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If you’re looking to start or grow a side hustle or small business, you might think a business loan is the right next step. A personal loan, however, is another popular financial product that you also might be able to use. For instance, by using it to free up some cash elsewhere in your budget, you could put more of your income toward funding your business.

Because there are potential benefits and disadvantages to both types of financing, it’s important to understand the differences. You’ll find that information here and be better equipped to decide whether a business loan vs. personal loan might work best for you.

What Is a Personal Loan?

A personal loan is a source of financing that a borrower typically can use for just about any legal personal purpose. That said, you typically cannot use the money from a personal loan directly for your business. You might instead use the lump sum to consolidate credit card debt, which could free up funds in your overall budget to put back into your business.

Typically, you’ll find unsecured personal loans, with the borrower agreeing to pay back the full amount, plus interest, in fixed monthly payments within a predetermined time frame.

Some lenders also offer secured personal loans, however,which means some form of collateral is involved. Also, some offer personal loans with variable interest rates.

How Personal Loans Work

When you apply for a personal loan, you can expect the lender to review your personal financial information — including your credit score, credit reports, and income — to determine your eligibility. In general, the better your credit, the better your chances of receiving a lower interest rate.

Personal loan amounts vary, but some lenders offer personal loans for as much as $100,000.

Although most personal loans have shorter repayment terms, the length of a loan can vary from a few months to several years. Typically, they last from 12 to 84 months.

What is a Business Loan?

A business loan is a type of financing used specifically to pay for business expenses. It could be used to purchase equipment or inventory, for example, or to fund a new project.

There are many kinds of small business loans available — with different rates and repayment terms — including Small Business Administration (SBA) loans, equipment loans, micro loans, and more. Rates, terms, and loan requirements also can vary significantly depending on the lender.

How Business Loans Work

Applying for a business loan tends to be more complicated than getting a personal loan. For one thing, you’ll likely have to submit more paperwork to back up your application, including your business’s financial statements and an up-to-date business plan. The lender also usually will want to review your personal and business credit scores. And you may have to be more specific about what the loan will be used for than you would with a personal loan.

If your business is brand new, lenders may be reluctant to give you a business loan. Some lenders might ask you to put up some type of collateral to qualify.

Differences Between Business and Personal Loans

There are several factors you’ll want to understand when considering the difference between a personal loan vs. a business loan, including the loan costs, how you plan to use the money, and how much you hope to borrow. Here’s a look at a few basic differences.

Cost Differences Between Business and Personal Loans

Whether you’re considering applying for a business loan or a personal loan, it’s important to be clear about how much it could cost you upfront and over the life of the loan.

Interest Rates

Interest rates for business loans can be lower than for the interest rates for personal loans, but the rates for both can vary depending on the type of loan, the lender you choose, and your qualifications as a borrower.

Fees

Fees also can affect the upfront and overall cost of both personal and business loans, so it’s a good idea to be clear on what you’re paying. Some of the more common fees for business loans and personal loans that you might see include origination, application, packaging, and underwriting fees, and late payment and prepayment penalties.

Some fees may be subtracted from the loan amount before the borrower receives the money. But fees also may be folded into a loan’s annual percentage rate (APR) instead, which can increase the monthly payment.

Down Payment

Business loans may be available for larger amounts than a personal loan. For a larger business loan — a substantial SBA loan or commercial real estate loan, for example — you could be required to come up with a down payment. This amount can add to your upfront cost. However, just as with a mortgage or car loan, a larger down payment can help you save money over the long term, because you’ll pay less in interest.

Whether you’ll need a down payment, and the amount required, may depend on your individual and business creditworthiness.

Different Uses for Business and Personal Loans

One of the biggest differences between business vs. personal loans is the way borrowers can use them.

•   A business loan can be used to finance direct business costs, such as paying for supplies, marketing, a new piece of equipment, business debt consolidation, or a business property. But it typically can’t be used for indirect business costs, which means a borrower can’t pay off personal debts with the money or buy personal property with it.

•   Some business loans have a very specific purpose, and the borrowed money must be used for that purpose. For example, if you get an equipment loan, you must buy equipment with it. Or, if you get a business car loan, you must buy a business car with the money.

•   With a personal loan, you have tremendous flexibility in how you use the loan, although that usually does not include business purposes. Rather, you can use a loan to pay off credit card debt, fund a home improvement, or pay an unexpected medical or car repair bill. Personal loans are typically smaller than business loans, and they generally come with a shorter repayment term. It can be helpful to have a clear intent for how the money will be spent and to keep separate records for business and personal expenses.

Differences When Applying for Business and Personal Loans

The criteria lenders look at can be very different when approving a small business loan vs. a personal loan. Here’s what you can expect during the application process.

Applying for a Personal Loan

When you apply for a personal loan, your personal creditworthiness usually plays a large role in the application and approval process.

•   Lenders typically will review a borrower’s credit scores, credit reports, and income when determining the interest rate, loan amount, and repayment term of a personal loan.

•   Generally, you can expect to be asked for a government-issued photo ID, your Social Security number, and/or some other proof of identity.

•   You also may be asked for proof of your current address. And the lender will want to verify your income.

Applying for a Business Loan

When you apply for a business loan, your personal finances still will be a factor, though other aspects of your application will be reviewed carefully.

•   The loan underwriters also will evaluate your business’s cash flow, how long you’ve been in business, your profitability, the exact purpose of the loan, trends in your industry, your business credit score, and more.

•   The lender may ask for a current profit-and-loss statement, a cash-flow statement, recent bank statements and tax returns for the business, your business license and a business plan, and any other current loan documents or lease agreements you might have.

•   You also will have to provide information about your collateral if you are applying for a secured loan.

Recommended: Understanding Credit Score Ranges

Structural Differences in Business and Personal Loans

Knowing the differences in how personal loans vs. business loans are structured could help you decide which is right for you and your business. A few factors that might affect your choice include:

Loan Amount

A business loan may be more difficult to apply for and get than a personal loan, especially if your business is a startup or only a few years old. But if you can qualify, you may be able to borrow more money with a business loan. While personal loan amounts typically top out at $50,000 to $100,000, some SBA loans can go as high as $5.5 million.

Loan Length

You’ll likely find personal and business loans with both short and long repayment terms. But generally, personal loans have shorter terms (typically one to seven years), while some business loan repayment periods can be up to 25 years.

Tax Advantages

If you have a business loan, deducting the interest you pay on the loan may be possible when filing income taxes if you meet specific criteria.

With a personal loan, it might get a little more complicated. If you use the borrowed money only for business costs, you may be able to deduct the interest you paid. But if you use the loan for both business and personal expenses, you would only be able to deduct the percentage of the interest that was used for qualifying business costs.

And you should be prepared to itemize deductions, documenting exactly how you spent the money. Your financial advisor or tax preparer can help you determine what’s appropriate.

Support

Along with the traditional banking services you might expect to get with any type of loan, a business loan also may come with operational support and online tools that can be useful for owners and entrepreneurs.

Risk

When you’re deciding between a personal vs. business loan, it’s also a good idea to think about what could happen if, at some point, the loan can’t be repaid.

•   If your business defaults and it’s a business loan, the impact to your personal credit would depend on how the loan is set up.

◦   If you’re listed as a sole proprietor or signed a personal guarantee, it’s possible you could be sued, your personal and/or business credit scores could take a hit, and your personal and business assets could be at risk.

◦   If your business is set up as a distinct legal entity, on the other hand, your personal credit score might not be affected — but your business credit score could suffer. And it could be more difficult for you to take out a business loan in the future.

Pros and Cons of Business Loans

There are advantages and disadvantages to keep in mind when deciding whether to apply for a business loan vs. personal loan.

•   A business loan can be more difficult to get than a personal loan, especially if the business is new or still struggling to become profitable.

•   If you qualify for a business loan, you may be able to borrow a larger amount of money and get a longer repayment term.

•   A business loan also can make it easier to separate your business and personal finances. {Personal loans typically can only be used for personal expenses, as the name indicates.)

•   There could be fewer personal consequences if the business defaults on the loan.

Recommended: Can You Refinance a Personal Loan?

