Sole proprietors can borrow for the business through a bank or credit union, an SBA-backed loan from a participating lender, a microloan from a nonprofit lender, or a community lender certified as a CDFI. Lenders mostly look at your credit history, a plan with projections, collateral where it is required and whether you can repay. The offers to be most careful with are the merchant cash advance, which is priced differently from a loan, and any offer that asks you to pay before you receive a cent.
First question: will the money pay for itself?
Borrowing for inventory that sells or equipment that lets you take more work can pay back. Borrowing to cover a gap that returns every month usually cannot, because the real fix is price, cost or volume. Before you apply, write down the monthly payment and the extra profit the money should create. Because a sole proprietorship is not a separate legal entity, the debt is effectively yours personally, as the sole proprietorship guide explains.
The main options compared
| Option | How it works | Facts to know |
|---|---|---|
| SBA microloan | Made by an SBA-approved nonprofit intermediary, which makes every credit decision and sets the terms (SBA) | Up to $50,000, average about $13,000. Maximum repayment term seven years. Interest rates vary by intermediary and are generally 8% to 13%. Cannot pay existing debts or buy real estate |
| SBA 7(a) loan | SBA guarantees part of a loan made by a participating lender. You apply to the lender, not to SBA (SBA) | Maximum $5 million. Uses include working capital, equipment, real estate and refinancing business debt. You must show you can repay and could not get the credit on reasonable terms elsewhere |
| CDFI loan | A lender certified by the Treasury's CDFI Fund: credit union, bank or loan fund serving low-income communities (CDFI Fund) | The CDFI Fund does not lend directly to individuals. Ask each CDFI which products it offers |
| Bank or credit union | A conventional loan or credit line | No standard terms. Your own bank can see your deposits, so start there |
Source: SBA microloan and 7(a) pages and CDFI Fund FAQ, reviewed October 31, 2026. Amounts, rates and rules change, so confirm them with the lender and on sba.gov.
The SBA's eligibility list covers whether the business is operating, for-profit, located in the US, within SBA size standards and not an ineligible business type. Ask the lender to confirm how your sole proprietorship fits, because the lender makes the credit decision.
What lenders look at
The SBA's Lender Match page lists what to have ready, and these are the things lenders typically review (SBA):
- A business plan with the amount you need and what you will use it for.
- Financial projections showing how the loan will be repaid.
- Credit history. The SBA says lenders use credit scores to judge risk and set interest rates. For a new business, eligibility is typically based on the owner's personal credit score, and poor credit history is one of the main reasons small business applications are declined.
- Collateral, such as a home, vehicle or inventory, though it is not always required.
- Industry experience, which is not required but can improve your chances.
For a sole proprietor, the natural proof of income is your filed returns with Schedule C (see the sole proprietor tax filing guide) and statements from a business bank account. Ask each lender for its exact document list.
How to find and compare lenders, step by step
- Get your papers together. Filed returns, recent business bank statements, a list of what you owe, and a one-page plan with what you will buy and how it pays back. Result: you can answer any lender quickly.
- Run Lender Match. It connects you with more than 800 participating lenders, and the SBA prepares a summary of interested lenders two business days after you submit. It is not a loan application and does not guarantee a match or an offer.
- Look at microlenders and CDFIs. The SBA lists approved microloan intermediaries, and the CDFI Fund publishes a list of certified CDFIs you can sort by name, location or type.
- Ask each lender for the same quote. Amount, term, rate, fees, total repayment in dollars, whether collateral or a personal guarantee is required, and any early payoff charge. Result: numbers you can compare line by line.
- Read the contract before you sign and keep a copy. Walk away from anyone who pushes you to sign today.
Merchant cash advances: why they need extra care
In a merchant cash advance, a provider buys a fixed amount of your future receivables. You repay the advance plus a "factor," often 20% to 50% of the amount, with payments that may rise or fall with daily sales (FTC). Concerns raised at an FTC forum include costs with estimated APRs in the triple digits, misleading promotion, providers skipping promised reconciliations when sales drop, and abusive collection, including contracts that make owners sign a "confession of judgment," which waives the right to contest a collection lawsuit.
