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Do Sole Proprietors Need Financing?

Jan 26, 2022 • 6 min read
sole proprietor financing needs
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      Most sole proprietors sell what they create or contribute, which makes business pretty simple. But what happens when you want your solo business to grow?

      Before you say, “No, I want to stay small,” know that growth can mean any number of things. Yes, adding a team can be part of growth, but so can investing in a new piece of equipment to help you create more product or to add another product line. You may not need extra hands to help, but you will be investing for growth.

      Which leads to the statement “it takes money to make money.” The concept behind the phrase is pretty simple: if you buy something that will help you do more or better business, you’ll make more money.

      Examples could include:

      • An ice cream truck driver purchasing a slushie machine to expand their menu
      • A lawyer hiring an assistant, freeing up their time to develop more business
      • A deck builder investing in search engine optimization to be more visible online
      • A clothing buyer wanting to increase travel to identify new designers

      The revenue these sole proprietors might make as a result of their efforts (measured by slushies sold, law clients retained, deck leads received, and incremental clothing sales, respectively) would be the return on investment (ROI): the difference between what you spend and what you get for it. They’d spend money to make money.

      Does it always make sense to take this approach? Well, if you put the numbers together, and it looks like you’ll make more by adding the “spend” than you spent on it, you’d have positive ROI—and that’s the place to start when you want to determine whether you should make the purchase or not.

      What If You Don’t Have the Money to Expand?

      Now comes the bigger question: I want to grow but I don’t have the cash. This is a pretty common position for sole proprietors because their revenue is mostly made up of what they can generate themselves. I know—I was in this position when I started my business.

      Before I had the 12-person content company I have now, I was a freelance copywriter with the dream of growing from a sole proprietor into a full-fledged business with employees. But as a creative person, I had no idea how to run a business and no money to seek out the help I needed. 

      I could have raised my prices and waited until I had the money, but that would’ve taken forever. To make it go faster, I could have slept less, worked more, and hoped I didn’t either keel over or compromise the output.

      Instead, I chose to preserve my health AND increase my speed to solution.

      I leaned on financing for the money to bring in a freelance operations person. She set up the nuts and bolts of the business and runs the day-to-day so I can stay focused producing outstanding creative work and bringing in new work.

      It proved to be the right decision. The time her presence saved me was exactly what I needed. With her handling the stuff I had no idea how to do, I grew revenues 3X in a year, and 7X after three years.

      What’s Your Reason?

      Every entrepreneur will have a unique reason, but they all usually fall into one of the following buckets:

      Time-Sensitive Opportunity

      Let’s say you’re a solo caterer with a great reputation for excellence. An impressed guest at a dinner party you’re working at asks you to cater his 1000-person office party next month.

      You know you’ll be in a great position to get more business from this guy’s company if you knock the holiday party out of the park, but you don’t have the money to buy the knock-out food or rent out the knock-out kitchen to prep it all.

      In this case, you could consider financing to bridge the gap.

      Expansion Plans

      Now imagine you’re the chicken farmer who supplies that caterer. As it turns out, your neighbor (also a chicken farmer) is ready to sell her property. You might seek out financing to buy her land and expand your operation. 

      You’d pay it back over time using the part of the extra revenue you make from the neighbor farm, and when you’ve paid back what you owe, all the profit from the new land belongs to you. 

      Capital Investment

      In this scenario, you’re the general contractor the chicken farmer is going to bring in to build out the new farm. You could do the work in half the time if you had a 2022 cement mixing truck instead of the 1978 model you inherited from your dad.  

      Since you think you can get a few more contracts in the area, financing the cement mixer now would make sense. Again, you can pay it off with the extra revenue created by being able to move faster and take on more work.

      Short on Funds

      The reason for this could be good or bad. Good might be something like you had to invest heavily in a pitch which you won, but the work doesn’t begin until next month and you need the money to pay your bills this month. Bad might be not having what you need to pay your bills because your clients haven’t paid you.

      So, if you were the general contractor’s preferred lumber supplier, you might purchase a whole whack of lumber to set aside for your newly busy general contractor client. Then you’d finance your bill payments and pay it back over the duration of the farm build.

      Staying a Solopreneur 

      A solopreneur offers a percentage of their company in exchange for money to grow the company. This will increase the value of the investor’s shares and will net them a healthy profit when you eventually sell your company. You see it on Shark Tank every week. 

      But what if you’re not interested in giving up any equity? What if you developed a better bundler strap for lumber hauling that will improve business for every forestry company on the planet? Why would you give any of that up to grow the company when you can finance the growth yourself? Partners are wonderful but sometimes you want to keep control for yourself—particularly when you built the business from the ground up, and when you want to retain the vision and chart the direction for progress. Consider all of this when you’re determining the best way to access money to make money.

      Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.
      About the author
      Dan Yurman

      Lendio contributor Dan Yurman is the co-owner of Re:word Content Co., a content agency in Toronto, Canada.

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