Pros and Cons of Personal Loans

A personal loan vs. business loan can have advantages and disadvantages to consider.

•   Personal loans can offer borrowers more flexibility than business loans in terms of usage, though those uses must typically be for personal expenses, such as paying for a home renovation or a vacation.

•   They’re generally easier to qualify for and may have lower interest rates.

•   One major hurdle may be that you cannot use them for any business expense in most situations. You could use them to free up cash in your budget which you might then apply to a business purpose.

Is a Business or Personal Loan Right for You?

Considering the differences between a personal loan and a business loan can help you decide which is right for your needs. You may want to do some online research, compare rates and terms, and/or ask a financial professional or business mentor for advice before moving forward with this important decision. Here are some things to think about as you look for a loan that’s a good fit for your personal and professional goals.

A business loan may make sense if:

•   You’re seeking a lower interest rate and/or repayment term.

•   You want to keep personal and business expenditures separate.

•   You’ve been successfully running your business for a while.

•   You need more money than you can get with a personal loan.

•   You hope to build your business credit.

•   You want to limit your liability.

A personal loan may make sense if:

•   Your goal is to use the money for personal purposes, which might free up funds in your budget for business expenses.

•   You plan to use the money for both business and personal expenses.

•   You can find a personal loan with a lower interest rate than a comparable business loan, and the lender approves the loan for business expenses.

•   You want to get the money as quickly as possible.

•   You are seeking a shorter repayment term.

•   You don’t want to secure the loan with collateral.

•   You feel confident about your personal ability to repay the loan.

Recommended: Can I Pay Off a Personal Loan Early?

The Takeaway

If you’re seeking funding to start or grow your business, you may decide to apply for a business loan. Another approach: You might apply for a personal loan, which could be used for personal purposes, freeing up money in your budget that could go toward your business. Personal loans are typically easier to apply for and offer quicker access to funds, but often at a somewhat higher interest rate and shorter term vs. business loans. Also, business loans usually offer significantly higher loan amounts and the interest can be tax-deductible. It’s worthwhile to consider the tax and credit implications of each type of loan too, among other factors.

FAQ

Are business loans more expensive than personal loans?

Business loans typically have lower interest rates than personal loans. However, these two loans aren’t interchangeable: one is for business uses, the other for personal expenses.

Can I use a personal loan for business?

Most (but not necessarily all) personal loans can be used for just about any personal use. Check the fine print, and follow the lender’s guidelines.

Are startup loans personal loans?

There are a few different options for funding a startup, including SBA loans, family loans, or crowdfunding platforms. But if you have good credit and are confident you can make the monthly payments, taking out a personal loan could be an effective strategy for funding a startup, if the loan permits that usage.

Photo credit: iStock/MicroStockHub

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.

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.

SOPL-Q425-040

In June 2025, the unemployment rate stood at 4.1% and the number of unemployed people at 7 million. This showed little change since May 2025. In fact, the unemployment rate has remained in a narrow range of 4% to 4.2% since May 2024.

Unemployment rates were lower in June in 2 states, higher in 1 state, and stable in 47 states and the District of Columbia, the U.S. Bureau of Labor Statistics reported Nineteen states and the District had jobless rate increases from a year earlier, 4 states had decreases, and 27 states had little change.

South Dakota had the nation’s lowest state unemployment rate in June 2025, 1.8%. The District of Columbia had the highest jobless rate, 5.9 percent. The next highest rates were in California and Nevada, 5.4% each. In total, 18 states had unemployment rates lower than the U.S. figure of 4.1%, 6 states and the District had higher rates, and 26 states had rates that were not appreciably different from that of the nation.

An unemployment rate of between 4% and 5% is still considered low for the U.S. But while low levels of unemployment sounds like great news for American workers, it presents challenges too. Economists say that inflation cannot ease significantly while unemployment is low.

For small businesses, the problem can be particularly acute. Not only is it hard to fill job openings, but salary pressure increases and if there aren’t enough skilled workers, the business can stagnate or slump.

Looking At Unemployment Data By City

In this story, we are taking a look at unemployment rates by city to get a feel for the job landscape across America. Using U.S. Bureau of Labor Statistics (BLS) data, we have created a list that ranks the jobless statistics for the cities that show the largest populations within their respective states.

On our list, Los Angeles, California, is the city with the highest unemployment in America, followed by Las Vegas, Nevada, and then Newark, New Jersey. Within this list, many fascinating — and even contradictory — trends are revealed that have bearing on small business owners.

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What is the Unemployment Rate and How Is it Calculated?

The U.S. labor force participation rate in June 2025 was 62.3%. This rate marked a tiny decrease from the 62.4% seen in May 2025 and was based on the total number of people aged 16 and older who were either employed or actively looking for work

The BLS, which falls under the Department of Labor, measures labor market activity, working conditions, price changes, and productivity in the U.S. economy. The unemployment rate for any area is the number of area residents without a job and looking for work divided by the total number of area residents in the labor force.

In other words, the unemployment rate represents the number of unemployed people as a percentage of the labor force (the labor force is the sum of the employed and unemployed). What the BLS unemployment rate will not tell you is how many people have taken themselves out of the workforce, perhaps becoming so discouraged in their job search that they have given up hope of finding a job.

Some economists say that the nation’s low unemployment could be due, in part, to a low labor participation rate.

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U.S. City Unemployment Rates: Lowest to Highest

To gauge the current state of unemployment across all 50 states, we’ve zeroed in on the cities with the largest population in each state, along with the District of Columbia. The data from June 2025 represents the most recently obtainable complete figures from the Bureau of Labor Statistics.

Below is our list of ranked cities, beginning with the city that had the lowest rate of unemployment and moving to the highest.

50. Sioux Falls, South Dakota

After it reached the distinction of ranking lowest on our list at 1.6% in July 2024, Sioux Falls has hung on to this position, and a year later it is at 1.8%. South Dakota has the lowest unemployment of all states in this month at 1.8% as well. “South Dakota traditionally has a lower unemployment rate than the rest of the country,” explained an economics professor in a recent paper. But the state’s low rates since 2023 create a “double-edged sword.” The super-tight labor market means economic growth can be difficult.

49. Portland, Maine

Portland’s unemployment rate has plummeted in the last six months, dropping to 2.2% in June. Maine overall is a new occupant of the bottom five set. Its seasonally adjusted unemployment rate was 3.3% in June 2025, slightly lower than in recent months. It has been below 4% for 43 months, the second longest such period and below the U.S. average for all but three months for more than 17 years.

48. Burlington, Vermont

The city of Burlington showed an unemployment rate of 2.3%, while the statewide unemployment rate was 2.6% in June. “There are nearly three job openings for every unemployed Vermonter,” according to the Vermont Department of Labor. Burlington is the industrial, tourist, and financial center of the state, with a population of 44,700. Burlington also has the distinction of being the least populous city in our list.

47. Huntsville, Alabama

The June 2025 jobless rate for Alabama of 3.2% continues the streak of low joblessness for the state. The unemployment rate of 2.6% for Huntsville makes it one of the country’s lowest for cities of its size. A metropolis of rapid growth, Huntsville has leading sectors in aerospace, defense, information technology, bioscience, and advanced manufacturing.

46. Fargo, North Dakota

Fargo, population 126,000, showed an unemployment rate of 2.8% in June 2025, while the state’s unemployment was 2.5%. One reason North Dakota has had such a low unemployment rate for years is because it is the fifth least-populated state in the United States. Fargo’s economy is based on education, the medical industry, agricultural equipment, and services.

45. Billings, Montana

The largest city in Montana showed an unemployment rate of 2.5%, down from 3.3% in the summer. Billings has a history of strength in agriculture and energy; more recently, it has focused on retail. In November. Montana’s unemployment rate reached its 41st consecutive month of unemployment at or below 3.4%.

44. Manchester, New Hampshire

The state of New Hampshire continued to show low unemployment at 3.1% in June. The jobless rate of Manchester, population 115,000, was also 3.1%. The very low jobless rate does create special challenges for employers, such as dealing with the size of the workforce, which is smaller in New Hampshire than it was before the Covid-19 pandemic.

