: 

“At Swoop we have supported a large number of professional property landlords with ‘incorporating’ their portfolios due to the tax benefits this creates. Landlords who own properties in their personal capacity are no longer able to claim tax relief on the interest they pay on borrowings held, whereas in a limited company, you can claim tax relief on interest paid. This challenge is magnified the larger the portfolio and loan amount as it massively impacts the profitability.”

Making sure you have the right support team around you is vital. Again, Swoop can offer support in this area, as should your accountant or any other reputable professional advisor.

Equity finance

Raising equity for a business as a sole trader is problematic because the founder cannot issue shares as a sole trader. Bobby Gleeson, Equity Funding Manager at Swoop says that if a sole trader wishes to raise equity, then they will need to restructure as an LLP:

“Investors are looking for a company that can grow tenfold. Clearly, small businesses right at the beginning of their journey will fit this description. But there also needs to be a demonstration that they are viable as a larger business, rather than just a good idea.”

Sole traders are likely to be funded through personal finance or a family and friends round. Attracting more significant investment will mean seeking out and engaging with investors as well as undertaking the due diligence process. As this can take months, sole traders will find that a significant amount of time will be taken away from your usual activities.

Due to the need to issue shares, Bobby says that you will soon find it necessary to become an LLP or limited company. You may therefore wish to restructure your business sooner rather than later. 

Sole trader business grants

Business grants are a popular way for businesses to obtain funding as they do not have to be paid back and can help boost a business especially in areas such as innovation, R&D and meeting sustainability goals. 

Nanna Strøm Pedersen, Customer Success Manager at Swoop, says that although many business grants are exclusively to limited companies, there are still many that are available to sole traders: 

“Every grant has different criteria, so the Swoop grant finder tool is a useful place to check what you are eligible for. The most important thing is not necessarily what sector you are operating in but rather which area you are registered with. Some areas historically have a lot of grant funding to allocate where others have limited resources.”

Nanna adds that before applying for grants, sole traders should understand the purpose for issuing grants in the first place: 

“Grants are often focused on a specific upcoming project, process improvement or a new employee. You have to match what you want to do with the help that is available for you, and if you are a very small one-person business, that may not be applicable to you. Eligibility criteria always varies and is always outlined in the grant brief, which you should read carefully to ensure you are not wasting your time before applying.” 

When it comes to the application, local grants which may be worth up to £25,000 will require you to register your interest, answer a few questions regarding your business, how it fits the eligibility criteria and what the funds will be used for. Nanna says that many grant providers also have in-house advisors who will be able to support the application and answer any questions. 

For larger grants, Nanna says:

“Highly innovative projects can attract sums north of £100,000 with a requirement for your enterprise to be revolutionary, often involving AI, tech, net zero or another game changer. For these grants, we would strongly suggest using an experienced partner who has a track record of winning this kind of funding. Arguably, grant funding can be the most valuable kind of funding to a small business but that goes hand in hand with being the most uncertain to acquire as you have to make a strong case that beats the competition applying for the same funds.”

How do I get started?

Register as a sole-trader with Swoop where we’ll present all funding options available to you, based on your business details.