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If you own a small business, one of the smartest ways to boost your profits is to make sure you are taking all the deductions you are entitled to on your taxes. Doing so can lower your taxable income and allow you to hold on to more working capital for your business.

But the U.S. tax code for small businesses is fairly complicated and does get revised often. It’s important to stay up to date on these changes.

The good news is that there are several tax credits available if you make your business facilities more energy efficient or purchase an electric vehicle to be used for business. Read on to learn the latest.

What Are Small Business Tax Deductions?

Small business tax deductions (or write-offs) are business-related expenses that you can subtract from your taxable income.

According to the Internal Revenue Service (IRS), business expenses must be both ordinary and necessary to be considered deductible. An expense is “ordinary” if it’s common and accepted in your trade or business. An expense is “necessary” if it’s helpful and appropriate to your business. An expense generally doesn’t have to be indispensable, however, in order to be considered necessary.

Many types of qualified business expenses are specifically addressed on the tax return, with a line to enter the deductible amount. Other qualified expenses can be listed separately.

Recommended: Business Legal Fees and Taxes

How Do Small Business Tax Deductions Work?

Virtually all businesses have to file a tax return with the IRS, but how much you’ll pay in taxes generally depends on how much your business has earned after qualified expenses have been deducted.

A small business tax deduction is an expense that you can deduct from your income to reduce your federal and state tax bill. A business could earn plenty of revenue and potentially pay no taxes if its deductions and credits reduce its taxable income to zero.

If your business brought in $150,000 in revenue, for example, but you had $50,000 in tax-deductible business expenses, you would then only be taxed on $100,000 of revenue, which could save you many thousands of dollars compared to what you’d owe on $150,000.

A 100% tax deduction is a business expense of which you can claim the entire cost on your income taxes. In some cases, however, you may only be able to claim a portion of the expense on your tax return.

Recommended: IRS Form 941

General Rules for Deduction Eligibility

In preparing your business’s tax return, it’s important to understand the eligibility requirements for each deduction before you claim it. The IRS’s rule of thumb is mentioned above: A business deduction is allowable if the cost is “ordinary and necessary” for your industry.

Items that are tax-deductible for small business fall into the categories of direct expenses, indirect expenses, and interest on debt. However, the IRS rules out certain specific expenditures, including real estate renovations, social club dues, and political contributions. Fines and certain legal settlement payments are also not deductible.

Claiming a small business tax write-off that you’re not eligible for could lead to an audit and possibly a penalty.

Recommended: How Much Does It Cost to Start a Small Business?

22 Small Business Tax Deductions

Whether you’re just starting a small business or your company is already well established, here is a list of write-offs that may be available to you. It can be a good idea to consult a tax professional, like a CPA, to find out which small business tax tips are appropriate for your situation.

1. Advertising and Promotion

The cost of advertising and promoting your business is typically 100% deductible. This can include costs related to hiring someone to design a business logo, launching your website, buying ad space in print or online media, running a social media marketing campaign, or sponsoring an event.

2. Car Expenses

If you use your car for business activities, such as driving to see a client or going to the store to buy office supplies, the costs may be tax deductible as long as you keep track of the mileage. The deductible mileage rate for tax year 2025 is 70 cents per mile.

If you have only one vehicle and use it for both personal and business needs, you will likely need to separate the mileage in order for car expenses to be considered a self-employed tax deduction.

3. Energy-Efficient Improvements

Thanks to the Inflation Reduction Act, qualifying small businesses can receive a tax credit that covers 30% of the cost of switching over to low-cost solar power — lowering operating costs and protecting against the volatile energy prices that are currently squeezing small businesses.

Small business building owners can receive a tax deduction of up to $5.81 per square foot (for tax year 2025) to support energy efficiency improvements that deliver lower utility bills.

4. Purchase of an Electric Vehicle

The New Clean Vehicle Credit, Previously-Owned Clean Vehicle Credit, and Qualified Commercial Clean Vehicle Credit are only available for vehicles purchased on or before Sept. 30, 2025. With this, you may qualify for a credit up to $7,500 under Internal Revenue Code Section 30D if you buy a new, qualified plug-in EV or fuel cell electric vehicle (FCV).

5. Child Care Facilities for Employees

If you provide child care for your employees either on-site or through a contract with an outside facility, you could be eligible for the Credit for Employer-Provided Childcare Facilities and Services. The credit is available for 25% of the care facility expenditures plus 10% of the resource and referral costs. It’s capped at $150,000 per tax year. You would claim it by filling out Form 8882.

6. Bad Debt Write-Offs

If you loaned money to an employee, client, or supplier and it wasn’t paid back, or if you made credit sales to customers that were never paid, you may be able to claim the outstanding debt as a business tax deduction.

Typically, to write off these debts, you need to have proof that it was indeed a business debt and not a personal loan.

7. Business Meals

Do you take clients (or potential clients) out for meals to discuss business? If so, these costs may be 50% tax-deductible. The snacks and meals you buy for your employees are also typically 50% deductible (in 2025). Food provided at company parties is generally 100% deductible.

In order to be eligible, food costs typically need to be reasonable — extravagant meals likely won’t qualify. They must also be available to the whole staff, not just highly compensated employees.

In 2026, major changes are coming to meal deductions, including snacks and coffee no longer being deductible. The tax and gratuity portion of the employer-provided meals will also no longer be deductible.