43. Honolulu, Hawaii

With a population of 345,000, Honolulu had an unemployment rate of 3.1% in June. Job gains were seen in professional and business services, trade, transportation and utilities, and private education and health services. Overall, Hawaii had an unemployment rate of 2.8%, continuing its steady decrease in joblessness this year.

42. Oklahoma City, Oklahoma

The largest city in Oklahoma continued its successful plunge in unemployment with a rate of 3.2% in June. Oklahoma City has one of the world’s largest livestock markets, with oil, natural gas, and petroleum products as its largest sectors. As for the state, Oklahoma’s rate of 3.1% is part of a slow increase seen over the last six months.

41. Bridgeport, Connecticut

The unemployment rate in Bridgeport, population 148,000, came in at 3.2% in June, showing continual lower unemployment than registered a year ago. The state was at 3.8% in June. In a statement to the press, state Department of Labor Commissioner Danté Bartolomeo said, “We’re seeing sustainable job growth, a low unemployment rate, and a steady job market with opportunities for workers at all levels of their careers.”

40. Nashville, Tennessee

The city of Nashville saw its unemployment rate at 3.4%, while the state’s jobless rate was 3.5%. The city is famous for music and entertainment, but healthcare and manufacturing are leading sectors as well. The city, population 1.3 million, is one of the fastest growing in America.

39. Omaha, Nebraska

In June, Nebraska continued its low unemployment rate of 3%. Nebraska’s low jobless rate is believed to be due to the dominance of industries like manufacturing and agriculture, which are less volatile than the energy or hospitality sectors. Omaha, population 487,000, had a jobless rate of 3.4%

38. Boise, Idaho

With a population of 237,000, Boise had a jobless rate of 3.5% in June. The major economic drivers in the region include semiconductor and other computer product manufacturing, food product manufacturing, administrative and business support services, and construction. Statewide unemployment stood at 3.6%.

37. Indianapolis, Indiana

The city of Indianapolis showed a June unemployment rate of 3.5%, an increase from 3.2% in May. An economist said recently that there were 5 job seekers for every 10 open positions in the state. Central Indiana’s life sciences and healthcare sector generates nearly $84 billion in total economic output. The state of Indiana showed a jobless rate of 3.6%, a sizable drop over the last year.

36. Milwaukee, Wisconsin

The state of Wisconsin had a jobless rate of 3.2% in June. Its largest city, Milwaukee, had an unemployment rate of 3.6%. The three sectors that comprise most of Milwaukee’s workforce are service sectors, manufacturing, and retail trade.

35. Baltimore, Maryland

At 3.6%, Baltimore continued to rank low for unemployment for a large city, but it is no longer attracting national attention for its gains. Maryland’s state unemployment rate hit an all-time low in October 2023, at just 1.7%, marking the lowest state unemployment rate in the U.S., but it has risen since then. In June, the Maryland unemployment rate was 3.3%.

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34. Atlanta, Georgia

Georgia’s largest city with a population of 496,000, Atlanta had a jobless rate of 3.6% in June, compared with 3.3% in May. Georgia’s unemployment rate was 3.5%. The sectors with the most job gains included accommodation and food services, health care and social assistance, arts, entertainment, recreation, and management of companies and enterprises.

33. Minneapolis, Minnesota

Minneapolis’ unemployment rate of 3.7% in June was an increase from 3.1% in May. The Twin Cities’ industries are dominated by healthcare, finance, manufacturing, and technology. Minnesota’s unemployment rate was 3.3% in June. ”Employers added staff and more Minnesotans started looking for work,” said Minnesota Department of Employment and Economic Development Commissioner Matt Varilek in a press statement.

32. Salt Lake City, Utah

Salt Lake City had a jobless rate in June 2025 of 3.7%, increasing from 3.3% in May. Known as the “Crossroads of the West,” the city’s major industries are government, trade, transportation, utilities, and professional and business services. The state’s unemployment rate was 3.2%.

31. Cheyenne, Wyoming

With a jobless rate of 3.7%, Cheyenne’s economy is based on light manufacturing, agriculture, the military and government, tourism, and transportation. Cattle and sheep-raising continue to thrive throughout the region, too. The unemployment rate in Wyoming was 3.3% in June.

30. Des Moines, Iowa

The largest city in Iowa had a June 2025 jobless rate of 3.8%, not much changed from 3.6% in May. Iowa’s seasonally adjusted unemployment rate was 3.7% in June. The state is recognized for its leading position in the agricultural sector, particularly corn, soybean, pork, and egg production.

29. Charleston, South Carolina

The state’s unemployment rate was 4.1%. South Carolina’s unemployment rate marked a decrease from the previous month and a record high in total employment. The June jobless rate of 3.8% for Charleston, population 151,000, is an increase over 3.1% in May.

28. Little Rock, Arkansas

Arkansas’ largest city’s unemployment rate was 3.9% in June, an increase since 2.9% last November. Healthcare is a leading sector in Little Rock, followed by manufacturing and construction. The state had a jobless rate of 3.7% in June, with the largest expansions in employment in the sectors of private education and health services.

27. Virginia Beach, Virginia

Virginia Beach had a jobless rate of 4% in June, inching up from 3.8% in May. Real estate, defense, and tourism are major sectors of the city’s economy. Virginia’s seasonally adjusted unemployment rate in June was 3.5%, a rise of 0.1 percentage points from the previous month and 0.6 percentage points higher than the previous year.

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26. Phoenix, Arizona

Phoenix, population 1.6 million, has seen its unemployment swing back and forth this year. It was 2.3% in April 2024, in June 2025 it stands at 4%. In the last 50 years, Phoenix’s economy has been powered by hospitality and leisure, but the city is also home to a growing number of high-tech, IT, renewable energy, and bioscience companies. Arizona had a 4.1% jobless rate in June.

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25. Charlotte, North Carolina

With a population of 879,000, Charlotte is home to corporations such as MetLife, NASCAR, Wells Fargo, Bank of America, and Lowe’s. Its unemployment rate was 4% in June, compared to 3.6% in May. The state’s jobless rate was 3.7%, unchanged for the last several months..

24. Jackson, Mississippi

With a population of 149,000, Jackson had a jobless rate of 4.1% in June. Jackson also has a lower average cost of living than the average for the U.S. Its major job sectors are advanced manufacturing, health care, information technology, and food processing. The largest increase from May to June of all the states was in Mississippi, a rise of +1.1 percentage points to land at 4%.

23. Charleston, West Virginia

The city with the largest population in West Virginia has 46,700 people and had an unemployment rate of 4.1%, a sizable increase from 3.5% in May. As it is the state capital, Charleston has government jobs as well as those in trade, utilities, education, and medicine. The chemical industry and the manufacturing sector are also significant. The jobless rate in West Virginia was 3.7% in June.

22. Kansas City, Missouri

Missouri had a jobless rate of 4% in June 2025, and Kansas City, its largest city, had a rate of 4.2%. The unemployment rate in Missouri reached a record high of 11.4% in April of 2020 and a record low of 2.1 in May of 2022. Kansas City is the third largest beef-processing city in America and has strong sectors in health care, tech, retail, and finance.

21. Jacksonville, Florida

The largest city in Florida with a population of 954,000, Jacksonville had a jobless rate of 4.2% in June. Florida’s seasonally adjusted unemployment rate as of June, 2025, was 3.7%, which is 0.4% below the U.S. rate of 4.1%. Florida’s unemployment rate held steady in early to mid 2025, with only a slight increase since May 2024.

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20. Wichita, Kansas

The unemployment rate in Wichita, population 395,000, was 4.3% in June. Agriculture, manufacturing, healthcare, and energy drive the Wichita regional economy. There was a seasonally adjusted unemployment rate of 3.8% for the state of Kansas in June. This is unchanged from 3.8% in May and an increase from 3.6% in June 2024.

19. Seattle, Washington

Seattle, population 733,000, showed a 4.3% jobless rate comparing to 4.1% in May. Thousands of tech sector layoffs in the Seattle area have had an impact, but the city continues to support innovation. Washington state’s unemployment rate was 4.5% in June 2025, a figure that remained steady.

