Self-employed business loans: financing for SME owners

Being self-employed comes with freedom and flexibility, but it also brings challenges, especially when it comes to securing funding. Whether you’re a sole trader, running a partnership, or heading a small limited company, you’ll probably find yourself looking for finance at some point to grow your business, manage cash flow or cover unexpected expenses.

Getting a loan for your business when you’re self-employed will usually involve extra considerations, but alternative lenders like iwoca are helping to expand the options available.

What does it mean to be self-employed?

To be categorised as self-employed means you work for yourself, taking full responsibility for the business activities, financial success (or failure) and tax obligations. Basically, you’re in control, and you’re not being paid by an employer, which comes with freedom and flexibility but a fair amount of pressure, especially in terms of ensuring you have enough money coming to the business. 

What can I use a self-employed loan for?

Any new business, particularly when self-employed, requires a decent chunk of money to not only get things up and running but also to cover cash flow gaps when awaiting payment and investing in assets, materials, inventory or promotional activity to grow the business. 

A self-employed loan can provide the necessary funds to address these needs, provide a buffer and give you the purchasing power to kick on, repaying capital in instalments or in line with future sales. 

Types of self-employment loans

Unlike personal loans, which depend largely on your individual credit history, small business loans are influenced and approved based on your business performance and personal creditworthiness. These loans can be used for various purposes, like purchasing equipment, managing day-to-day expenses or scaling operations.

Lenders often look for proof that your business is stable enough to handle loan repayments, but they also consider how long you’ve been trading, your income and your overall financial health.

Depending on how you’ve set up your self-employed business, lenders will assess your risk differently and offer loan terms accordingly. 

1. Sole trader loans

Being a sole trader is the most straightforward way to operate as a self-employed person. As a sole trader, you’re the sole owner and decision-maker of your business. However, this structure also means that you are personally liable for any loans or debts the business incurs, and it can be harder to access finance from certain business finance lenders.

Personal liability can make borrowing riskier, as lenders will consider your personal credit score and business income when evaluating loan applications, with personal assets (like your home) being at risk if you default on repayments​.

2. Partnership loans

In a partnership, two or more individuals share ownership of the business. Each partner is responsible for the profits, losses and debts according to their share in the business. 

Lenders assess the financial standing of each partner when assessing a loan application. The amount you can borrow, as well as the terms, will often be proportional to the partnership agreement – the division of ownership and responsibility​.

3. Limited company loans

A limited company is a separate legal entity from its owners, meaning the business itself is responsible for any debts or loans, rather than the individual owners. This structure can make it easier to secure limited company loans with larger amounts and better terms, as the risk is generally lower for the business owner. 

Finance lenders will review your company’s financials, such as profit margins, cash flow and projected earnings, rather than relying solely on owners’ personal financial history.

What loans are available to self-employed businesses?

Self-employed businesses, especially limited companies, can access a wide range of financing products. The right one for your business will depend on what you need the money for and how you plan to repay it.

Here are the main self-employed loan methods available in the UK:

Unsecured business loans

Using an unsecured business loan means you’re not required to provide any assets (like property or equipment) as collateral. They’re typically easier to access for smaller amounts or shorter periods, although lenders tend to charge higher interest rates to offset their risk. Unsecured business loans are ideal for businesses that need quick capital but don’t want to tie up their assets​ or commit to long-term debt.

Secured business loans

A secured loan is backed by an asset, such as your business premises, vehicles or equipment. Since this reduces the lender's risk, these loans usually come with lower interest rates and allow you to borrow larger amounts. However, if you default, the lender can claim the asset​ used as security.

Government-backed loans

Start-up loans backed by the government are available for eligible new businesses. These loans range from £500 to £25,000, with a fixed 6% interest rate. Along with the loan, you get free mentoring to help guide your business growth​. There are also other government schemes and small business loans offered by the British Business Bank.

Invoice financing

Using invoice financing is a way to unlock cash that’s tied up in unpaid client invoices. The lender advances a portion of the invoice's value, giving you access to funds before the customer has paid you. This option is useful if your business faces cash flow gaps due to longer payment terms​, such as in the construction industry, or if you’re impacted by seasonality, say, if you’re in retail or hospitality. 

Merchant cash advances

For businesses that accept card payments, a merchant cash advance allows you to borrow against your future sales. Repayments are made automatically through a percentage of daily card transactions, making this a flexible option if your business income fluctuates​.

What are the borrowing advantages for limited companies vs. sole traders?

When weighing up the benefits of sole traders vs. limited companies, in the context of business financing, limited companies typically have better access to financing. This can be crucial, especially if you’re an ecommerce seller needing to invest in inventory finance and marketing, or you’re in the trade and require new materials and tools for upcoming projects.