8. Business Insurance Premiums

You likely have at least one type of insurance coverage for your company and/or your staff. That might be workers’ compensation, liability, property, or data breach insurance. If the type of insurance is considered ordinary and necessary, you can typically write off 100% of your policy premiums.

9. Business Loan Interest

If you’ve taken out small business loans, including lines of credit and mortgages on business real estate, or if you’ve used business credit cards, the interest you pay on those loans may be 100% tax-deductible.

10. Payments to Contractors and Freelancers

If you hire freelancers or independent contractors to help in your business, you may be able to deduct their fees as a business expense. You may also want to keep in mind that if you pay a contractor $600 or more during the tax year, the IRS typically requires you to submit a Form 1099-NEC to both the IRS and the contractor.

Recommended: 1099 vs W2 Employee: What’s the Difference?

11. Education and Training Expenses

If you invest in furthering your knowledge and expertise to give you a leg up in the market, or provide your employees with educational benefits, you may be able to write off some of these costs as business expenses.

Tax-deductible education expenses can include: classes and workshops intended to improve skills in your field, subscriptions to professional publications, attending industry seminars and webinars, and getting business certifications.

12. Equipment Depreciation and Section 179 Deductions

Depreciation is a way of spreading the cost of business equipment or assets over time. It essentially measures how much an asset’s value has been used up or exhausted during the year.

Items that can be depreciated by small business typically include computers and other office equipment, machinery, office furniture, and business vehicles. For more specifics, you can read “Topic No. 704,” a document about depreciation, at the IRS website.

13. Business Gifts

If you give clients and prospects gifts as part of your business, the IRS generally permits you to deduct up to $25 per person per year. Any amount you spend over the $25 limit is not deductible.

A gift given to a member of a client’s family is also typically looked at as a gift to the client, unless you have a personal connection to the family member.

14. Home Office Deduction

Do you run your business out of your home? If so, you may be able to deduct expenses tied to creating and maintaining that workspace.

To qualify for the home-office tax deduction, you generally must utilize part of your home regularly and exclusively for business. The office does not need to be in a separate room, but it must be in a space solely designated to work and business operations.

You can typically deduct home office expenses in one of two ways: simplified (in which you multiply a specified rate by the square footage you use for your business, up to a maximum deduction of $1,500) and regular (which involves you itemizing expenses for home office use, including mortgage interest, rent, insurance, utilities, and depreciation).

15. Legal and Professional Fees

If your business has incurred legal expenses, such as hiring a business lawyer or going to court, you are generally able to deduct them as a business expense. Even if you go to court and do not win the case, those legal fees will likely qualify for deduction.

The legal expenses incurred, however, typically must be considered ordinary and necessary to the business in order to be considered a tax write-off.

Also, expenses you may incur when hiring professionals like bookkeepers, accountants, and tax preparers for your business are generally deductible.

16. Office Supplies and Business Tools

Every pen, sheet of paper, and toner cartridge you purchase for your business can typically be written off on your taxes.

For supplies to be deductible, they generally need to be considered essential to running and maintaining a functional office. It can be a good idea to keep receipts and categorize these small business expenses as you go. This can make it easier to file your taxes at the end of the year.

17. Professional Memberships and Subscriptions

Any expenses related to obtaining or maintaining professional licenses or memberships in an industry organization may be deductible.

18. Rent for Business Premises

If you pay rent for an office, warehouse, retail space, or other type of business property, that monthly rent expense may be fully tax-deductible. If you deduct rent as a business expense, you will typically not be able to take the home office deduction as well.

19. Salaries and Employee Benefits

As long as they’re not for you or other business partners, employee salaries and benefits are generally considered write-offs for small businesses.

This category typically includes employee wages, paid time off, commissions, and bonuses, as well as employer-sponsored life insurance or retirement account contributions.

20. Startup and Organizational Costs

If you started your business in the latest tax year, you may be able to write off up to $5,000 of the expenses you invested in launching.

Startup expenses generally include any costs incurred to create or buy the business, such as expenses related to marketing, travel, training, and forming a corporation or partnership.

21. Phone and Internet Expenses

Generally, what you spend to provide your business with internet and phone service can be written off in order to lower your tax liability. If you use the phone and internet for a mix of work and personal reasons, however, you can typically only write off the percentage of the cost that goes toward your business use.

22. Business Travel and Lodging

If you travel for work, such as to visit clients or attend industry events, your travel expenses may be considered business tax write-offs. This can include transportation (flight, rental car, train, parking, and tolls), hotel stays, and meals.

Recommended: What Is an Employer of Record?

How to Claim Small Business Tax Deductions Effectively

To prevent missing out on credits and deductions, you could likely benefit from hiring a skilled accountant. Your accountant should be able to identify all the expenses you can deduct. You may already be familiar with some — such as the rent you pay for your home office, interest on business loans, and travel costs — but there may be many others that fit your particular case.

Keeping careful financial records, including receipts, should help ensure your accountant has all the needed documentation come tax time. Between filings, if you are considering a costly business move, it’s wise to check in with the accountant beforehand to learn about any tax breaks you might be able to claim.

Common Mistakes to Avoid When Filing Business Taxes

Plenty of small business owners make mistakes when filing their company’s tax return. Here are some to watch out for:

•  Neglecting to separate personal and business finances. This complicates recordkeeping and tax filing.

