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If you’re in charge of your business’s finances, you’ll want to have a handle on all the various reports a small business can run to ensure its accounts are on the right track.

One report you may find helpful is a trial balance. Prepared at the end of every reporting period, a trial balance is a worksheet that provides a quick accuracy check of your books. If the trial balance shows equal credits and debits, you can use it to prepare your balance sheet. If it reveals an error, you can fix it before you prepare any official financial statements.

Here’s a closer look at what a trial balance sheet is, why you’d use one, and the difference between a trial balance and a balance sheet.

What Is a Trial Balance Sheet?

A trial balance sheet lists the balances of all general ledger accounts of a company at a certain point in time. The debit balance amounts are entered in one column (called debits), and the credit balance amounts are entered in another column (called credits).

Each column is then tallied at the bottom to prove that the total of the debit balances is equal to the total of the credit balances. The goal of preparing a trial balance is to make sure the entries in a company’s bookkeeping system are mathematically correct.

Generally, a trial balance is generated for internal use in a company and isn’t distributed publicly.

Recommended: How to Read Financial Statements: The Basics

How Trial Balance Sheets Work

The double-entry principle in small business accounting means that for every debit, there’s an equal credit. As a result, every credit entered into a company’s account must have an offsetting debit somewhere else. In addition, the total credits from all ledger accounts must equal the total debits from all accounts.

A trial balance moves all credits and debits into one spreadsheet so that someone can make sure that everything lines up. If it does, the transactions posted in ledger accounts in terms of debit and credit amounts are correct. If it doesn’t, some work may be required to get them aligned.

The key difference between a trial balance and a general ledger is that the ledger shows all of the transactions by account, while the trial balance only shows the account totals rather than each individual transaction.

What Trial Balances Include

Typically, a business initially records its financial transactions in bookkeeping accounts within the general ledger. Because of double-entry accounting, these transactions are recorded as both a credit and a debit to corresponding accounts. For example, if you have any type of small business loan, you credit accounts payable (liability account) and, though it may seem illogical, you also need to debit the cash account (an asset).

General ledger accounts typically include:

•   Assets

•   Equity

•   Income

•   Gains

•   Liabilities

•   Expenses

•   Losses

The trial balance is created by tallying all of the debits and credits from each account, then placing these sums in the debit or credit column for each account.

Something to note: If any adjusting entries were entered in the general ledger, such as a doubtful account allowance, you would also include that in the trial balance. The worksheet should show the figures before the adjustment, the adjusting entry, and the balances after making the adjustment.

Recommended: Net Present Value: How to Calculate NPV

Undetectable Errors in a Trial Balance

A trial balance is designed to provide a quick way to ensure that debits and credits match up. If they don’t, there’s an error somewhere. However, a trial balance may not show the following types of errors:

•   Reversal

•   Omission

•   Original entry

•   Commission

•   Principle

Errors of Reversal

When using double-entry accounting, there’s a credit and a debit of the same amounts. Sometimes, however, a credit is entered incorrectly as a debit or vice versa. A trial balance won’t reveal this type of mistake.

Errors of Omission

If a transaction wasn’t entered into the accounting software, it won’t appear in the trial balance.

Errors of Original Entry

A trial balance won’t tell you if an incorrect amount was entered as both a credit and a debit.

Commission Errors

This happens if the wrong account is debited or credited and is often a mistake caused by oversight.

Principle Errors

This is another mistake that occurs when the wrong account is debited or credited. Rather than being an oversight, however, it may be a mistake in understanding accounting principles and which expenses or revenues should be categorized under which types of accounts.

Recommended: What Is Invoice Financing?

Trial Balance Sheets vs Balance Sheets

While both a trial balance and a balance sheet look at debits and credits and must find equilibrium between the two, there are some differences between these two financial reports.

Recommended: Business Cash Management, Explained

Examples of Trial Balances

A trial balance lists all of the company accounts, along with the balance of credits and debits for each. Once all of the accounts and values are complete, you add up the total in each column. Here is an example:

If the totals match, as they do in the above example, there are no obvious errors in the ledger. If the totals are different, however, it tells you that something is wrong. The next step is to locate the problem in the ledger and correct it before you prepare any other financial statements, such as a balance sheet, income statement, or cash-flow statement.