18. Louisville, Kentucky

With an unemployment rate of 4.3% in June, Louisville has been holding steady since last autumn. Louisville, with a population of 628,000, is known for shipping and cargo and, more recently, for major manufacturing and health care. Kentucky’s seasonally adjusted unemployment rate for June 2025 was 4.9%, down 0.1 percentage points from May 2025 and down 0.1 percentage points from June 2024.

17. Houston, Texas

The June unemployment rate for Houston, the fourth most populated city in America, was 4.3%, a little bit higher than the state of Texas’ rate of 4.1%, which was the same as the national rate of 4.1%. Despite a minor month-over-month decline in total non-farm jobs, the civilian labor force and the number of employed individuals both reached new record highs for the sixth consecutive month, according to the Texas Workforce Commission.

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16. Albuquerque, New Mexico

The largest city in New Mexico had a jobless rate of 4.4% in June, which is an increase over 3.8% in May. It’s still a long way down from its pandemic high of 10%. Albuquerque and the rest of the state are on a growth curve — the top three industries are oil drilling and gas extraction, scientific research and development, and hospitals. New Mexico’s jobless rate was 4.2%.

15. Denver, Colorado

Colorado’s jobless rate was 4.7% and Denver, its largest city, had a rate of 4.4%. Considered a magnet for work-from-home professionals, Denver is a fast-growing city, but one with housing costs that are 36% higher than the national average. Software and financial services are among its hottest industries. Aerospace, digital communications, and food and beverage sectors are also expanding.

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14. Boston, Massachusetts

At 4.8%, Massachusetts showed comparatively high unemployment in June, but Boston’s unemployment rate was 4.5%. The city is the economic engine and cultural hub of New England, with higher education, health care, and financial services as the major drivers. In a recent survey of cities most attractive to recent college graduates when considering job openings and affordability, Boston came in at number 12, making it the top city in the Northeast.

13. Wilmington, Delaware

Located midway between Washington, D.C. and New York City, Wilmington is Delaware’s largest city and its economic engine. Wilmington had an unemployment rate of 4.6% in June 2025. The state itself was at 4% unemployment.

12. Providence, Rhode Island

With a population of 189,000, Providence had a jobless rate of 4.6% in June, which is a decrease in the jobless rate from 5.2% in July. The state’s unemployment rate was 4.6%. About one-third of the city’s economy is based in trade, transportation, utilities, and educational and health services. The four Fortune 500 companies based in Rhode Island are CVS Heath, United Natural Foods, Textron, and Citizens Financial Group.

11. New York, New York

The Big Apple had a jobless rate of 4.6% in June, which is a decrease from 5.6% in July 2024. This makes it one of the cities on our list with an unemployment rate higher than the national average. However, New York City, with its population topping 8.4 million, also shows gains in employment four years after the start of Covid-19 lockdowns. New York State is estimated to have lost about 2 million jobs in the immediate wake of the pandemic. The state has a jobless rate of 4%, which is also an improvement over a year ago.

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10. Columbus, Ohio

Ohio’s unemployment rate was 4.9% in June 2025, unchanged from May 2025. Columbus, its largest city, clocked in at 4.7%. The number of workers unemployed in Ohio in June was 293,000, down from 294,000 in May 2025. The number of unemployed has increased by 41,000 in the past 12 months from 252,000.

9. Portland, Oregon

In June 2025, Oregon’s unemployment rate increased to 4.9%, the highest in four years, with a loss of 4,300 non-farm jobs. The job market contracted, particularly in sectors like manufacturing, leisure and hospitality, and other services, while education, health, and information sectors saw slight gains. Portland, its largest city, had a jobless rate of 4.7% in June, ticking up from 4.3% in May.

8. Anchorage, Alaska

Anchorage, the city with the largest population in Alaska, had a jobless rate of 4.8% in June, leaping from 4% in May. Alaska often shows a relatively high unemployment rate. Over the last 40 years, the average unemployment rate in the United States has been 6.3%, while in Alaska, it averaged 7.9% since 1976. Therefore, the November rate of 4.7%, while higher than the national average, is low for this state.

7. Chicago, Illinois

The June 2025 unemployment rate of 5% for the city is a decrease from 6% or higher a year ago. The city and its suburbs are home to 35 Fortune 500 companies, with strengths in manufacturing, printing, insurance, transportation, financial trading, and food processing. Illinois’s rate of 4.4% is also a full point lower than a year ago.

6. Philadelphia, Pennsylvania

The unemployment rate for Philadelphia stood at 5.1% in June, compared to 4.4% one year ago. The state of Pennsylvania ranked at 4% in June, just below the national average. Philadelphia’s comparatively low unemployment bolsters the region’s ongoing recovery from the pandemic, which hit Philly hard and led to the loss of more than 100,000 jobs in the first two months of Covid-19 alone.

5. New Orleans, Louisiana

The June 2025 jobless rate of 4.1% in the Big Easy compares to 4.6% one year ago. Unemployment has come a long way since its alarming Covid-19 days of 20% in April 2020 and an April 2021 rate of 9%. As a tourist favorite and a major port on the Gulf Coast, New Orleans is considered an economic and commercial hub, and Louisiana’s 4.5% unemployment rate is just above the national average.

4. Detroit, Michigan

The unemployment rate for Detroit of 5.3% in June 2025 is an improvement over last year, when it hit 6.3% in November. The city has gone through a rough economic ride, starting well before Covid-19: Detroit experienced a 61% decrease in population from 1950 to 2010, lowering its ranking from the 4th most populous city in America to the 27th. Detroit’s jobless rate was an eye-popping 27% in June 2009. The state of Michigan’s jobless rate was 5.3% in June.

3. Newark, New Jersey

In June, the city’s unemployment rate was 5.5% in June, compared to 5% in June 2024. However, this is still a marked decrease from a high of 9.7% in 2010. The city of Newark has a population of over 305,000, and some 25% of residents are living in poverty, according to U.S. Census data. The state’s jobless rate of 4.9% is well above the national average.

2. Las Vegas, Nevada

Las Vegas, the largest city in Nevada, had the second-highest unemployment rate on our list at 5.8% in June 2025, compared to 5.5% in May. Las Vegas shows a lot of turbulence in employment, with a high number of people in the workforce actively looking for jobs. Nevada’s rate was 5.4%, which is actually a slight decrease from the jobless rate over the last six months.

1. Los Angeles, California

The city on our list with the second-highest population in America (at 3.9 million) had an unemployment rate that is the highest of all the cities on this list at 5.9%, compared to 5.9% in June 2024. Both the city and the state of California have struggled since Covid-19. California’s unemployment rate for June 2025 was 5.4%, tied with Nevada for the highest in the United States. Key causes in California include layoffs in the tech sector, the slow recovery of the entertainment and tourism industries after strikes and the pandemic, and a structural issue where high costs make it hard for businesses to hire and for workers to afford living in the state.

Recommended: Small Business Loans in California

Notable Mention: Washington, D.C.

The nation’s capital of Washington, D.C., population 712,000, showed an unemployment rate of 6.1% in December, which is higher than any of the cities on our list. It was 5.7% one year ago.

What Factors Affect Unemployment Rate?

Unemployment is a key measure of the health of the American economy and considerable resources are put into analyzing it. There are many different reasons for unemployment. Apart from the common causes found in any economy — a worker leaving for another job or being fired — there is cyclical unemployment and structural unemployment.

Cyclical unemployment is caused by economic downturns or is related to changes in business conditions. As the name indicates, it can be temporary. After a recession ends, unemployment typically falls.

Structural unemployment is different. It usually means there is a mismatch between the jobs available and the skill levels of the unemployed. Technological changes, a lack of relevant skills, and jobs moving overseas cause structural unemployment.

Structural unemployment can be hard for a society to deal with — it produces permanent disruptions in the economy and obviously a lot of stress among the people who want to work but can’t get a job.

How Does a Low Unemployment Rate Affect the Economy?

The problem of high unemployment seems far away indeed. A reasonable unemployment rate is somewhere between 3% and 5%. The current rate of unemployment means that the economy is producing near its full capacity, maximizing output, and driving wage growth.

However, the labor market can reach a point where each additional job added does not create enough productivity to cover its cost. This causes an output gap, or “slack,” in the labor market. The economy is in danger of becoming “overheated.”