In a case it brought, the FTC alleged that a provider advertised "no upfront costs" but deducted fees from the advertised "Total Purchase Price," so businesses got less than promised, and that it advertised no personal guarantee while its contracts included one. Those are allegations, but they show what to check in any contract.
| Ask before signing | Why it matters |
|---|---|
| What is the total I repay, in dollars, and over how long? | A factor rate is not an APR, and a Federal Reserve staff study cited by the FTC found owners often underestimate what they will pay |
| How and how often is it collected? | Daily or weekly bank debits strain cash flow, and payments may track sales |
| What fees come out of the money I receive? | Fees deducted from the advertised amount mean you get less than the headline figure |
| Is there a personal guarantee or a confession of judgment? | Either one can put your personal assets within reach |
| What happens if sales drop? | Ask whether payments are adjusted and how, and get the answer in the contract |
Worked example with made-up numbers
The figures below are invented to show the arithmetic. Your offers will differ.
| Advance, factor 1.3 | Term loan at 10% | |
|---|---|---|
| Money received | $20,000 | $20,000 |
| Repaid over | 6 months, $4,333 a month | 36 months, about $645 a month |
| Total repaid | $26,000 | about $23,232 |
| Cost of the money | $6,000 | about $3,232 |
| Rough annualized cost | roughly 100% | 10% |
The advance looks short and simple, and in dollars it costs almost twice as much while the money is outstanding for a sixth of the time. Because you repay it in installments, you hold only about half the money on average, which is why the annualized figure is so much higher. The exact number depends on the payment schedule. The 10% is inside the 8% to 13% range the SBA gives for microloans, but your rate depends on the lender and your credit. Compare total dollars, term and annual rate together.
Loan scams: the fee-first offer
The FTC's warning signs for advance-fee loans: a guarantee of credit whatever your history, fees hidden until after you apply, an approval followed by a demand for payment before the money is released, and requests to pay by cryptocurrency, wire transfer or gift cards. A legitimate lender may charge an application or appraisal fee, but the FTC says a fee never guarantees a loan, and "No one legitimate will ever ask you to pay for a promise" (FTC).
The SBA's Office of Inspector General warns about anyone who promises SBA loan approval but requires a payment up front. It also says SBA only emails from addresses ending in @sba.gov and that an SBA logo on a page is no proof the page is genuine. Check a lender's state registration with your state attorney general or financial regulator, and report scams at ReportFraud.ftc.gov. Offers that arrive by text or chat deserve the same suspicion, as the messaging scams guide shows.
Frequently asked questions
Can a sole proprietor get an SBA loan?
SBA's 7(a) eligibility list covers a business that is operating, for-profit, located in the US, within size standards and unable to get credit on reasonable terms elsewhere. You apply through a participating lender, who decides, and Lender Match can introduce you to lenders.
How much can I borrow with an SBA microloan?
Up to $50,000, with an average of about $13,000, repaid within seven years at most. Nonprofit intermediaries make the credit decisions and set the terms, and the money cannot repay existing debts or buy real estate.
What is a CDFI?
A financial institution certified by the Treasury's CDFI Fund to serve low-income communities, such as a credit union, bank or loan fund. The CDFI Fund funds CDFIs but does not lend directly to individuals.
Is a merchant cash advance a loan?
It is structured as the purchase of your future receivables, repaid with a factor that is often 20% to 50% of the amount. That is why you should compare the total dollars repaid and the term, not a factor rate.
How do I spot a loan scam?
Be suspicious of guaranteed approval, any fee demanded before funding, and requests to pay by wire, cryptocurrency or gift cards. A real lender checks your credit and your ability to repay first.
Sources: SBA: Microloans · SBA: 7(a) loans · SBA: Lender Match · SBA: Find the right loan for your small business · SBA: Establish business credit · SBA Office of Inspector General: Protect yourself from scams and fraud · CDFI Fund (U.S. Treasury): Frequently asked questions · CDFI Fund (U.S. Treasury): CDFI certification · FTC: Small business financing, Staff Perspective outlines issues · FTC: Looking for small business financing? Read this first · FTC: Merchant cash advance providers banned from industry, ordered to redress small businesses · FTC: What to know about advance-fee loans