Recommended: How Does Trade Credit Work?

Preparing a Trial Balance

Most accounting software systems can generate a trial balance at the click of a mouse. The system will also update your trial balance with each entry you make. However, it’s not hard to create a trial balance yourself. Simply follow these steps:

1.    Create a table with three columns titled (from left to right): Account Name, Debits, and Credits. An optional fourth column (placed to the left of Account Name) would be Account Number.

2.    Use the company’s chart of accounts to locate all of the account names, and list them in the Account Name column (if desired, include account numbers in the appropriate column).

3.    Go to each account and add up all of the debits and credits during the accounting period. Subtract the smaller number from the larger number, and place the remainder in the appropriate column. For example, if the cash account had a total of $6,000 in debits and $5,000 in credits, you would place $1,000 in the debits column.

4.    Total each column, and put the totals at the bottom. If they are the same, your trial balance is balanced.

Recommended: How Business Bank Accounts Work

The Takeaway

A trial balance is a worksheet that helps ensure your company’s bookkeeping is accurate, up to date, and balanced. It’s a great report to use internally before creating your balance sheet. Unlike a trial balance, a balance sheet is an official financial statement that will be shared with external parties.

If you apply for a small business loan, for example, the lender will likely examine your balance sheet to see how much cash you have on hand, how much money is tied up in assets, and how much debt you currently have. They want to make sure that your business has enough available cash to manage your loan repayments.

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 goes on to a trial balance sheet?

A trial balance sheet includes all accounts in the general ledger, including assets, equity, revenues, gains, liabilities, expenses, and losses. It lists the description of the account and its final debit or credit balance. These balances are then totaled to arrive at total credits and total debits to make sure they are equal.

How are trial balance sheets and balance sheets different?

A trial balance sheet is an internal document that’s often the first step in creating a balance sheet. It summarizes the closing balances of the accounts in the general ledger. A balance sheet, on the other hand, is shared externally and summarizes the company’s total liabilities, assets, and shareholders’ or owners’ equity.

What is the point of a trial balance?

A trial balance is prepared at the end of every reporting period to ensure that the entries in the company’s general ledger are correct. It can be a helpful tool to verify mathematical accuracy before performing more in-depth financial analysis.

​​Photo credit: iStock/deepblue4you

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.

SOSMB-Q126-035

Borrowing money to build your small business can be a bet on your future success — but the form of credit you use might affect the outcome. The amount of interest you pay can have a real impact on your business’s cash flow and profitability.

Depending on your company’s financial situation, you may get approved for a business line of credit, a small business loan, or a credit card. All involve their own fees, annual percentage rates (APRs), and payment schedules, and each has its pros and cons.

For certain uses, a small business loan might be preferable to a business credit card — or vice versa. Here’s how to evaluate your options.

When a Business Loan May Make More Sense

If your company is planning, say, a large expansion or the purchase of industrial equipment, you’re likely to find that credit cards or business lines of credit won’t cover the estimated costs. Instead, such big-ticket purchases generally seem to call for small business loans.

When you get a small business loan, the lender provides you with a lump sum, charging interest at a fixed or variable APR and specifying a repayment schedule over a given term. Fixed-rate loans are to be repaid in identical installments over the term of the loan, a predictable expense that should allow you to plan with confidence. Variable-rate loans may have lower rates upfront, but they also have the potential to get more expensive if there’s an uptick in the underlying prime rate.

When a Business Credit Card May Be the Better Fit

No matter how carefully you run your business, unexpected situations will crop up now and then. You may have to deal with equipment glitches, cost overruns, sudden mishaps that require out-of-town travel or the services of a specialist, or something else that you hadn’t predicted.

This is when the flexibility and quick cash access provided by a small business credit card may serve you well. You should be able to handle moderate short-term expenses smoothly and promptly, without the delay of waiting for loan approval.

