Can a Sole Proprietor Get an SBA Loan?

As the sole proprietor of a business, the relentless everyday tasks can all get on top of you. It puts a lot of pressure on you as an individual, and you might feel as though your entire life is consumed by the business.

Sole proprietors are often most affected by economic crises due to the lack of government intervention that they receive. Due to this, a lot of sole proprietorships go under when times get tough because the owner cannot afford it all on their own. 

This is where the SBA loan could come in very helpful for sole proprietors. However, there are a lot of unknown answers that come with researching the SBA loan, and many sole proprietors are unsure of whether they can apply for the loan or not.

What is a sole proprietor?

A sole proprietor can also be referred to as a sole trader or a proprietorship. It can be defined as an unincorporated business in which only one owner pays personal income taxes on the profits.

The sole proprietor type of business is one of the easiest to establish or abolish because there is a significantly less amount of government intervention, compared to other types of businesses.

The people who pay the income tax on the profits are called sole proprietors, and they’ll often list the business under their own name. It’s not necessary to create a separate business name because it doesn’t need to be listed as another entity.

What is an SBA loan?

An SBA loan is a type that can be awarded to small businesses by private lenders but is backed by the government. There are several SBA loan programs to choose from, including 7(a) loans, microloans, and 504 loans.

If you qualify for an SBA loan, you’ll need to put up an amount for an unconditional personal guarantee as collateral for the business. This will need to be made up by everyone with at least 20% ownership of the business.

The collateral means that you are responsible if you cannot repay the loan along with the preplanned repayment schedule.

So, at first glance, it looks like a sole proprietor wouldn’t be able to apply for an SBA loan due to the lack of government intervention and the collateral agreement. But is this the case?

More About the PPP Loan

What’s the PPP loan, you might be asking. The Paycheck Protection Program (PPP) is a federal relief initiative that was established by Congress to be executed through both the U.S. Treasury Department and the Small Business Administration.

The PPP loan works with small businesses to make sure that they have enough funding to pay their employees up to eight weeks of payroll.

The funding can also be used to cover operating expenses such as utilities, rent, or mortgage payments.

The SBA is in charge of the PPP loans and will forgive them if the loan has been applied properly by the business.

Overall, the PPP loan is designed to offer small businesses enough relief when they need it to ensure that their businesses keep running through the tough times. The entire PPP authorizes up to $349 billion in relief.

Who is the PPP loan available for?

The Paycheck Protection Program was originally designed to help small businesses that are more vulnerable to economic changes than larger corporations.

While Google or Amazon might not be affected by an economic downturn - and they might even benefit from it - small businesses can be severely impacted.

These small businesses might be forced to spend all of their savings, profits, and investments to keep the business afloat.

If there are no customers to replenish the profits of said business, the owners will be forced to continue spending without getting anything back.

This is a common stressor for many small business owners, and why an SBA loan is so important.

Can sole proprietors apply for an SBA loan?

Yes, sole proprietors can now apply for SBA loans. However, this wasn’t always the case and won’t be the case for every sole proprietor. The SBA released a statement that is as follows:

“Starting April 3, 2020, small businesses and sole proprietorships can apply for and receive loans to cover their payroll and other certain expenses through existing SBA lenders.”

This quote is on their website and states that sole proprietors can receive the PPP loan from SBA lenders, as long as some conditions are met.

For starters, the sole proprietor must have started their business operations before February 15th, 2020 to qualify for the loan. Any businesses created after this time will not be eligible to apply for the SBA loan.

To prove that you can apply for the PPP loan from SBA lenders, you will need to be able to provide either a payroll statement or similar documentation from the pay period covering February 15th, 2020.

This shows the lenders that you had employees covering this date and that you were in operation. A bank statement is not acceptable documentation to prove this.

A sole proprietor can apply for the PPP loan with an amount that is 2.5 times their average monthly payroll needs.

This extra funding is to help with operations management and any contingency planning that might be required as the end of the economic crisis is unknown.

What are the payroll costs for sole proprietors?

The payroll costs of a sole proprietor are another grey area in which many people are unsure. Not knowing what falls under the payroll costs of your business can lead to you applying for too much or too little relief.

Applying for too much might cause your application to be denied while applying for too little could still leave you struggling.

According to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, sole proprietors can estimate their payroll costs by taking the following advice:

“The sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period.”

The payroll costs allow you to cover your own salary as well as the salary of any other employees you might have. You can then use the rest of the relief wherever you need it most to keep your business running smoothly.

Applying for an SBA Loan as a Sole Proprietor

The SBA has links to all relevant PPP loan applications on their website so that you can apply online to eligible lenders, saving both you and the lenders time. However, you don’t have to apply online if you’d rather apply in person.

The SBA states on their website that:

“You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating in the program.”

This allows you to choose your own lender if you would prefer to stick with someone you’re already familiar with, as long as they’re participating in the Payroll Protection Program.

There is a PPP loan application online that you can print out and fill in before meeting with an eligible lender. 

You will also need to take all of the required documentation with you to satisfy their need to see your business credentials.

Each lender will have their own requirements, some wanting more documentation and others wanting much less, but below is a list of the most common things that you might need to dig up:

  • 2020 tax return, including Schedule C
  • 2020 Form 1099-MISC
  • 2020 payroll tax forms 940/941
  • Income and expense reports such as invoices, bank statements, or earnings statements

Again, every lender is different. Some might even want to see all of these documents from the following year as well.

Others might want you to prove why you need the number of staff you have, and whether you can cut back on their salaries or not.

So, sole proprietors can get an SBA loan if they are struggling and need relief, provided they were operational before 15th February 2020.