Recommended: Success Secrets of Hispanic- and Latine-Owned Small Businesses

How Does Unemployment Affect Small Businesses?

An increasing demand for labor coupled with a falling unemployment rate can result in wage inflation. With fewer people available to work, employers have to increase wages to attract and hold onto talent. While that’s pleasant for the workers, some businesses can’t afford to pay a lot more. The money that might go to growing the business has to go toward payroll.

Also, when there are more jobs than there are people with the necessary skills and experience, employees may begin feeling overwhelmed and stressed. Small businesses typically have less money to funnel toward training and recruitment. This is a time when small businesses may turn to debt financing, whether it’s seeking a small business loan or looking for investors.

Recommended: 12 Ways to Boost Loan Eligibility for Your Business

The Takeaway

In June 2025, the unemployment rate stood at 4.1% and the number of unemployed people at 7 million. This reflected little change since May 2025. The unemployment rate has remained in a range of 4% to 4.2% since May 2024.

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.

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.

Photo Credit: iStock/glegorly

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.

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.

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.

SOSMB-Q425-020

EBITDAR, which stands for earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs, is an operational efficiency metric. It’s often used by investors, lenders, and business owners to understand how well a company is performing from its primary business operations. It does this by adding back non-operational, non-recurring, and non-cash expenses to net income.

Here’s what you need to know about EBITDAR, including how to calculate it, how it’s used, and what it can tell you about your business.

What Is EBITDAR?

EBITDAR is a variation of EBITDA (earnings before interest, taxes, depreciation, and amortization), an accounting metric that removes the effects of non-operational costs from net income. The only difference? EBITDAR also excludes restructuring and rental costs. (EBITDAR is also similar to adjusted EBITDA, which additionally removes various one-time, irregular, and non-recurring items from EBITDA.)

By removing rental costs, investors can analyze and compare companies that may have similar operations but that choose to access assets differently — some companies rent, while others choose to own. Excluding rental costs allows comparison of profits apples-to-apples.

EBITDAR is also an important measure if you are exploring business loans because it’s often used by lenders to estimate the cash flows that a company has available for principal and interest payments.

Breakdown of EBITDAR

Let’s dig a little deeper into each part of EBITDAR’s meaning and why each variable is important.

Earnings: Earnings are the profit a business makes from its core operations. With EBITDAR, earnings are calculated by subtracting expenses from total revenue. However, unlike net earnings, EBITDAR doesn’t subtract all business expenses. It factors in the cost of goods sold, general and administrative expenses, and other operating expenses, but doesn’t subtract costs that are not directly related to the company’s operations, namely interest paid on debt, amortization and depreciation expenses, income taxes, and the cost of restructuring or renting.

Interest: The interest a company pays on its loans is added back to net income with EBITDAR. The reasoning behind this is that while interest is an expense, it doesn’t reflect how well the company is utilizing its debt. Businesses take on different amounts of debt for different reasons and receive different interest rates based on a variety of factors (for example, credit score, existing debt, and collateral).

Taxes: Different localities have different tax laws. Depending on where a business is located, it may have a dramatically different tax burden than another company with the same amount in sales. To better compare such companies, EBITDAR removes the effect of taxes from net income. This makes it easier to compare the performance of two or more companies operating in different states, cities, or counties.

Depreciation: Depreciation is the process of writing off the cost of a tangible asset over the course of its useful life. With EBITDAR, depreciation is added back to net income because depreciation depends on past investments the business has made and not on the company’s operating performance.

Amortization: Amortization is similar to depreciation, but is used to spread out the cost of intangible assets, such as patents, copyrights, trademarks, non-compete agreements, and software. These assets also have a limited useful life due to expiration. Amortization is added back to net income in EBITDAR because this expense isn’t directly related to a business’s core operations.

Restructuring costs: The restructuring of operations or facilities is an expense that doesn’t occur very often for most companies. Also, many analysts view it as essentially an investment that could potentially help the company generate additional revenue and profits. As a result, any costs associated with restructuring are added back to net income with EBITDAR to give analysts a better understanding of how well the central business model is performing.

Rental costs: Because rent can vary significantly from one location to another and is not within a business’s control, rent costs are added back to net income in EBITDAR. This allows for a better understanding of a company’s operating performance and potential. In addition, rent is a fixed cost, which means the expense is guaranteed to occur regardless of how a company performs.

Recommended: Partnership Business Loans Explained

EBITDAR Formula

The standard formula for EBITDAR is:

EBITDAR = Net income + Interest + Taxes + Depreciation + Amortization + Restructuring or Rent Costs

An alternative formula:

EBITDAR = EBITDA + Restructuring/Rental Costs

where:

EBITDA = Earnings before interest, taxes, depreciation, and amortization

Recommended: Debt-to-EBITDA Ratio Explained

How Does EBITDAR Work?

The premise of EBITDAR is that certain expenses can distract analysts from understanding how well a company is performing financially. It includes only core operating expenses, and the following expenses are added back to net income:

•   Non-cash expenses

•   Non-recurring expenses

•   Non-operational expenses

What EBITDAR Tells You

EBITDAR, rather than EBITDA (earnings before interest, taxes, depreciation, and amortization), is primarily used to analyze the financial health and performance of companies that have gone through restructuring within the past year or have unique rent costs — such as restaurants, casinos, shipping companies, and airlines.

EBITDAR (like EBITDA) is also useful for measuring a company’s operating cash flow and for comparing the profitability of companies with different capital structures and in different tax brackets.

However, companies do have to pay interest, taxes, and rent, and they must also account for depreciation and amortization. As a result, EBITDAR does not paint a complete picture or offer a true measure of how profitable a business is. In some cases, it can be used to hide poor choices. A company could use this metric to avoid showing things like high-interest loans or aging equipment that will be costly to replace.

Recommended: What is EBIDA?

Limitations of EBITDAR as a Metric

Given what EBITDAR means specifically and its particular qualities compared with other metrics, there are also points to consider before you decide to use it. These concerns can include the following:

•   EBITDAR’s focus on operations means that it ignores costs that are unrelated to operations, but a company still has to pay for things like taxes and debt interest. That means that EBITDAR can mislead a company (or an investor) about how much cash the business actually uses.

•   EBITDAR eliminates geographical disparity when it comes to rent costs, but it doesn’t allow for local differences in what a company can charge for its goods or services.

•   EBITDAR seeks to remove costs that aren’t controllable, but restructuring, especially if it happens often, may be at least partially controllable and reflect on the operation of the company — or may be built into the design of the company and be a cost that might be worth considering.

Recommended: Operating Income vs. EBITDA

When to Use EBITDAR

EBITDAR is commonly used when you’re evaluating businesses in industries with significant rent or lease costs, such as hospitality, retail, or airlines. It provides a clearer view of operational performance by excluding expenses like interest, taxes, depreciation, amortization, and rent.

This metric is particularly useful for comparing companies with different lease or property ownership structures, as it standardizes performance across various financial arrangements. Investors and analysts rely on EBITDAR to assess profitability before accounting for non-operational costs, helping them understand the core earnings potential of a company, especially in rent-heavy sectors.

Recommended: What Is a Debt Covenant?

Example of EBITDAR

Here is the income statement for Company X for 2025:

To use Company X’s income statement to arrive at EBITDAR, you would add back interest ($20,000), taxes ($120,000), depreciation ($25,000), amortization ($15,000), and rent ($5,000) to the net income ($455,000) to arrive at an EBITDAR of $640,000 for 2025.

Recommended: EBITDA vs. Revenue

Industries That Commonly Use EBITDAR

As mentioned earlier, EBITDAR can be useful when you’re evaluating a company that has recently restructured, as it excludes those costs so that you can focus on the company’s operations.

Additionally, there are specific industries in which rent costs tend to be high. EBITDAR may be an appropriate metric for these, too, since it excludes those rent costs. These industries can include:

•   Restaurants

•   Hotels

•   Casinos

•   Airlines

•   Retail

Pros and Cons of Using EBITDAR

Recommended: What Is GAAP and How Does It Work?