A business credit card’s APR is generally higher than that of a business loan, but with a card, you can usually avoid interest charges by paying the balance in full each month. Also, some business credit cards offer a 0% introductory rate for the first 12 months.

Recommended: Startup Business Loans

Key Differences: Business Loan vs Business Credit Card

Business loans and credit cards operate in different ways because they’re meant to address different financial needs. The amount of money you can access, the way the money is disbursed, and the terms and conditions of repayment are important points of comparison.

How You Receive Funds

After your business loan is approved, the lender typically sends the entire amount to your business checking account in a lump sum. By contrast, a credit card gives you revolving credit, allowing you to tap into the credit as desired until you hit the spending limit.

Repayment Structure

Borrowers repay a business loan over an agreed-upon period of time with a strict monthly schedule of equal payments divided between principal and interest. Paying down a credit card should be much more flexible; each month, you can pay the required minimum, the full balance, or some amount in between.

Interest Rates and Total Cost

Business loan rates, whether fixed or variable, are likely to be lower than the average business credit card APR. Typical rates on new term loans as of late 2025 tended to be between 7% and 8%, with the APR on credit cards that charge interest averaging roughly 22%.

Despite lower rates overall, the total cost of a business loan can still be substantial. Even moderate interest paid on a large principal amount can add up to a hefty sum over many years.

Rates on credit cards (and variable-rate loans) can rise if there’s a jump in the underlying benchmark rate, which is typically the prime rate. However, you do have some control over how much credit card interest you pay. You might use cards with introductory 0% APR periods, for example. And, if you pay card balances in full each month, you can usually avoid interest entirely.

Borrowing Limits

Business loans may offer significantly higher caps than credit cards because they’re designed to be used for major projects like purchasing real estate or equipment. Multimillion-dollar loans are common. Small business credit card limits rarely exceed $50,000, so cards are often better suited for operating expenses.

Also, the amount of principal you borrow via a business loan tends to reflect your business’s financial situation at the time of your application. Once finalized, that amount typically doesn’t change over the life of the loan. By contrast, a credit card’s spending limit can be raised or lowered as your business’s revenues and credit history change.

Speed and Application Requirements

In general, it’s much faster to get a business credit card than a business loan. Cards can be approved within days if the business owner has a high personal credit score. Card applications — especially online — rarely require extensive documentation.

A business loan application, however, does call for substantial paperwork that takes time to review. Processing speed depends on the lender and the type of loan. The wait can range from one week to three months. (If you’re considering applying for a Small Business Association loan, try out SoFi’s SBA loan calculator to get a cost estimate.)

Among the documents lenders generally want to see from a company are:

•   A credit report

•   Income statements

•   Bank statements

•   Budgets

•   Business plans

•   Several years’ tax returns for the business and the owner

Impact on Business Credit

Business loans and business credit cards can both help build a company’s credit score if the payments are reported to credit bureaus. However, for riskier enterprises like microbusinesses or startups, a business credit card often requires a personal guarantee. This means any missed payments by the business can directly affect your personal credit score.

Pros and Cons of Business Loans

Pros

•   Lenders pay the entire approved amount in a lump sum.

•   Fixed-rate loans have predictable payments, making for greater stability.

•   Business loans tend to be much larger because they are designed for major projects.

•   Fixed-rate loans can be a convenient way to consolidate existing debt.

Cons

•   The application process requires extensive paperwork.

•   Funding the loan can take from one week to three months, depending on the lender and the type of loan.

•   The principal is finalized at approval and typically, there’s no way to raise the credit limit.

•   You pay interest on the full principal amount from day one.

Pros and Cons of Business Credit Cards

Pros

•   Business credit cards provide quick access to funds.

•   Payment amounts are flexible, and it’s possible to avoid interest charges by paying the balance in full each month.

•   The spending limit may be raised if your business’s financial situation improves.

•   Getting a card is much faster than getting a loan.

•   Using the card sensibly can help your business build a solid credit history.

•   Some credit cards offer rewards, including cash back and travel points.

Cons

•   A credit card’s APR is generally higher than that of a business loan.

