Sole trader vs limited company
Two legal forms; very different lender treatment. The single biggest reason a UK lender's decline letter says "we can only lend to limited companies" — and what it would cost to change that.
The legal difference
| Sole trader | Limited company (Ltd) | |
|---|---|---|
| Legal personhood | None — trader = business | Separate legal person |
| Liability | Unlimited personal | Limited to share capital |
| Registry | HMRC (private) | Companies House (public) |
| Public accounts | No | Yes (annually, FRS 102) |
| Taxation | Income tax + Class 2/4 NI | Corp Tax (~25%) + dividends |
| Setup cost | £0 (just register with HMRC) | £12 (Companies House online) |
| Setup time | 1 day | 24 h (Companies House approval) |
| Ongoing compliance | SA tax return | Confirmation statement + accounts + Corp Tax return |
Why most UK alt-lenders restrict to Ltds
1. FCA perimeter / Consumer Credit Act
Lending to a sole trader is often regulated consumer credit under the Consumer Credit Act 1974 — even though the loan is "for business". The CCA exempts some larger and clearly-business agreements, but the default is regulated. Becoming FCA-authorised for consumer credit costs £5k–£50k + ongoing compliance, which most non-bank alt-lenders haven't pursued. So they restrict to Ltds, which sit outside the consumer-credit perimeter for business purposes.
2. Data availability
A Ltd publishes accounts annually at Companies House. Even small / micro-entity accounts give the lender a starting balance sheet, basic P&L info, director names, registered office, charges history, and PSC structure — all free, all public, all standardised. A sole trader publishes nothing publicly. The lender has only what the trader voluntarily supplies (often without external audit), which is far harder to underwrite.
3. Recovery
If a Ltd defaults, the lender registers a charge at Companies House (or already has one), can wind the company up, and recovers from company assets. The shareholders walk away with their personal assets intact (limited liability). Recovery is operationally clean.
If a sole trader defaults, recovery means personal bankruptcy proceedings against the individual — operationally heavier, politically sensitive, and many lenders just don't have the appetite. Personal Guarantees from Ltd directors give the lender a similar position without the operational pain (because the PG is enforced as a civil debt, not a CCA-regulated consumer credit collection).
Which UK lenders DO lend to sole traders
- Capital on Tap — business credit card, lends to sole traders + Ltds (FCA-authorised for consumer credit)
- iwoca — selectively for smaller loans where consumer-credit perimeter applies
- Tide — business overdraft + small loans for sole traders
- High street banks — most through their personal-business banking products
- Specialist sub-£25k lenders — Funding Circle's smaller programs, etc.
Below £25k, most sole-trader business loans are regulated consumer credit under the CCA. Above £25k, the relationship is often exempt under the CCA's "exempt agreement" rules (specifically high-net-worth exemption or business-purpose exemption) — but the lender still needs careful documentation.
When sole traders become Ltds
Common transition triggers:
- Tax efficiency — once profits exceed ~£40k/year, the Ltd + dividend structure usually has lower effective tax (though this gap has narrowed since the 2023 Corp Tax increase to 25%).
- Bringing in equity / co-founders — sole trader can't issue shares.
- Larger facility threshold — alt-lender or bank requires incorporation to fund above a certain size.
- Major customer requirement — corporate customers often won't contract with a sole trader for liability reasons.
- Brand / professionalism — Ltd in the name is sometimes a soft signal customers expect.
From a lender's perspective, a fresh Ltd that emerged from a sole-trader business is an excellent prospect: the founder usually has 1–3 years of trading history (just not publicly available before), often needs working capital to fund the new structure's setup (deposit on commercial lease, professional indemnity, accounting software setup), and is past the "first 90 days uncertainty" of a true greenfield incorporation.
Borrowsignal's filter default
Borrowsignal delivers Ltd-only leads by default, matching the FCA-perimeter restriction most of our customers operate under. Customers can opt into sole trader leads (rare; specific to FCA-authorised consumer-credit lenders) — those leads come without the Companies House profile but with separate HMRC + open-banking enrichment where available.
Related
- FCA-regulated lender
- UK SME definition
- Companies House
- KYC / AML — different requirements per structure
Frequently asked
What's the legal difference between a sole trader and a Ltd?
Sole trader: no separation between person and business, unlimited personal liability, taxed via self-assessment, HMRC-registered (private). Ltd: separate legal person, limited liability, taxed via Corp Tax + dividends, Companies House (public). Both can trade; the form changes risk + tax + lender treatment.
Why do most UK alt-lenders only lend to Ltds?
FCA perimeter (sole-trader lending often regulated consumer credit, requiring permissions most don't hold); data availability (Ltd publishes annual accounts, sole trader nothing); recovery (Ltd wind-up is cleaner than sole-trader bankruptcy).
Which UK lenders do lend to sole traders?
Capital on Tap (cards), iwoca (selective), Tide (small loans + overdraft), high-street banks via personal-business products, specialist sub-£25k lenders. Below £25k loans to sole traders are generally regulated consumer credit.
Can a sole trader become a Ltd?
Yes. Incorporate (£12, 24h at Companies House), transfer assets/contracts/customers to the new Ltd. Triggers: tax efficiency above ~£40k profit, equity for co-founders, lender size requirement, corporate-customer contracts.