Business loans for sole traders and the self-employed

Millions of UK businesses are run by sole traders: builders, hairdressers, consultants, couriers, photographers, cleaners. Plenty of them borrow to buy a van, take on a bigger job or smooth out a slow season. The options are real, but they aren't quite the same as those open to a limited company, and the differences matter.

You and the business are the same in law

A limited company is a separate legal person. It borrows in its own name, and its debts are its own. As a sole trader, there's no such separation. The business is you, trading under your own name or a trading name, and every debt the business takes on is your personal debt.

That has some practical consequences:

• There's no limit to your liability. If the business can't repay, the lender can pursue you personally. That can mean a county court judgment (CCJ), and in the worst cases a charge over your home or bankruptcy.
• There's no separate business credit file. Lenders look at your personal credit file, because that's the record of the person who's borrowing. It's the same file that a mortgage lender or car finance company would check.
• You don't usually sign a personal guarantee. A guarantee is how a company director promises to repay if the company can't. You're already personally liable, so there's nothing for a guarantee to add. A lender may still ask a spouse or partner to sign too, especially if a shared home is involved.

Ordinary partnerships work in much the same way. The partners are personally liable for the partnership's debts. Limited liability partnerships (LLPs) are different: like companies, they're separate legal entities.

The £25,000 line: regulated and unregulated lending

This is the rule that shapes sole trader borrowing more than any other.

Lending to individuals is generally covered by the Consumer Credit Act and regulated by the Financial Conduct Authority (FCA). Sole traders count as individuals, and so do partnerships of two or three partners. For business borrowing, there's an exemption: if you borrow more than £25,000, wholly or mainly for business purposes, the agreement is generally not regulated. You'll usually be asked to sign a declaration confirming that the money is for your business.

So in broad terms:

• £25,000 or less: regulated. The lender and any broker must be authorised by the FCA. The lender has to check that you can afford the repayments, show you an APR (the annual percentage rate, a standard measure of the cost including compulsory fees) and give you set information before you sign. You have a legal right to repay early, with limits on what the lender can charge for it, and in most cases a right to withdraw within 14 days of the agreement.
• Over £25,000: generally unregulated. The agreement is governed by its own terms and the general law. More business lenders operate here, but you have fewer statutory protections, so reading the agreement carefully matters more.

The threshold is about the amount of credit, not the total you'll repay with interest. On hire purchase, the credit is broadly the price less your deposit. Different rules can apply to a loan secured on your home, so a lender or broker should confirm which regime covers your agreement.

Why does this matter? Regulated lending costs a lender more in permissions, checks and paperwork. Many specialist business lenders only lend to limited companies, or only above £25,000, for that reason. Below the line, your options often come down to high street banks, asset finance providers and a smaller group of lenders set up for regulated business lending.

What lenders look at

Without published company accounts, a lender builds its picture from your personal tax records and your bank account.

• Self assessment tax returns, usually the last one or two years. Lenders often ask for your SA302 tax calculation and the matching tax year overview, which show your declared income and the tax you owe. You can download both from your HMRC online account, or your accountant can provide them.
• Business bank statements, usually the last three to six months. Regular income, a healthy balance and no returned payments help. If you run the business through your personal account, expect more questions, because the lender has to separate business money from personal spending.
• Your personal credit file. Missed payments, CCJs, heavy card balances and lots of recent applications all count against you. It's worth checking your file with the main credit reference agencies before you apply.
• Your personal finances. Especially for regulated lending, the lender looks at what you spend on your home, family and other debts, not just what the business earns.
• How long you've been trading. Many lenders want at least one full tax year of figures, and some want two.

Our guide to the documents you need for a business loan has a full checklist.

A worked example. Say you're a self-employed electrician and your last tax return shows turnover of £82,000 and profit of £34,000. A lender works from the £34,000, not the £82,000. It then takes off your income tax and National Insurance, your personal spending and your existing commitments, such as a mortgage and a car loan, to see what's left each month for a new repayment. If the business has grown since that return, send recent figures too. This is an illustration: each lender sets its own affordability rules.