•   Spending limits tend not to exceed $50,000.

•   A personal guarantee may be required, meaning missed payments can ding your personal credit score.

•   Using a credit card to purchase a large asset is often not recommended, given the comparatively high APR.

Recommended: Equipment Financing

How to Choose: Business Loan or Credit Card

When deciding between a business loan and a business credit card, your smartest choice depends on how much money you need, what you plan to use it for, and how large a monthly payment your cash flow can sustain.

If you’re borrowing for something big, you’re likely to do best with a business loan. Expenditures on the order of a plant overhaul, business expansion, or purchase of industrial equipment could be well-suited to loans. The loan’s fixed dollar amount and predictable installment schedule make for a consistent expense that’s steady enough to plan around. (It may be helpful to use SoFi’s business loan calculator ahead of time to find a payment amount your business can handle.)

You should expect a fairly rigorous loan application process that could take weeks or months to complete. If it turns out that the loan amount isn’t sufficient for your needs, your business may have to submit another application to get additional funds.

By contrast, a business credit card might be the way to go if you need moderate, flexible funding over the short term. Examples might include paying for operating expenses or covering unexpected situations. The card’s APR is likely to be higher than that of a small business loan, but your repayment options are more flexible. Keep in mind that limits rarely exceed $50,000, but can be raised. For riskier enterprises, such as startups, a personal guarantee may be required.

As a rule of thumb, short-term financing tools (i.e., credit cards) aren’t the best way to finance costly, long-term investments.

The Takeaway

Business loans may provide a lump sum with interest accruing immediately. They are considered well-suited for large, long-term investments like expansion or equipment purchases. By contrast, credit cards provide revolving funds, and interest is charged only on the amount used. Also, loans have a fixed repayment schedule, while cards have more flexible payments and, if paid in full each month, may help you avoid interest altogether.

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 it better to get a business loan or a business credit card?

That depends. The best form of credit for you will depend on how much money you need, what you plan to use it for, and how large a payment your cash flow can sustain each month. For big, multiyear projects, a business loan (at a comparatively low interest rate) is likely to be better for you. If you foresee needing smaller sums for operating expenses, a credit card gives you more flexibility, including the possibility of paying no interest by paying off the balance in full each month.

What is the biggest difference between a business loan vs credit card?

A business loan and a credit card differ in several important ways, but one of the biggest contrasts has to do with when you access — and pay for — the purchasing power. With a business loan, the principal is delivered all at once, meaning you pay interest charges on the full amount from day one. Credit card funds are also available right away, but you do not pay interest until you use the money; once you do, you pay interest only on the amount you spend.

Do business credit cards have lower interest rates than business loans?

Business credit cards usually have higher interest rates than business loans. In fact, for many business loans, owners find they can lower their interest rate even more by offering collateral.

Can I use a business credit card to build business credit?

Yes. If you want to build or repair your business’s credit, sensible use of a credit card can help. Most small business credit cards report their activity to one or more business credit bureaus. Making all your payments on time and keeping your credit usage low demonstrates financial responsibility. If all goes well, you can likely build business credit in a matter of months.

When should I avoid using a business credit card for business expenses?

Avoid using your card to purchase a large asset for your company, such as a truck or a piece of heavy machinery. Even if the purchase amount doesn’t exceed your credit limit, the card’s comparatively high APR could end up tacking a big premium onto the price.

Photo credit: iStock/Miljan Živković

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.

SOSMB-Q425-100

For some small business owners, securing capital is crucial. However, getting a bank loan can be challenging for startups or ventures that have not yet shown much revenue.

Peer-to-peer (P2P) lending is an option for those looking beyond traditional banks or credit unions. Keep reading to learn more about what P2P lending is, how it works, how to qualify for a loan, and more.

What Is P2P Business Lending?

With P2P lending, a business receives a loan directly from an investor or a group of investors. It eliminates the bank as a middleman, making it easier for borrowers and lenders to connect via online platforms.

For many borrowers, this is a viable financing option, as it may offer faster approval and more competitive interest rates, even for borrowers with less-than-perfect credit. For investors, it can be an opportunity to support businesses they believe in.