•  Failing to track expenses accurately. Without accurate accounting, you may miscalculate your estimated taxes.

•  Overlooking available deductions and tax credits your business qualifies for. Some examples might be home office expenses or depreciation.

•  Delaying or skipping quarterly estimated tax payments. Paying these on time can help you avoid penalties for lateness and underpayment.

•  Not setting aside money to pay quarterly federal, state, and self-employment taxes. To cover these tax bills, it’s a good idea to escrow 30% to 40% of your net income per year.

The Takeaway

One of the simplest ways to reduce your income tax bill is to ensure you’re claiming all of the tax deductions available to your small business. Understanding which business expenses qualify can help you avoid overpaying come tax time. It can also help guide your business decisions throughout the year and help you decide if it’s time to explore small business financing.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What qualifies as a small business tax deduction?

The IRS says that a small business expenditure qualifies as a tax deduction if the expense is both ordinary and necessary. An expense is “ordinary” if it’s common and accepted in your trade or business. An expense is “necessary” if it’s helpful and appropriate to your business.

How can I maximize my business tax deductions?

In order to maximize your business deductions, it’s likely a wise move to hire a tax professional, such as an accountant or attorney. They are likely to have the best grasp of all the deductions you’re eligible for, because they stay up to date on the tax statutes and IRS guidance.

Are home office expenses fully deductible?

Home office expenses are generally deductible if your work area meets the IRS requirements: a designated space in your home that’s used regularly and exclusively for business operations. If you qualify for this deduction, you could fully write off direct expenses such as rent and utilities – but only the percentage that applies to your home office.

If you opt for the IRS’s simplified calculation method, the maximum home office expense deduction is $1,500.

Can I deduct business meals and entertainment?

Restaurant meals with clients and in-office lunch or snacks you buy for your employees are typically 50% deductible in 2025. Food provided at company parties is ordinarily 100% deductible. Overall, the food must be reasonably priced and available to the whole staff.

As for entertainment, you generally can’t deduct any expenses for those events.

What records do I need to keep for tax deductions?

You’ll likely benefit from tracking your business activity in your ledger or accounting software. Per the IRS, your records should show your gross income and your purchases, sales, payroll, and other transactions.

Keep all documents that support your deduction claims. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks.

Photo credit: iStock/Moon Safari

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOSMB-Q126-005

This is the fifth installment in a five-part series.

There might not be such a thing as having too many resources when it comes to starting your own business.

Some people concentrate on small business startup loans or finding investors, but an exciting route to explore is grants. Small business grants are funds provided by governments, nonprofits, or private organizations to help businesses grow or launch, and unlike loans, they typically don’t have to be repaid.

We’ve put together a list of grants and funding programs for startups along with some super useful checklists of best practices for you, to help you no matter where you are on your journey.

Recommended: Small Business Grants: Where to Find Funding

Small Business Grants 2026: The Top 17

What could be more useful than small business loans and grants when you’re turning your idea into reality? These programs offer what could prove a turning point.

1. U.S. Chamber of Commerce

The U.S. Chamber of Commerce helps small businesses access funding through a mix of grant programs and support initiatives aimed at economic growth.

2. Minority-Owned Business Loans and Grants

The U.S. Department of Commerce Minority Business Development Agency (MBDA) offers targeted grants and loans designed to aid minority-owned businesses. Owners can find information about the programs at MBDA.gov.

Recommended: Small Business Grants for Minorities

3. Women-Owned SBA Program

Women-Owned Small Business (WOSB) Federal Contracting Program is a federal government program contracting dollars to women-owned businesses every year. Through this Small Business Administration (SBA) program, women entrepreneurs get business training, counseling, federal contracts, and access to credit and capital.

4. The Self Employed Growth Grant

The National Association for the Self Employed (NASE) offers growth grants of up to $4,000.

Since 2006, the NASE has awarded nearly $1 million in small business grants. They can be used for marketing, advertising, hiring employees, expanding facilities, and other business needs.

5. Innovation Research and Tech Programs

The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grant programs focus on research and development for technology innovation and scientific research. The programs help connect small businesses with federal grants and contracts with 11 government agencies.

6. The FedEx Small Business Grant

The FedEx Small Business Grant Contest offered corporate small business grants for growth. The program ran from 2012 through 2024 and has since retired, but entrepreneurs can still learn from their journeys.

7. Amber Grant for Women

Since 1998, the Amber Grant has been giving money to female entrepreneurs monthly. They’ve expanded their grant-giving to include “Marketing Grants” and “Business Category Grants,” as well as two “$25,000 Year End Grants.”

8. Veterans Grant

The Second Service Foundation (formerly StreetShares) offers small business grants for veterans. The Military Entrepreneur Challenge provides financial support to help veterans, military spouses, and Gold Star Family entrepreneurs who lack the financial means to start or grow their small businesses.

Recommended: Small Business Loans and Grants for Veterans

9. Refugees Grant

Provided by the U.S. Department of Health and Human Services, the Microenterprise Development Program helps refugees develop, expand, or maintain their own businesses and become financially independent. To equip refugees with the skills they need to become successful entrepreneurs, the program provides training and technical assistance.

10. Nonprofit Environment Grant

Nonprofits interested in protecting the environment can apply for a small-business grant through the Patagonia Corporate Grants Program. The retailer looks for innovative businesses with proposed projects that are quantifiable and have specific goals, objectives, and action plans. These nonprofit grants typically fall between $5,000 and $20,000.

