Sources of Finance for a Sole Trader
The ability of a sole trader is relatively limited when compared to a private or public company. The sole trader has multiple options for extending his finances and preventing dilution of ownership while continuing to fulfil his financial needs. The sole trader may utilize his personal capital, retained profits, sale of assets, sale and lease back, loans or credit lines from banks and hire purchase. However, the sole trader must understand that an expanding business will have to eventually agree to dilute ownership since these strategies are only delay tactics.
The sole trader can invest his own savings into his business for expansion. A sole trader who is confident about the future prospects of his business may be prepared to invest additional savings into the business for expansion. This prevents him from the burden of interest payments and allows him to retain full control over the business.
A profitable business generates a positive net income every year. Instead of drawing out large sums of money, a sole trader may opt to retain the earnings for business expansion.
When a sole trader is short of personal capital and retained earnings and there's a need to further investment in the business, he may decide to sell some of his assets. This could be a property registered in the name of the business. The sole trader may rent an office and use the sale proceeds to expand his business.
If the sole trader does not have any other assets to sell, he may decide to sell an asset or a property and lease it back from the buyer. This helps him to retain the same business address and continue business as normal while raising capital for expansion.
The sole trader can approach a bank or a financial institution to apply for a loan. This could include a business loan, a credit line, credit cards, trade credit and a mortgage. Trade credit and credit cards are preferred by sole traders as these will usually not require a mortgage of the business assets. Trade credit is mostly secured against the accounts receivable and the work in progress of the sole trader.
This sole trader may acquire a certain asset through hire purchase by paying a proportion of the value as down payment and paying a rental on the remaining value until the full payment has been cleared. Hire purchase provisions are often available on purchases of machinery or similar assets.