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Being a sole proprietor means managing the operations of the business as well as resolving challenges that come your way. Amongst all, one of the common challenges that sole proprietors need to resolve is raising funds. What kind of sole proprietor business loan you can obtain? This article talks about various types of business loans a sole proprietor can seek along and also lists documents required for a business loan.
Can a sole proprietor get a business loan?
The sole proprietorship is one of the most common types of self-employment in the country. These businesses can be of various types such as retail stores, consultancy firms, service providers, traders, and so on.
Yes, sole proprietors can get a business loan. In fact, depending on their need, they can choose the right loan scheme for their businesses. In this article, you can read about five different kinds of loan schemes that are suitable for a sole proprietor.
Types of business loans suitable for sole proprietors
Here is a list of business loans sole proprietors can obtain from a bank or NBFC.
1. Loan for self-employed:
Sole proprietors are essentially self-employed. Generally. there are two types of self-employed – self-employed professionals and non-professionals. Many banks offer business loans for self-employed of both types. For example, there are separate business loans designed for doctors, chartered accountants, etc.
Interest rate: Depending on the kind of self-employed business loan you may be obtaining the interest rate ranges between 12-30%. Here are some examples:
| Bank name | Interest rate |
| Axis Bank | 11.90% to 22% p.a. |
| HDFC Bank | 10.5% to 22% |
| Tata Capital | 11.5% |
| Bajaj Finserv | 12.5% onwards |
| SBI Bank | 12.5% to 28% |
Note: The rate of interest on short term business loans fluctuates periodically. It is best to get the latest information from the lending institute.
2. Short term loan:
You can opt for a short-term loan. The advantage of a short-term loan is that usually, it does not require any collateral. Its tenure ranges between 1-5 years and can be obtained for any business needs. That means you can utilise this loan for various purposes such as meeting day-to-day expenses, funding business expansion plans, buying raw materials, and so on.
Interest rate: Although the interest rate varies from bank to bank. Currently, short-term business loans can range between 8-36%. Here is more about it:
| Bank name | Interest rate |
| SBI | 8.40% onwards |
| ICICI Bank | 10% to 32% |
| HDFC Bank | 12% to 36% |
| Tata Capital | 13% to 36% |
| Axis Bank | 12% to 30% |
| Bajaj Finserv | 13% to 36% |
Note: The rate of interest on short term business loans fluctuates periodically. It is best to get the latest information from the lending institute.
3. Invoice discounting
Invoice discounting is another efficient way of funding for sole proprietorship firm. A sole proprietor can obtain a loan of up to 80-90% of the invoice amount. You get paid early against the invoice that you have generated against your customer. In other words, you do not have to wait for the entire credit period for your customer to pay you. Instead, you can get the invoice to the bank, and obtain a loan against it. Then, you can repay the bank once the customer pays you.
For many MSMEs, this is the preferred way of raising money for their businesses.
4. Collateral loan
If you have collateral to promise, you can raise a greater amount of funds for your business. Assets such as property, fixed deposits, mutual funds, etc., can be promised as collateral. The amount of the loan depends on the cost or amount of the collateral. For example, a loan against FD can help you obtain a loan of up to 90% of the FD amount. Often, the interest rates for a collateral business loan are lower. This is because the lending institute can liquidate the asset in case you default.
Interest rate: The interest rate on the collateral loan depends on the collateral promised, the bank’s policies and so on. Currently, the collateral business loan can be obtained at an interest rate between 9-12%. However, it is best to check the interest rate with the lending institute.
| Bank name | Interest rate |
| SBI | 8% to 10% |
| IDFC Bank | 9% onwards |
| HDFC Bank | 8% to 10% |
| Axis Bank | 10% to12% |
| Bank of Maharashtra | 10.50% to 12% |
| ICICI Bank | 11% to 13% |
Note: The rate of interest on short term business loans fluctuates periodically. It is best to get the latest information from the lending institute.
5. Overdraft
An overdraft facility on your current business account is yet another way to raise funds for your business. The overdraft facility allows sole proprietors to withdraw money from their accounts even if the account balance is zero. Such a facility is sanctioned by the bank depending on the credit history and creditworthiness of the proprietor.
Interest rate: The interest rate on the overdraft facility is often determined by the bank. Currently, it ranges between 11-19%. However, it is best to get the latest information from the bank.
| Bank name | Interest rate |
| SBI Bank | 9.65% onwards |
| HDFC Bank | 10% to 19% |
| ICICI Bank | 11% to 18% |
| Kotak Mahindra Bank | 11% to 19% |
Note: The rate of interest on short term business loans fluctuates periodically. It is best to get the latest information from the lending institute.
6. Government loan schemes
Government has many loan schemes for MSMEs including sole proprietors. You need to check the eligibility criteria before applying to them. Here are some of the popular loan schemes amongst sole proprietors include:
- Pradhan Mantri Mudra Yojana
- National Small Industries Corporation
- Credit-Linked Capital Subsidy Scheme
- PSB Loan in 59 minutes
- Credit Guarantee Fund Trust for Micro and Small Enterprises
- Startup India
7. Other loans
Apart from the loan schemes mentioned above, sole proprietors can also apply for the following types of loans depending on their purpose.
- Equipment financing: A loan for buying new machinery or equipment.
- Commercial vehicle loan: A loan to buy a new commercial vehicle such as a truck.
- Medical equipment loan: A loan to buy a new medical equipment.
- Raw material purchase loan: A loan to buy raw materials.
- Trader’s loan: A loan scheme you can avail of if you are a trader.
Documents required for business loan
Depending on the loan, you may require a different set of documents. However, here is a list of commonly asked documents by the bank while applying for a business loan.
- Filled-in form
- PAN card of the sole proprietor
- Aadhaar card of the sole proprietor
- PAN card of the business
- Address proof of the business
- Latest income tax returns
- Bank statements of the company for 6-12 months
- CA-certified balance sheet and P&L account statement
- Collateral-related document in the case of collateral loan
- A business plan or a project report
- Any other document specified by the bank or lending institutes
Conclusion: applying for a loan
- It is important to do your research before applying. You can browse through various loan schemes of different banks for doing your research. Also, visit the nearest branch to know the current interest rate.
- Check your CIBIL score. Usually, a CIBIL score of more than 650 or 700 is considered to be a good score to apply for a loan.
- Learn about the eligibility criteria before applying. If you do not fit the criteria, your application will be rejected.
- Learn about the application process, processing charges and so on.
- With most banks, you can apply online as well as offline. You can either visit the bank and apply in the branch else you can also log in to the website and apply for a desired loan.
Swati is a passionate content writer with more than 10 years of experience crafting content for the business and manufacturing sectors, and helping MSMEs (Micro, Small and Medium Enterprises) navigate complexities in steel procurement, and business services. Her clear and informative writing empowers MSMEs to make informed decisions and thrive in the competitive landscape.