11. Rural Small Business Grant

The U.S. Department of Agriculture administers the USDA Rural Business Development Grants program, which provides financing to strengthen and grow small businesses in rural communities.

12. Grant Application Database for Women-Owned Businesses

IFundWomen is a grant marketplace that specializes in funding and coaching for women-owned businesses. You can submit one application and when IFundWomen adds a grant from an enterprise partner, it will match the partner’s grant criteria to applications within the database. If your business is a match, you’ll receive a notification and invitation to apply.

Recommended: 30 Small Business Grants for Women

13. Federal Grants for Disadvantaged Micro-Entrepreneurs

The Program for Investors in Microentrepreneurs (PRIME) offers federal grants to micro-enterprise development organizations so that they can provide assistance to disadvantaged micro-entrepreneurs. These organizations, such as the Nebraska Enterprise Fund and the Micro Enterprise Services of Oregon, both of which were awarded funding in 2021, can be private nonprofits or run by state, local, or tribal governments.

14. Facebook Small Business Resources

Small Business Funding is a resource offered by Meta for business owners to connect with purpose-driven lenders, access educational resources, and find communities of small business owners like them.

15. Visa Program for Tech Startups

The Visa Everywhere Initiative is a grant competition that offers funding to tech-forward startups across five different regions worldwide. Applicants must show how they’ve developed a product or service that creatively involves Visa’s products. The overall winner of the competition is awarded a $100,000 small-business grant. Additional grants are awarded to finalists.

16. Marketing Makeover Award

Through the Comcast RISE program, startup businesses can receive free marketing services and technology makeovers. These awards are given quarterly to businesses that have been operational for at least one year. To qualify, you also need to be located within the Comcast or Effectv service area — and your business must be 51% owned by someone who identifies as a woman or person of color.

17. Hello Alice Funding and Partnerships

The Hello Alice Grant Platform partners with a variety of companies, such as Progressive and DoorDash, to offer different grants for small businesses, including startups. You can create an account to receive notifications about new opportunities and apply to the grants that are relevant to your business.

Recommended: Working Capital Adjustment

3 Checklists of Best Practices for Small Business Success

These three checklists will help you cover all the bases.

18. Internal Revenue Service Checklist

The IRS checklist below provides the basic steps you should follow to start a business, along with useful links for action:

1.   Apply for an Employer Identification Number (EIN) if applicable

2.   Select a business structure

3.   Choose a tax year

4.   If you have employees, have them fill out Form I-9 and Form W-4

5.   Pay your business taxes

Information about specific industries can be found at the Industries/Professions Web page.

19. Chamber of Commerce Checklist on Insurance

The insurance policies you need will depend on the size of your company (i.e., how many employees you hire) as well as your assets and liabilities. The Chamber of Commerce recommends looking into these:

•  Worker’s compensation

•  Professional liability insurance

•  Product liability insurance

•  Business vehicle insurance

•  Small business health insurance

•  General liability insurance

20: Checklist for Digital Marketing Success Plan

Based on best practices in marketing, you should cover these five bases to help your business take off:

1.    Create a brand identity

2.    Build a website

3.    Establish a social media presence

4.    Activate email marketing

5.    Explore online advertising

Recommended: Nonprofit Startup Grants

The Takeaway

Exploring small business startup grants and funding programs can uncover valuable opportunities that don’t require repayment and may give your business a financial boost without debt. While grants are competitive and often come with eligibility criteria, understanding what’s available and how to apply positions you for success.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What are small business startup grants?

Startup grants are funds provided by governments, nonprofits, or private organizations that don’t have to be repaid. They’re often designed to support new businesses, innovation, or entrepreneurs from underrepresented groups.

Who typically qualifies for small business startup grants?

Eligibility varies, but many grants target early-stage businesses, women-owned, minority-owned, veteran-owned, or mission-driven companies. Some grants also focus on specific industries or geographic areas.

How do startup grants differ from small business loans?

Grants don’t require repayment, while loans must be paid back with interest. However, grants are usually more competitive and may come with stricter application requirements or usage guidelines.

What can small business startup grants be used for?

Grant funds may be used for expenses like equipment, marketing, product development, or operating costs, depending on the grant’s rules and restrictions.

Photo credit: iStock/Hispanolistic

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOSMB-Q126-006

If you need more working capital to grow your business, a secured business line of credit could be a good solution. Because it’s backed by collateral, such as real estate or business equipment, it can be easier to qualify for and may offer better rates and terms than other, unsecured forms of business financing.

Here’s a closer look at how secured business lines of credit work, their pros and cons, how they compare to unsecured business lines of credit, and how to go about getting one.

What Is a Secured Business Line of Credit?

Whether a business line of credit is secured or unsecured, it’s a flexible financing option that allows a business to borrow money when it needs it (up to a certain limit) and only pay interest on the amount it withdraws. Once it pays back the funds it has taken out, the full amount becomes available again.

The difference is that, unlike an unsecured credit line, a secured business line of credit requires the borrower to put up collateral. This is an asset of value (such as equipment, real estate, or intellectual property) that, should the business become unable to repay the loan, the lender could seize and sell to recoup its losses.

Recommended: How to Incorporate

How Do Secured Business Lines of Credit Work?