EBITDAR vs EBITDA

What is EBITDAR vs. EBITDA? Both metrics are used to measure a company’s operational performance. The key difference is that EBITDAR also excludes rent costs, making it particularly useful for industries with high lease expenses, like retail or hospitality.

EBITDA, on the other hand, focuses on core earnings without factoring in non-operational costs like depreciation and interest. While both metrics assess profitability, EBITDAR offers a more specific view in rent-heavy businesses, whereas EBITDA is more widely applicable.

EBITDAR vs EBIT

EBIT (earnings before interest and taxes) and EBITDAR are both metrics used to evaluate a company’s operational performance. EBIT focuses on core earnings by excluding interest and tax expenses, making it a key measure of profitability. EBITDAR takes this a step further by also excluding depreciation, amortization, and rent, providing a clearer view of a company’s operational performance in rent-heavy industries like hospitality or retail.

While EBIT is widely applicable, EBITDAR is particularly useful for comparing businesses with significant lease obligations.

Recommended: What Is the Difference Between EBIT and EBITDA?

EBITDAR vs Net Income

EBITDAR means something different than net income. Though they are both profitability metrics, they measure different aspects of a company’s performance. EBITDAR focuses on operational earnings by excluding key expenses like interest, taxes, rent, depreciation, and amortization, offering insight into core operations.

Net income, on the other hand, is the company’s total profit after all expenses, including non-operational costs like interest, taxes, and depreciation, are deducted. While EBITDAR helps assess operational efficiency, net income reflects overall profitability and is more comprehensive for understanding a company’s financial health.

Recommended: Improving Business Financial Performance

The Takeaway

EBITDAR, or earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs, is a valuation metric of a firm’s profitability without considering the tax rate and the capital structure of the company. It aims to measure a company’s profitability from its core operations.

While similar to EBITDA, EBITDAR goes a step further by removing the effects of rent or restructuring costs. This makes it a better tool for companies that have non-recurring or highly variable rent or restructuring costs, such as casinos and restaurants.

Calculating EBITDAR can be helpful for seeing how your business performs from one quarter or year to the next, as well as how it compares to other businesses in your industry. It may also come into play if you’re applying for a business loan. Banks and other lenders often look at EBITDAR (or EBITDA) when deciding whether your business is a risk they’re willing to take on.

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 difference between EBITDAR and EBITDA?

EBITDAR’s meaning is earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs and EBITDA’s is earnings before interest, taxes, depreciation, and amortization, so the two are very similar metrics. The only difference is that with EBITDAR, restructuring or rental costs are also added back to net income.

Is EBITDAR the same thing as gross profit?

No. Gross profit is calculated by subtracting the cost of goods sold (COGS) from revenue. Unlike EBITDAR (earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs), gross profit does not include non-production costs.

What is the formula for calculating EBITDAR?

To calculate EBITDAR (earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs), you add certain non-recurring, non-operating, and non-cash expenses to net income. The formula is: Net income + Interest + Taxes + Depreciation + Amortization + Restructuring/Rental Costs = EBITDAR.

When is EBITDAR more useful than EBITDA?

EBITDAR may be a more useful metric than EBITDA when you are evaluating companies in industries that involve high rental charges, such as retail or hospitality. That’s because EBITDAR excludes costs for rent (and restructuring) while EBITDA does not.

Why do analysts use EBITDAR in valuation?

Analysts use EBITDAR in valuations of companies to compare the operating profitability of different companies in industries that involve paying a lot of rent, such as hotels, airlines, and casinos. Because rent prices vary by location, EBITDAR, which excludes rent costs, helps focus the comparison on operations.

Photo credit: iStock/Inside Creative House

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.

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 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.

SOSMB-Q425-024

Are you wondering, what does net income mean? Net income is the total profit a business makes in a given reporting period after all of its expenses are paid. It’s often referred to as a company’s “bottom line” because it appears at the bottom line of the income statement.

Read on for a closer look at net income’s definition, how to calculate net income, and the pros and cons of using net income as a performance gauge, plus an example that includes routine business expenses.

What Is Net Income?

Net income (NI) is defined as the total amount of money a business makes during a reporting period after deducting all costs, allowances, and taxes.

Also referred to as “net profit” or “net earnings,” net income is calculated by taking the company’s total sales and subtracting the cost of goods sold (COGS); selling, general, and administrative (SG&A) expenses; operating expenses (OPEX); interest on debt (such as small business financing); taxes; and other expenses. In other words, it is a measurement of profit after a business has covered all of its costs.

Net income appears on the bottom line of a company’s income statement.

Recommended: How To Start a Wedding Business

How to Calculate Net Income

To calculate net income for a business, you start with a company’s total revenue, then subtract the business’s COGS and OPEX to calculate the company’s earnings before tax. You then deduct tax from this amount to find the net income.

There are three formulas for calculating net income:

Option 1:
Total Revenue – COGS – Operating Expenses – Interest – Taxes = Net Income

Option 2:
Total Revenue – Total Expenses = Net Income

Option 3:
Gross Income – Expenses = Net Income

Before you can calculate net income, it’s important to understand the following terms.

•   Revenue: Total amount of money a company brings in from its business operations

•   Cost of goods sold (COGS): All costs associated with the manufacturing of a product or delivery of a service. Examples include:

◦   Factory labor

◦   Freight costs

◦   Production parts

◦   Raw materials

◦   Storage costs

•   Gross income: Revenue minus COGS

•   Operating expenses (OPEX): All costs associated with the day-to-day running of a business not related to COGS. Examples include:

◦   Office supplies

◦   Payroll

◦   Property taxes

◦   Rent

◦   Repairs

◦   Travel

◦   Utilities

Recommended: Minimum Business Income and Taxes

Net Income Calculation Example

Let’s say Company ABC wants to calculate its net income for the first quarter of this year. Here are the numbers Company ABC is working with:

Total revenue: $300,000

COGS: $100,000

OPEX: $15,000

Interest expense: $10,000

Taxes: $60,000

Net income = $300,000 – $100,000 – $15,000 – $10,000 – $60,000

Net income = $115,000

Recommended: What Is Capital Structure?

Net Income vs Gross Income

Net income’s meaning is how much a company makes (or nets) after all expenses are paid. Gross income, on the other hand, is how much money a company makes from its sales after accounting for COGS. The difference between the two is that gross income does not subtract operating expenses, interest, or taxes, whereas net income does.

Net Income vs Cash Flow

What does net income mean vs. cash flow? When you’re comparing the two metrics for a company, the numbers can differ dramatically.

One reason is that there is typically a time gap between documented sales and actual payments. Another factor is that net income subtracts a variety of non-cash expenses, such as depreciation/amortization and stock-based compensation. These are real expenses and reduce a company’s earnings. However, they don’t actually affect its bank account.

Net Income vs Operating Net Income

Operating net income’s meaning is similar to net income, but there are a few key differences.

Unlike net income, operating net income looks at a company’s profits from operations alone without accounting for income and expenses that aren’t related to the company’s core activities. So unlike net income, operating net income does not consider income tax, interest expenses, interest income, or gains or losses from sales of fixed assets.

Sometimes referred to as EBIT (earnings before interest and taxes), the formula for operating net income is:

Operating Net Income = Net Income + Interest Expense + Taxes

Recommended: What Are Income Statements?

What Is Net Income Used for?

Net income is a measure of a company’s profitability. It tells you exactly how much money a company has left over after subtracting all costs from total revenue that can be invested back into the business, distributed to shareholders, or saved for a future use.

Overall, a company’s profit (or lack thereof) determines its future operations. Therefore, net income can determine whether a company:

•   Needs to restructure

•   Is able to pay its current and future liabilities

•   Needs access to alternative capital (such as debt or equity financing)

•   Should consider expanding its operations for further growth

Lenders will also look at a company’s net income when deciding whether to approve or deny a company for a loan, such as a ​​business term loan or equipment financing. While assets and credit scores are important, lenders also want to see whether a company has enough profit to pay upon its debts.