Thanks to a broader range of finance options and lenders willing to offer credit, limited companies have a better chance of getting improved terms and more significant funding amounts. Also, any debts as a limited company are on the business, rather than impacting personal assets, although some lenders may also request a personal guarantee.

How to qualify for a self-employed business loan

Qualifying for a loan as a self-employed business owner can be a little more challenging, but it's still very doable. 

Here’s what lenders will likely look for when assessing self-employed business owners for loan approval:

1. Time in business: Most lenders prefer to work with those who have been trading for at least 1 to 2 years. If your business is newer, a government-backed loan can be a good place to start.
2. Proof of income: To prove your income, traditional lenders often ask for your tax returns (SA302 forms), bank statements and business accounts from the last 1–3 years. This helps demonstrate how consistently your business generates revenue and whether you can afford the loan​.
3. Credit score: Your business credit score is a key factor in determining whether you'll be approved, as it shows how reliable you’ve been with past borrowing. A higher credit score could result in better loan terms, but a lower score may still be accepted, especially with secured loans​.
4. Cash flow forecasts: Lenders want to know how you plan to repay the loan, so they may ask for a cash flow projection that shows how your income will cover repayments, operational costs and future growth​.
5. Business plan: If you’re applying for a start-up or growth loan, a clear business plan that outlines your strategy, goals and financial projections can be crucial in securing funding​.

Do I need a personal guarantee to get a self-employed business loan?

There is a good chance you may need to provide a personal guarantee for a self-employed business loan. Lenders often request these guarantees when offering unsecured loans, as they’re not asking you to put up business assets as collateral. However, when self-employed, you might not be able to get a secured loan if you don’t have a lot of valuable business assets. 

Whether you need a personal guarantee depends on various factors, such as:

• Creditworthiness and perceived business risk level
• Type of loan
• The amount you’re looking to borrow
• Length of the repayment schedule 

Improving your chances of approval

To understand how to get a business loan as a self-employed individual, consider the following steps:

• Improve your credit score: Make sure you’re paying off debts on time and avoid applying for multiple loans in a short period. Lenders look for a solid credit history as a sign of financial responsibility​ (find out how to build business credit here).
• Organise your financials: Keep your tax returns, bank statements, and business accounts in order so you can easily prove your income and business stability​.
• Choose the right loan: Different loans have different criteria. Compare unsecured loans, secured loans, and government-backed options to find what suits your needs best​​.

Funding your self-employed business with an iwoca Flexi-Loan

For self-employed business owners, accessing fast and flexible finance can make all the difference when it comes to managing cash flow, unexpected costs or expanding your operations.

We don’t currently provide funding for sole traders. iwoca’s Flexi-Loan is designed to meet the needs of small business owners across a variety of sectors, with transparent and accessible finance. Here are some of the features and benefits: 

• Borrow up to £1,000,000 with repayments spread over a matter of weeks or months (up to 5 years). 
• You can repay early at any time, without incurring extra fees, which helps to save on interest​​.

• Loan terms are tailored to your needs, whether you require a small cash injection or significant capital for larger projects​.
• Applications are fully online, and many businesses receive a decision within 24 hours, plus, once approved, funds are often available on the same day.
• Approvals are based on business performance and revenue potential, not just your credit score.

‍Finance your self-employed funding needs with iwoca

FAQs for self-employed business loans

Can I get a loan if my business is new?

Yes, startups can still get loans, with a range of start-up loans available, including secured and unsecured loans, merchant cash advances and invoice finance. The key is in understanding your needs and making sure that you’re in a position to effectively manage the debt.

What documents do I need to apply for a business loan as a sole trader?

Lenders will generally ask for the following:

• Proof of income (tax returns and bank statements)
• Personal identification (passport or driver’s licence)
• Business financials (cash flow statements or a business plan)​​.

Can I get a business loan if I have bad credit?

Yes, but your options may be more limited. Secured loans or guarantor loans are often better for individuals with poor credit. You may also face higher interest rates due to the increased risk​.

What’s the difference between sole trader loans and limited company loans?

As a sole trader, you're personally responsible for repaying the loan, meaning your personal and business finances are tied together. For a limited company, the loan is taken out in the company’s name, separating your personal liability from the business. This can sometimes make it easier to secure larger loans​.

Will a sole trader loan cost more than a limited company loan or a personal loan?

Sole traders are often subject to higher interest rates due to increased lender risk. This is typically the case if your business is new, has inconsistent revenue and cash flow and doesn’t have a proven credit history. Therefore, limited company loans can generally enjoy better terms.

You could consider a personal loan if you have a strong personal credit rating, as this can get you better terms, but you might prefer to keep borrowing in line with your business.

How do I get a loan if I don’t have proof of consistent income?

Some lenders offer alternative options like merchant cash advances or invoice financing, which allow you to borrow against future earnings. These can be good choices if you struggle to prove consistent income through traditional documents​​

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