Secured or unsecured, a business line of credit works in a similar way to a business credit card. You get a credit limit and your business can tap into funds up to that amount whenever you want or need the money. You pay interest only on the funds you draw, and once you repay them, your line of credit is renewed to its original limit. However, a business line of credit is not available forever. Typically, you have to renew the credit line annually to get it extended.

For a secured business line of credit, you must put a business asset on the line. Because this lowers the risk for the lender, a secured line of credit often comes with favorable rates and terms than an unsecured one. However, with a secured business line of credit, you risk losing the asset you put up if you default on your payments.

Recommended: Loans for Restaurants

Pros and Cons of Secured Business Lines of Credit

A secured business line of credit has several advantages, but there are some disadvantages as well. Here’s a rundown.

Unsecured vs Secured Business Lines of Credit

While unsecured and secured business lines of credit function in very similar ways, there are some key differences.

Recommended: Types of Small Business Loan Fees

What Can Be Used to Secure a Business Line of Credit?

There are several types of assets you can use as collateral to secure a business line of credit. All these items can reassure the lender that they will be repaid in some fashion, even if you default.

Real Estate

Real estate is one of the most common types of collateral used to secure a business line of credit. This is because property tends to be valuable and hold its value over time.

You can use any type of real estate that you or your business owns. However, you may want to think twice before using your primary residence as collateral for a business line of credit. Should you run into trouble repaying the debt, you could lose your home.

Cash

Cash savings in a bank account is a liquid asset, meaning it’s readily available. If you put cash up as collateral, a lender may feel confident that they won’t experience significant loss should you end up defaulting.

Equipment

Equipment or machinery owned by your business can also be used to secure a business line of credit, since these assets are often high in value. However, they also tend to lose value over time due to wear and tear. As a result, you may not be able to get a high line of credit with equipment as your collateral.

Intellectual Property

Intellectual property, like trademarks, patents, or copyrights, can have significant value. A lender will often accept this type of intangible asset as collateral for a business line of credit.

Inventory

You may be able to use your company’s inventory as collateral for a secured business line of credit. However, this may require an appraisal in order for the lender to accept it.

Accounts Receivable

Accounts receivable refers to the money that your customers owe you — but have not paid you — for the goods and services you have provided for them. Since the monetary value of your accounts receivable is relatively simple to determine and has a definite monetary value, lenders may be willing to let you use accounts receivable to secure a business line of credit. They may take into account how long the debts have been outstanding and how reliable those customers are in paying their bills.

Recommended: Types of Businesses

Alternatives to Secured Business Lines of Credit

A secured business line of credit can be a great way to even out gaps in your cash flow or buoy your finances. However, a credit line isn’t necessarily your only business financing option. Others include:

Business Loans

Unlike a business line of credit, a business loan provides you with a lump sum of capital that you pay back (plus interest) in regular installments. (One exception is a delayed draw term loan, which allows you to withdraw predefined amounts of a total preapproved loan amount.)

Business loans can be secured or unsecured and may require a down payment. A loan can be a good choice when you need financing for a specific project or major acquisition or investment that will help grow your business. If your business is new, a startup business loan may be easier for you to qualify for.

A business loan calculator can help you estimate what your monthly payment might be as well as the total costs of the loan. If you are considering applying for a Small Business Administration (SBA) loan, an SBA loan calculator can also factor in some fees associated with those loans to give you more customized estimates.

Recommended: Calculating Debt-to-Income Ratio

Merchant Cash Advances

With a merchant cash advance (MCA), a lender gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee. An MCA can come in handy if you’re in a pinch and need capital to cover a cash-flow shortage or short-term expense. However, MCAs tend to be significantly more expensive than other types of business financing.

Invoice Financing

In invoice financing, a lender gives you a cash advance on your outstanding customer invoices. Also known as accounts receivable financing, it uses your invoices as collateral. Invoice financing can be easier to get than a traditional business loan or business line of credit, but tends to come with higher interest rates and fees.

Business Credit Cards

LIke a personal credit card, a business credit card allows you to use money when you need it, up to your credit limit, and then pay it back with interest to the lender. Business credit cards may also earn perks and, used responsibly, can help build your businesses credit history. However, they may come with higher interest rates than personal credit cards or business loans.

Equipment Financing

If your business requires substantial equipment, machinery, or technology to operate, you might consider equipment financing. With this kind of financing, you may be able to get a loan or a line of credit, but either way it will be secured by the equipment asset you are purchasing. Having this backing may mean lower interest rates than you’d pay for an unsecured loan.

Secured Business Line of Credit Application

When you apply for a business line of credit, you’ll have to determine how much credit you need. You’ll also want to check your eligibility, research and compare lenders, and gather the necessary documentation.

Where to Find a Secured Business Line of Credit

Secured business lines of credit are offered by traditional banks, credit unions, alternative online lenders, and the U.S. Small Business Administration (SBA). Rates and terms can vary widely from one lender to another, so it may be a good idea to shop around and compare offers.

Credit Requirements

Although collateralizing can mean that requirements will be lower than for unsecured financing, you generally need to have an adequate credit profile for your personal and/or business credit scores to qualify for a secured business line of credit. Many lenders look for a personal credit score of at least 600. If your credit score doesn’t pass muster, you may have a harder time receiving approval. It’s a good idea to check your personal and business credit scores before applying.