How Businesses and Investors Interpret Net Income

When investors are considering making an investment in a company — or when the companies themselves are analyzing their own performance — net income is a metric they’re likely to consider. If a company’s net income is high, it indicates that the company is profitable and suggests that it is operating well and may be a good candidate for investment. It’s important to look closely at the underlying accounting practices used to arrive at this metric, however, since the number could be subject to manipulation.

Pros and Cons of Using Net Income as a Metric

Pros

One of the biggest benefits of using net income as a performance metric is that it includes all of a company’s expenses. Because of this, it provides a complete picture of how much a company is making vs. how much it is spending.

Another plus is that net income is recognized under the Generally Accepted Accounting Principles (GAAP), which means companies don’t have much flexibility when it comes to calculating and interpreting net income. All publicly traded American companies must report financial results in accordance with GAAP.

In addition, net income is a central line item on all three of a firm’s primary financial statements — the income statement, balance sheet, and cash flow statement.

Recommended: Net Operating Income vs EBITDA

Cons

One drawback of net income is that it can be misleading. A company with a low net income may actually be doing well. If it made a large asset purchase or decided to expand, for example, those types of expenses would temporarily drive down its net income.

Also, because net income includes variable deductions, like interest on business financing and taxes, it’s not particularly useful for comparing a company’s financial performance across an industry. EBITDA (earnings before interest, taxes, depreciation, and amortization) is generally a better way to determine a firm’s operational efficacy or an appropriate profit level.

In addition, net income doesn’t reveal a company’s actual flow, since there may be a delay between making sales and collecting on those sales.

Recommended: EBITDA vs. Net Income

How Net Income Is Used on a Balance Sheet

Once you’ve calculated your company’s net income, you can use that figure to start creating your balance sheet.

The balance sheet reports a business’s assets, liabilities, and equity at a specific point in time. It is divided into two main sections: assets on one side and liabilities and equity on the other side. The two sides must balance out, meaning they should be equal to one another.

Net income affects how much equity a business reports on the balance sheet. It is included in the retained earnings line item of the balance sheet.

The Takeaway

Net income’s definition is the amount of money a business has after all revenue and expenses are accounted for. Unlike gross income, it also takes into account interest, taxes, non-cash expenses, as well as non-recurring revenue and expenses.

Net income is a key metric of profitability used by analysts, investors, and lenders. When it comes to net income vs. net profit, they’re the same thing.

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

How are net income and gross income different?

Net income takes total revenue and subtracts all expenses a business may have, which include the cost of goods sold (COGS), operating expenses (OPEX), taxes, interest on debt, and non-cash expenses. Gross income, on the other hand, takes total revenues and subtracts only COGS.

Are profit and net income the same thing?

When it comes to net income vs. net profit, the two are the same. But net income is just one form of profit. Both profit and net income (also called net profit) refer to the amount of money that a business has left after expenses have been paid. But there are multiple forms of profit, including gross profit and operating profit that are not all the same as net income.

What is the formula for net income?

The formula for net income is:

Net Income = Total Revenue – Total Expenses

Can you find net income without revenue?

No. The formula for net income starts with total revenue. It’s possible, however, for that number to be zero in the event that the company did not make any sales.

What does a negative net income mean?

A negative net income means that a company is spending more money than it is earning in revenue. This is also called a net loss.

Photo credit: iStock/Charnchai

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.

SOSMB-Q425-027

When you’re starting a business, it can be tempting to lease rather than buy any expensive office or warehouse equipment you need in order to conserve cash flow. However, this may or may not be your best option.

Whether it’s better to buy or lease equipment for your business will depend on a number of factors, including your cash reserves, the type of equipment you need, whether that equipment will hold its value over time, and how long you plan to have the item in service.

Learn the pros and cons of leasing vs. buying equipment, tools, computers, and vehicles for your company.

Leasing vs Buying Equipment

Leasing business equipment can help preserve capital and provide flexibility, which can be important when you are starting a small business. However, leasing could end up costing you more in the long run. Let’s break it down and compare.

Pros and Cons of Leasing Equipment

There are a number of benefits of leasing vs. buying equipment. Here are some to consider.

•  Down payments for leasing are usually lower than financing (and sometimes no down payment is required).

•  Leasing terms are often flexible (e.g., you may be able to buy out your lease).

•  Leasing allows you to test out equipment before you commit to it.

•  Maintenance and repair costs are usually free.

•  Monthly lease payments may be tax deductible.

•  A lease can be easier to get than a loan if you don’t have good credit.

•  It’s easier to upgrade after your lease expires.

But there are also a number of downsides to leasing vs. buying equipment. These include:

•  You don’t own the item while leasing it.

•  You’ll likely have a higher overall cost.

•  Depreciation is generally not tax deductible.

•  You’re obligated to stick with the lease even if you no longer need/use the equipment.

•  Termination fees may apply for breaking the lease contract.

Pros and Cons of Purchasing Equipment

There are also advantages and disadvantages to buying equipment. Here’s a look at some of the benefits of purchasing business equipment:

•  You own the equipment.

•  The lifetime cost is usually less than leasing.

•  The equipment counts as an asset on your balance sheet.

•  You can likely claim depreciation on your taxes.

•  You’re free to use equipment however you choose.

•  You can sell the equipment after using it.

Purchasing equipment also has disadvantages. Here are some to consider:

•  You’ll need more cash or credit upfront.

•  You can’t always test out the equipment before purchasing.

•  You are liable for maintenance and replacements.

•  You may get stuck with old or outdated equipment.

•  If you finance equipment, that will increase liabilities on the balance sheet, which could prevent you from borrowing more money.

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What Types of Business Equipment Can You Lease?

Just about any type of equipment that is pivotal to a business’s operation can be leased. This includes but is not limited to:

•  Audio equipment

•  Communication equipment

•  Company vehicles

•  Computer hardware

•  Computer software

•  Construction equipment

•  Digital signage

•  Fitness equipment

•  HVAC systems

•  Lighting systems

•  Manufacturing equipment

•  Medical equipment

•  Office furniture

•  Office equipment

•  Copiers and printers

•  Fax machines/scanners

•  Point-of-sale systems

•  Security systems

•  Call center systems

•  Wireless point-to-point systems

•  Video surveillance

•  Warehouse equipment

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Pros and Cons of Leasing Computers

When it comes to computers, there are benefits of leasing equipment vs. buying, but there are also drawbacks.

The biggest argument in favor of computer leasing for small business owners may be that the hardware is always up to date. A lease may allow you to stay current on the latest technology without having to repurchase every couple of years. This can help small businesses keep up with technological advances.

If your tech needs are modest, however, and you can comfortably use the same gear for longer than five years, it may make more sense to simply buy the equipment you need.

Pros and Cons of Leasing Business Vehicles

Whether to lease vs. purchase a business vehicle is also a debate for many business owners. When making that decision, it can help to consider the following:

Leasing a car can have many advantages for business owners, including a potentially higher write-off on your taxes and lower monthly costs.

In terms of the long-term financial impact, however, leases can be less attractive. Since you don’t build equity and typically have to pay fees that don’t come with a loan (such as an acquisition, or lease initiation, fee), it could be cheaper overall to buy a car and hold onto it for as long as possible. Vehicle refinancing can provide relief down the road.

Buying can also make sense if you plan to do any customization to the car, since altering the car is not typically allowed with a lease.

If you think buying might be the way to go but want to conserve capital, you may want to look into getting a small business auto loan, which is a type of financing tailored specifically for business owners.

Pros and Cons of Leasing Warehouse Equipment

Unlike computers, warehouse equipment tends to age pretty well, so there’s a lot to consider when deciding whether to purchase vs. lease your warehouse equipment.

To make a decision about whether to lease or buy warehouse equipment, you may want to consider how long you are going to need it. If the asset is something you know you’re going to need for the next decade or so, paying cash or financing the purchase could make more sense than leasing.

Pros and Cons of Leasing Office Furniture and Fixtures

Depending on what kind of business you have, office furniture and fixtures may play a larger or smaller role in your needs. As with any business-related equipment, there are both positive and negative aspects to consider if you’re thinking about leasing your office furnishings.

