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Can sole traders get business loans?
Yes, it is possible to get a business loan as a sole trader. This is important, as being able to access funding can help your business grow or provide some financial breathing space.
As with most small business loans, eligibility criteria to qualify for a sole trader loan tends to vary between lenders. You may also find it is a little more challenging to access funding if you operate as a sole trader. But there are definitely options available.
What is a sole trader loan?
A sole trader loan is a business loan that allows you to raise finance if you run a business as a sole trader. This may make a sole trader business loan an option if you are self-employed, a freelancer, or a contractor. Some lenders refer to these types of loans as self-employed loans for this reason.
It’s likely that you’re a sole trader if you both own and run your business, and take all the important decisions about your venture yourself. Any profits from the business are yours, but you’re also personally responsible for any debts – which is different to if a business is registered as a limited company, which creates a legal distinction between a business and its owners.
What types of business loans can sole traders get?
Sole trader business loans can be either secured or unsecured.
Unsecured sole trader loans
An unsecured business loan can be taken out without having to provide security for the loan. This means you’re not putting any assets at direct risk of being lost to the lender, which can also make the application process quicker and easier. However, you may have to provide a personal guarantee, which means you’d have to repay the loan from your own personal funds if your business can’t.
Secured sole trader loans
A secured business loan does require an asset to be put forward as security for the loan, either from your business or a personal asset you own. This may allow you to borrow more, or at a slightly better rate. However, as a sole trader, the asset used as collateral may have to be your home, or another valuable asset, which the lender could potentially take if repayments aren’t met.
Pros and cons of sole trader business loans
Advantages
- Loans may be tailored towards sole traders
- Repayment terms may be more flexible
- Could help pay for growth and expansion plans
- Could be used to cover short-term expenses or cash flow challenges
- Approval can be relatively quick, particularly for unsecured loans
- Loan interest may be tax deductible as a business expense
Disadvantages
- It can sometimes be harder to access funds as a sole trader
- Your personal and business assets may be at risk, either due to a personal guarantee or having to provide security
- Interest rates may be higher because it’s considered more risky to lend to sole traders
- Available loan amounts may be smaller for similar reasons
Am I eligible for a sole trader loan?
As a general rule, you’ll need to be 18 or over and your business must be UK-based in order to qualify for a sole trader business loan. Beyond that, there may be other minimum requirements, often in relation to turnover, length of trading history, and credit score, but these tend to vary between lenders.
How to find sole trader business loans through NerdWallet UK
We want to help you find a business loan that suits your needs, and you can do this without affecting your credit score.. Follow the steps below, and we’ll highlight from our panel of providers the loans that are right for you and offer the best chance of acceptance.
- Answer some short questions about you and your business, so we know what you’re searching for.
- Get matched instantly with the loans from our panel of lenders you’re most likely to be eligible for.
- Compare loans and apply to your chosen lender, with forms pre-filled using the details you’ve provided already.
» COMPARE: Find business loans for sole traders today
Sole Trader Business Loan FAQs
Yes, there are start up business loans that can be taken out by sole traders with new or younger businesses.
It may be possible to get a sole trader business loan if you have bad credit, though it’s likely there’ll be fewer options to choose from and interest rates will be higher. It could also increase the likelihood of having to provide a personal guarantee or security for the loan.
» MORE: Bad credit business loans
Generally, it is thought to be easier to get a business loan if your business is set up as a limited company rather than as a sole trader business. This is mainly because lenders believe limited companies pose less of a risk, due to the financial separation between owner and business, the need to register with Companies House, and an obligation to post more detailed financial accounts. However, setting up as a limited company won’t be the right option for every business owner, and there are plenty of business loans available to sole traders.
» MORE: Sole trader or limited company?
Yes, sole traders may be able to qualify for certain business grants in the UK.
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