Other Documents

When you submit your application for a secured business line of credit, you may be asked to submit a number of additional documents, which might include:

•   Business name, address, phone number, and email address

•   Business plan

•   Annual sales and/or revenue

•   Business and personal tax returns

•   Financial statements (such as your balance sheet and income statement)

•   Recent bank statements (business and personal)

•   Proof of ownership of collateral

•   A photo of your driver’s license

•   Articles of incorporations (if applicable)

•   Appraisal of collateral or other proof of its value (if applicable)

The Takeaway

A secured business line of credit can provide your startup or small business with flexible financing and, because collateral lowers the lender’s risk, may be easier to qualify for than other types of small business financing.

Bear in mind, however, that using a business asset (such as real estate or equipment) as collateral poses some risk to you as a borrower. Should you become unable to make payments on the credit line, you could lose that asset.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

Do you have to use collateral for a business line of credit?

No. An unsecured business line of credit does not require putting up any assets as collateral.

Can you get a secured business line of credit with a lower credit score?

It may be possible to get a secured business line of credit with a relatively low credit score. However, you may receive a lower line of credit and pay higher rates than a borrower with excellent credit.

What are the advantages of unsecured business lines of credit?

The major advantage of an unsecured business line of credit over a secured one is that you don’t need to provide collateral. When you compare business lines of credit to business loans, the main advantage is flexibility. Rather than getting one lump sum of capital upfront, a line of credit allows you to take some money out now and more at a later time, while paying interest only on the amount you are using.

What types of collateral are most commonly accepted?

There are a variety of assets commonly used as collateral to secure a business line of credit. Real estate is a popular choice, as are cash and equipment.

Is a secured business line of credit better for startups?

If a startup has little or no credit history but does have a substantial asset that it can use for collateral, a secured business line of credit might be a good choice. While it can be difficult for a new business to get financing, offering security may help and could even result in more favorable terms. However, if the startup defaults, it could lose the asset.

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Are you an entrepreneur who’s just starting out and wondering what type of business structure you should choose? You may already know that the most common structures are sole proprietorship, limited liability company (LLC), partnership, S corporation, and C corporation. As you make your decision, it’s worth considering the pluses and minuses of an LLC structure, even if you’re just getting your company off the ground.

What Is a Limited Liability Company (LLC)?

An LLC is a type of business structure that protects the owner’s personal money and property if their company runs into any type of legal trouble. For example, if your business is found liable in court or defaults on a large debt, your house, car, and personal assets are shielded from legal seizure.

Among the LLC’s advantages are more flexibility when it comes to taxes and, compared with some alternatives, less paperwork for daily operations.

Pros of Forming an LLC

Here are some of the top benefits of a limited liability company.

•   Limited personal liability: Incorporating as an LLC protects your personal assets should your company run into legal trouble or be unable to pay its debts. However, if you’re required to personally guarantee loans taken out in the company’s name (e.g., a small business credit card), you would be directly responsible for any debts.

•   Tax advantages: The tax benefits of an LLC are notable. By default, all profits are passed through the company to members of the LLC and taxed at their individual rates. If you prefer, though, an LLC allows you to opt for taxation as an S corporation, potentially limiting the self-employment taxes you’ll have to pay.

•   Stated roles for multiple LLC members: Another LLC advantage is that you can designate multiple owners upfront. This can help you avoid some business headaches over owners’ duties and domains. As long as you have a solid operating agreement, it’s easy to legally establish everyone’s responsibilities and profit allocations.

•   Simpler to establish and run than a corporation: The costs and paperwork involved in setting up an LLC go beyond what’s required for a sole proprietorship, but aren’t nearly as intensive as the process of creating a corporation.

Cons of Forming an LLC

There are also aspects of an LLC structure that may be less appealing.

•   Tax disadvantages: If you’re treating your LLC as a pass-through entity, you’ll pay full self-employment taxes on the first $168,600 of your net income. To pay less, you’d have to elect for your company to be taxed as an S corporation. You’d then be able to draw a reasonable salary (which is subject to self-employment taxes) and distribute to yourself and other members any remaining net profit (which isn’t subject to self-employment taxes).

•   Limited continuity: If a member of the LLC leaves, state law may call for dissolution of the original LLC. This would mean you’d have to refile the needed paperwork and go through the entire process again. To avoid such problems, the LLC’s solid operating agreement should contain some provisions spelling out how the business would handle this development.

•   Ongoing fees: Even after you pay the initial filing fee to your state, you’re likely to have additional fee obligations. Examples include payment for registered agent services, attorney fees for drafting an operating agreement, annual report charges, licenses, permits, and more.

Recommended: Sole Proprietorship vs LLC: How to Choose

LLC vs Other Business Structures

As mentioned above, LLCs are just one type of business structure. An individual business owner can also choose to operate their company as a sole proprietorship, S corporation, or C corporation.

•   Sole proprietorship: This is the easiest business structure to adopt. It forms automatically when you start selling goods or services; no formal filing is required. Legally, there is no separation between you and your business, so you’ll be personally responsible for repaying small business loans and covering any court judgments against your company. This exposure puts all of your personal assets at risk.

•   S corporation: When operating as an S corporation, you can give yourself a salary and pay payroll taxes only on that amount. Income beyond your salary that is distributed to you as profit is not subject to the same self-employment tax.

•   C corporation: A C corporation is taxed independently of its owners. Like all corporations, it offers liability protection. Compared to an LLC, there are more rules and paperwork involved, and it doesn’t offer the same amount of tax flexibility. A C corporation may be a good option if you’re trying to avoid startup business loans and plan instead to raise capital from other sources.