While the pros and cons of leasing office furniture and furnishings can seem similar to those for leasing other equipment, there are a few other concerns to bear in mind. If your business requires a significant number of on-site office workers, being sure you have ergonomic, efficient, up-to-date furnishings can be important. And if your business has a client-facing office, you’ll also want to be sure that the furnishings pass muster. In these cases, leasing may be preferable if your contract makes it easy to upgrade your choices when needed.

What to Consider When Choosing Whether to Lease or Buy

If you’re unsure whether it’s better to lease or buy business equipment, asking yourself the following questions may help you make your decision.

How Much Cash Do You Have?

If you have extra capital sitting around and a strong cash flow, buying may be a better option than leasing. Paying for the item outright avoids having to get financing or enter into a lease agreement.

If, on the other hand, cash is somewhat tight, it could be better to lease the equipment, since this will allow you to keep more of the cash you have free for any unexpected expenses.

What Will the Equipment Be Used For?

Think about how you plan to use the equipment, and whether it will be for the short or long term. Certain assets wear out as you use them, while others can become outdated over time.

If the equipment is likely to be useful and functional for many years, you might be better off purchasing it. If, on the other hand, it’s likely to wear out or become outdated quickly, it could be wiser to lease.

Is Handling Equipment Maintenance Doable?

When you lease equipment, you typically don’t have to worry about maintenance and repairs, since this is usually covered by the leasing company. When you buy equipment, this becomes your responsibility.

When weighing whether to lease or buy, it can be a good idea to research the potential cost of maintaining the equipment and then consider whether or not you would be able to handle those expenses.

Is Your Business Structured for Growth?

Part of the decision about leasing vs. buying comes down to whether you’re primarily focused on business growth or on profits. If your focus is growth, you may want to hold off on this kind of capital expenditure and lease. You can then put this cash toward other assets that can help you grow your business.

If you’re looking to quickly increase profits, purchasing equipment may be the better route. Owning assets can lower your operating costs and increase the overall value of your company.

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How Long Will You Need the Equipment?

Keeping in mind whether the equipment serves a permanent need or is something that fills a more temporary gap is key here. If the equipment is intended to fill an ongoing, unchanging need of your business, it can be worthwhile to invest in it permanently. If you need equipment or space for a specific project, leasing may make more sense than buying, since it doesn’t have to commit you beyond what you need. You may even want to think about whether you should lease vs. rent. When you rent equipment, it’s usually for a period of six months to one year, so it’s an even more short-term option than leasing.

What Are the Tax Implications?

Taxes can be another factor to consider. In many cases, your expenses for either purchasing or leasing equipment may be tax deductible to some degree.

For some equipment purchases, a company may be able to write off the cost over a number of years (a process called depreciation). However, in many cases, for eligible equipment, they may have the option to deduct most of the cost right away, up to that year’s limit. If you take out a loan to pay for the equipment, you may be able to deduct some or all of the interest you pay on toward the loan yearly as a business expense.

When you lease the equipment, you may be able to deduct what you are paying for that tax year, depending on the kind of contract that you have. Many variables affect what your options are, so it’s a good idea to consult with a trusted tax professional about the tax implications of your different decisions.

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Leasing vs Financing Business Equipment

Equipment leasing and equipment financing are two ways to acquire business equipment without paying for it in full at the outset. However, these two options are structured differently.

Equipment leasing is a long-term rental agreement. You pay the leasing company a monthly fee for the duration of the lease agreement, and you have full use of the asset during that time. At the end of the lease, you return the equipment. You may also have the option to renew the lease or purchase the equipment at that time. A monthly lease payment may be lower than a monthly loan payment for the same asset.

Equipment financing or an equipment loan, on the other hand, involves borrowing money to purchase a piece of equipment. The lender offers up to 100% of the purchase price. The business then pays the lender a portion of the purchase price (plus interest) each month until it is fully paid off.

Once the loan is paid in full, the business owns the equipment. While monthly payments may be slightly higher for an equipment loan than for an equipment lease, at the end of the loan term, the business fully owns the equipment.

Here’s a quick look at the differences between an equipment lease vs. an equipment loan.

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5 Ways of Financing Business Equipment Purchases

If you’re thinking about financing your equipment purchase, you have a few different options to consider.

1. Small Business Loans

With a traditional term business loan, you borrow a lump sum and repay it (plus interest) in monthly installments over the term of the loan. You can use the funds from the loan for virtually any business expense, including purchasing equipment. Terms loans are available from banks, credit unions, and online lenders.

When applying for a small business loan, you will likely need to present information about your business, financial statements for you and your business (such as profit and loss statements, tax returns, and bank account statements), and also explain how you plan to use the loan.

2. Equipment Loans

Business equipment loans are specifically for equipment purchases. You can get an equipment loan from a traditional bank, an online lender, or an equipment financing and leasing company.

In some cases, you must make a down payment, typically 10% to 20% of the purchase price. The lender then covers the rest of the cost of the equipment. Each month, you pay the lender a portion of the purchase price (plus interest) until you’ve paid for the item in full.

Because equipment loans are secured with the equipment you are purchasing (which lowers risk for the lender), approval and funding take place relatively quickly. Even startups are often able to qualify for equipment loans. There are also ways to get equipment financing with poor credit, such as offering additional collateral or increasing your down payment.

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3. Business Credit Cards

Another equipment financing option is to use a small business credit card. This may be especially appealing if you are able to get a card with a 0% introductory annual percentage rate. These offers often last as long as 12 to 18 months. If you can pay off the equipment in that time, you’ll get interest-free financing. If you need more time, however, you may get hit with high interest costs. Business cards also tend to have lower credit limits than other types of equipment financing options.

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4. Small Business Grants

Grants for small businesses provide free money for startups and existing businesses and, in some cases, may be used for purchasing business equipment.

Grants can come from federal, state, and local governments; nonprofit and community organizations; and for-profit companies. Many are designed to help business owners who have historically had trouble getting financing from banks and investors, such as women, military veterans, and members of minority groups.

5. Vendor FInancing

In some cases, the company from which your business is purchasing equipment may be able to provide financing itself. This financing may take the form of deferred installment payment or even stock in your company. Typically, the interest rates will be higher than they might be for a conventional bank loan. This kind of funding also means that you will have an ongoing relationship with the company that provided your equipment.

The Takeaway

It can be wise to make lease vs. buy equipment decisions on a case-by-case basis. Leasing can be a good option for business owners who have limited capital or who need equipment that must be upgraded every few years, while purchasing equipment can be a better option for established businesses or for equipment that has a long usable life.

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

Is leasing or buying heavy equipment better?

As you perform your lease vs. buy equipment analysis, you’ll find It depends on what you’re buying, how long it will last/be useful to you, and how much cash you have on hand. Leasing has financial benefits, such as lower payments and not being saddled with an outdated piece of equipment. Buying, on the other hand, may be more affordable in the long run, and you’ll own an asset you can then sell.

For tax purposes, is it better to lease or buy business equipment?

Both have tax benefits. When you purchase equipment, you can typically write off the cost of that equipment over time (known as depreciation). If you finance an equipment purchase, the interest you pay on that loan can usually be deducted as a business expense. And, if you lease, you may be able to deduct your lease payments as a business expense. Other factors can impact your tax options, too, so consulting with a tax professional could be worthwhile.

How is purchasing different from leasing equipment?

There are some benefits of leasing equipment vs. buying it, but also some drawbacks. When you buy equipment, you own it. If you take out a loan to buy it, you may need to pay a certain amount upfront, then make monthly payments that include interest. When you lease equipment, you pay a monthly fee to use it for a certain period of time and then return the equipment (though in some cases, you may have the option to purchase it).

What are the benefits of financing equipment instead of leasing?

When you finance equipment, you are essentially taking out a loan to buy the equipment outright. That means that you have full control of the equipment and can alter it as you choose or even sell it, though you will still have to pay off your loan. If you lease equipment, you are paying to use it, but you don’t own it, usually can’t alter it, and are answerable to your contract. When your contract is up, typically you will stop making payments and the company will take back the equipment.

Can startups lease equipment with bad credit?

A startup with bad credit may be able to lease equipment. Most likely, they will need to provide a higher down payment, offer more collateral, and/or pay a higher interest rate to reduce the risk they present.

Photo credit: iStock/Jacob Wackerhausen

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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.

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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