The point to take from it: lenders look at profit, not turnover. Claiming every allowable expense keeps your tax bill down, but it also lowers the income a lender can see. That's a trade-off to discuss with your accountant if you're planning to borrow, not a reason to file anything inaccurate.

Your main options

A few of these deserve a closer look.

Asset finance is often the best fit. If you need a van, a vehicle or equipment, the provider owns or has rights over the asset until you've paid, so it can lend with less weight on your trading history. With hire purchase you own the asset after the final payment. With leasing you rent it. See hire purchase vs leasing for the differences.

Start Up Loans are a government-backed scheme delivered by the British Business Bank. They're personal loans for business purposes, aimed at people starting a business or in its early years, and they come with help on your business plan and free mentoring. Limits, rates and eligibility are set by the programme and can change, so check GOV.UK's Start Up Loan page. Our guide to startup business loans covers the other options for a new business.

Borrowing against your home can unlock larger sums at lower rates, but if you can't keep up the repayments you could lose your home. Take advice before you agree to it.

Should you set up a limited company first?

Some sole traders wonder whether incorporating would make borrowing easier. Sometimes it does, but rarely straight away.

• A company limits your liability, up to a point. The company's debts are its own. But on most business loans to small companies, lenders ask the directors for a personal guarantee, so for borrowing, you're often still on the hook. Our guide to personal guarantees explains what that means.
• A new company has no track record. Some lenders will take your sole trader history into account, but others will treat a new company as a start-up until it has filed its own accounts. Incorporating just before you apply can narrow your options for a while.
• It opens up more lenders later. Once a company has a year or two of filed accounts, it can reach the many business lenders that only deal with limited companies, at any amount.
• It changes your tax and paperwork. Companies pay corporation tax, file accounts at Companies House and pay you through salary or dividends. Whether that suits you depends on your profits and plans.

Incorporating is a significant decision with tax and legal effects. Talk to an accountant before you make it, and if you're planning to borrow, mention that too, so the timing works.

Common mistakes to avoid

• Applying with income that's out of date. If your last return understates what you earn now, send recent bank statements or management figures as well.
• Mixing business and personal money. A separate bank account for the business makes your figures far easier for a lender to read.
• Borrowing more than you need to get past £25,000. Larger loans can mean more lenders, but you pay interest on the extra and give up the protections of regulated lending.
• Making lots of applications at once. Each full application leaves a hard search on your personal credit file, and a cluster of them can put lenders off.
• Forgetting it's all personal. A business loan as a sole trader sits on your personal record. It affects your next mortgage or car finance application too.

Questions people ask

Can a sole trader get a business loan?

Yes. Sole traders can get unsecured loans, asset finance, overdrafts, merchant cash advances and, for new businesses, government-backed Start Up Loans. You're personally responsible for the debt, and lenders will look at your tax returns, bank statements and personal credit file.

Are business loans to sole traders regulated by the FCA?

Lending of £25,000 or less to a sole trader, or to a partnership of two or three partners, is regulated by the FCA. Lending of more than £25,000 wholly or mainly for business purposes is generally exempt, and you'll usually sign a declaration to confirm the purpose. Regulation brings extra protections, but fewer business lenders offer regulated loans.

What documents does a self-employed person need for a business loan?

Usually your last one or two self assessment tax returns, with the SA302 tax calculations and tax year overviews, plus three to six months of bank statements and proof of identity and address. For larger amounts, lenders may also ask for accounts prepared by an accountant or recent management figures.

Does a sole trader need a personal guarantee?

Not usually for your own business borrowing, because as a sole trader you're already personally liable for the debt. A lender may ask someone else, such as a spouse or partner, to guarantee or to borrow jointly, especially when a shared home is involved.

Is it easier to borrow as a limited company?

Once a company has a trading record and filed accounts, more lenders are open to it, because many business lenders only deal with companies. But directors usually still give personal guarantees, and a newly formed company can look like a start-up to lenders. Speak to an accountant before incorporating.