Overall, an LLC is a good middle ground for many business owners. LLC status does call for more paperwork and legal preparation than a sole proprietorship, but the advantages of an LLC company — including liability protection and tax flexibility — may make the extra effort worthwhile.

It’s also worth considering that lenders may prefer LLCs over sole proprietors when it comes to small business loans and business lines of credit, as setting up an LLC may help convey that your company is fully established. Taking these steps to protect yourself may signal to others that you’re a responsible business owner.

Recommended: Equipment Financing

Is an LLC Right for Your Business?

An LLC may be the best fit for your business if you want to protect your personal assets but don’t want the heavy lift of forming a corporation. Many small businesses choose this structure because an LLC is much simpler to form and more customizable (e.g., the option to be taxed as an S corporation).

However, there are also reasons to consider C corporation status. If you plan on raising money from investors, having a C corporation makes it easier to divide equity among them and to issue different classes of stock. The downside is that forming and maintaining a C corporation is costlier; it requires more extensive record-keeping, reporting, and operational processes.

How To Form an LLC

To form an LLC, you’ll need to do the following:

•   Choose the state you want to be based in. State laws set the rules for LLCs, so be aware that your selection may have financial consequences.

•   Pick an appropriate name. Note that your state may have naming rules, plus you’ll want to confirm there’s no other company with your preferred name, so check the Secretary of State’s website or call the office to make sure.

•   File articles of organization with your state. You’ll probably have to pay a filing fee.

•   Hire a registered agent to receive all legal correspondence. If your LLC has multiple members, you can designate one of them as the registered agent.

•   Put an operating agreement in place. This ensures everyone knows their role in day-to-day operations.

•   Get an employer identification number (EIN) from the IRS. It’ll enable you to open a business checking account if you don’t already have one.

The Takeaway

The benefits of a limited liability company structure for a small business are worth considering. Though shifting your business from sole proprietorship to LLC involves extra paperwork and fees, having the LLC’s liability protection and tax flexibility may compensate.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What are the advantages of an LLC company?

Forming an LLC has a few advantages. For starters, it’s easier to form than a corporation, and it protects you from personal liability should your company fall behind on debt payments or lose a lawsuit.

What are the disadvantages of forming an LLC?

LLCs must pay initial filing fees as well as annual fees for reports, license renewals, and more. Both the amount and the timing of those fees varies by state. In addition, an LLC business owner is considered self-employed; this means you’ll owe self-employment taxes for Social Security and Medicare on your company’s profits. However, an LLC can choose to be taxed like an S corporation, which may introduce ways to lower the tax bill.

How does an LLC compare with a sole proprietorship?

It requires more effort to form an LLC than a sole proprietorship, but there are many benefits of an LLC as well. Perhaps the biggest one is that the owner’s personal assets are not at risk in the event of a lawsuit or debt default.

A sole proprietorship can be formed very fast. You have sole proprietor status as soon as you start to sell your goods and services. However, this business structure doesn’t provide any legal safeguards to the owner.

Do LLCs pay more taxes than other business types?

You may end up paying more to the IRS, thanks to self-employment tax rules, but you do have options. For example, you can choose for your LLC to be taxed as an S corporation, which could mean you’d owe self-employment taxes only on the wages you draw.

Is an LLC the best business structure for beginners?

As always, it depends on your business needs and financial situation. Setting up as a sole proprietorship is the easiest, because the structure requires no official paperwork or fees. LLCs offer liability protection and tax options, but take more time and money to establish. New entrepreneurs should consider how soon they want to start doing business and whether they expect to take on partners or investors.

Photo credit: iStock/Igor Suka

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Hundreds of thousands of business applications are filed every month for everything from new restaurants to landscapers to companies pushing the latest tech. But what makes one of these companies a startup? Is it simply the act of launching a new business?

Not quite. According to a common definition, a startup business is a newly formed company created to develop an innovative product or service and bring it to market, often with the goal of rapid growth and scalability. Other businesses, by comparison, may be designed to serve an existing market and may prioritize sustainable revenue over growth.

This guide takes a deeper look into what makes a startup business, how they are funded, and what challenges they commonly face.

Key Characteristics of a Startup

Startups are defined by a unique set of traits that distinguish them from traditional small businesses. Understanding these characteristics helps explain how startups operate, grow, and navigate risk in competitive markets. The key features of startups include:

•   Technology and innovation: Startups typically introduce new products or services that don’t yet exist in the marketplace. Often these innovations rely on new technology to power them.

•   High potential for growth and scalability: By design, startups are looking to grow quickly by offering a unique product that is able to tap into a large market. Business plans for startups should include plans for the scaling of the business, including how the business expects to attain the funding and resources necessary for growth.

•   Reliance on external funding: Many new small businesses may depend on self-funding or traditional sources of capital, such as small business loans or business lines of credit. A startup, on the other hand, may depend on outside sources of funding, such as angel investors or venture capital to fuel growth.

•   Adaptability: Startups often function in dynamic environments and operate with limited resources. At the same time, they are looking for products that meet the demands of the market. The ability to learn from failures and quickly pivot as market conditions change helps these businesses succeed in finding opportunities and out-maneuvering slower competitors.

•   Potentially higher risk: Startups often require significant capital to get off the ground, and it’s no guarantee that the product or service they offer will provide a return.

Recommended: Small Business Credit Cards

How Startups Differ From Small Businesses

Startups and small businesses are often grouped together, but they are built with very different goals in mind. Startups are typically focused on innovation and disruption, often entering the market with a new product or service while still refining a scalable business model. Their primary aim is rapid growth, frequently targeting national or global markets rather than serving a single local community.

Small businesses, on the other hand, usually operate with proven business models and prioritize steady revenue from the start. They tend to serve established local or niche markets and focus on long-term stability rather than aggressive expansion. Because of this, small businesses are more likely to rely on traditional debt financing or equipment financing, while startups often seek outside investors willing to take on higher risk in exchange for potential high returns.

Recommended: Small Business Checking Accounts

Types of Startups

Startups come in a variety of forms, each with its own set of goals. Here are several examples:

•   Buyable startups: A buyable startup is a company built with the end goal of being purchased by a larger company. These startups may put more focus on the innovative products or services they offer and less on developing their business for the long-term. Examples include WhatsApp, which was purchased by Facebook, or Postmates, which was bought by Uber.

•   Social startups: Social startups may be nonprofit or for-profit companies that are focused specifically on solving social issues, often through technology. TOMS Shoes, which donates a pair of shoes for every pair sold, is a good example of a social startup. Warby Parker uses a similar model with glasses.

•   Scalable startups: Scalable startups focus on business models that allow for rapid growth in customer base and revenue. They often use technology to handle high demand efficiently so costs stay low even as the company grows exponentially. For example, Spotify uses a subscription model to deliver content and scale efficiently.

•   Offshoot startups: An offshoot startup is a company that spins off of a larger, more established parent company. For example, PayPal was acquired by eBay before spinning off to become a payment processing giant of its own.

The Stages of a Startup

Launching a business can be expensive. Startups often receive funding in stages. In the very earliest stage, known as pre-seed funding, the startup often relies on relatively informal sources of funding, such as personal savings or loans from family. At this stage, founders are developing their idea, doing market research, and creating prototypes.

Angel investors may get involved at this stage, as well. These are wealthy individuals who invest their own money in a company in exchange for equity, perhaps also offering expertise and mentorship. Startups may also turn to more formal sources of funding, such as startup business loans or microloans.

Once an idea seems to have legs, the next round is seed funding. Angel investors may continue their funding at this stage, and venture capital firms may step in as well. Venture capitalists are companies that invest pooled money in startups in exchange for equity. In addition to capital, they often provide guidance.

From here, startups may go through several rounds of funding, known as Series A through Series E funding as the company grows. New sources of capital may be available at each funding stage, such as private equity, which involves investing in privately held companies.

Recommended: Small Business Line of Credit

Challenges Startups Commonly Face

Starting any business can involve challenges. Here are several that startups commonly face:

•   Funding: Securing the capital needed to get a business off the ground and keep it growing is perhaps the number one challenge startups face. Entrepreneurs must work to convince investors that their idea is worth pursuing over and over again through each round of funding.

•   Competition: No good idea arises in a vacuum. It’s likely that there will be other startups out there with similar concepts and products to offer all vying for market attention, customers, and funding.

•   Finding customers: It’s one thing to have a great idea, but it’s another to actually get it in front of people who are willing to use it. Reaching new users and building trust can be a critical challenge of getting a product or service off the ground.

•   Talent: Startups must build teams of exceptional employees to carry out their vision. This is especially critical when companies are small and the skills of every team member really count. However, startups are inherently risky, so it can be challenging to convince talent to join an emerging company, especially if a large part of their compensation — such as stock options — depends on the success of the company.

•   Scaling: The goal of most startups is growth. Scaling means increasing revenue at a faster rate than costs grow. Achieving this is not always easy and involves carefully managing growth, building scalable infrastructure, and maintaining quality.

The Takeaway

Understanding what defines a startup helps clarify how these businesses differ from traditional small companies in purpose, structure, and growth strategy. Built around innovation, adaptability, and scalability, startups aim to test ideas quickly and expand rapidly while navigating higher levels of risk. By recognizing the characteristics, stages, and challenges startups face, entrepreneurs can better decide whether the startup model aligns with their goals and resources.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is the official definition of a startup?

There is no single official definition, but a startup is generally defined as a young company created to develop a new product or service under conditions of uncertainty. Startups typically focus on innovation, testing a scalable business model, and finding repeatable ways to grow in emerging or evolving markets.

How is a startup different from a small business?

While startups are designed for rapid growth and market disruption, other small businesses typically function within an existing market and are focused on sustainable growth and operations.

What are the stages of a startup?

Startups are broken into stages based on funding. There is the pre-seed stage when an idea is just getting off the ground, the seed stage that kicks off the business, and possible Series A through Series E rounds of funding as the business grows. Ultimately, the goal of a startup is usually a sale of the business or an initial public offering.

How do startups get funded?

Startups may receive funding in a variety of ways, from personal savings and small business loans in the early stages of development to angel investors, venture capital, and private equity through other stages of funding.

Do all startups aim for rapid growth?

No, not all startups aim for rapid growth. While many pursue fast scaling and large markets, others focus on sustainable growth, niche audiences, or lifestyle goals. These startups may prioritize steady revenue, profitability, and long-term stability over aggressive expansion or venture capital funding.

Photo credit: iStock/RealPeopleGroup

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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