As with any form of financing, there are benefits and drawbacks to consider for loan crowdfunding with P2P lending.

Recommended: Learning About Microloans

How Does P2P Business Lending Work?

Peer-to-peer business lending is an alternative financing option that allows borrowers to connect directly with investors through online platforms. This can be helpful for borrowers who may not qualify for a bank loan, who desire a faster loan turnaround, or who are looking for competitive interest rates.

P2P lending for businesses follows this basic process:

1.    The P2P lending company assesses a borrower’s credit via its platform to determine eligibility. Lenders have different requirements regarding credit ratings, with some being stricter than others.

2.    Based on their credit assessment, the lending company assigns applicants a credit rating and interest rate to help lenders and investors choose the risk level they are happy with.

3.    Borrowers make a listing for their loan, often with additional information such as what the loan will be used for, why they’re a smart investment, and other introductory information for lenders and investors.

4.    Lenders can then review your listing and decide whether to make an offer, outlining the amount they can lend and their repayment terms.

5.    When the listing ends, qualified offers from lenders combine to form a single loan, which is then disbursed directly to the borrower for immediate use.

P2P lending platforms typically make money by charging fees to both investors and borrowers. When comparing a bank loan to a P2P loan, borrowers should consider these fees and each lender’s interest rates to ensure they’re getting the right loan for their needs.

Recommended: Unsecured Business Line of Credit for Startups

Typical Peer-to-Peer Rates, Terms, and Amounts

Rates, terms, and loan amounts for P2P business loans can vary greatly depending on the applicant’s risk category, investor criteria, and the P2P platform being used. Generally, the platform will determine the interest rate for borrowers based on their risk factor.

Pros and Cons of P2P Business Loans for Borrowers

P2P business lending offers both borrowers and investors numerous benefits, but it can also involve risks. Understanding some of the pros and cons can help you make an informed decision when looking into peer-to-peer loans for your small business.

Pros:

•   Quick loan-application process and funding times

•   Competitive interest rates for low-risk borrowers

•   Access to funding for those who may not qualify with traditional lenders

•   More personal process as lenders can get to know the borrower’s story based on their profile

•   Access to unsecured loans

Cons:

•   Unlike most banks, P2P platforms may not be backed by the Federal Deposit Insurance Corporation

•   Higher default rates

•   Interest rates can vary greatly, depending on the borrower’s risk category

Common P2P Business Loan Uses

One advantage of P2P business lending is that funds can be used for a variety of purposes, making it a viable option for many small business owners.

Common uses for P2P loans include:

•   Startup funds for new businesses

•   Real estate costs

•   Equipment purchases

•   Inventory purchases

•   Cashflow management

•   Expansion costs

Five Tips on Qualifying for a P2P Loan

Before applying for P2P business lending, check out these valuable tips to help you prepare and qualify:

1. Collect Documents Before Applying

You may need to provide:

•   Tax returns

•   Bank statements

•   A business plan outlining the reason for the loan

•   Identifying documents

•   Documents regarding your income and outstanding debts

2. Check Your Credit Score

Check both your personal and business credit. Knowing your credit score will help you determine which P2P loans you’re eligible for. If your credit rating is low, you can take steps to build it, such as paying off existing balances and making loan payments on time.

3. Check Your Eligibility

Most P2P lenders will have basic requirements for loan applicants, such as proof of citizenship, age, residence, and bank account information.

4. Determine What You Can Afford

Assess your business needs and finances to determine how much money you need to borrow and whether you can pay back the loan responsibly.

5. See About Pre-Qualifying

P2P lenders who offer pre-qualification typically do so via a soft credit pull (which does not affect your credit score) to make sure you meet basic eligibility requirements before applying.

How to Apply for a P2P Business Loan

As with any loan, you’ll need to make sure you are eligible for the P2P loans you want to apply for. After you’ve determined eligibility, take the following steps to apply for business financing:

1. Determine the Loan Amount

Determine the loan amount you’ll ask for by assessing your financial situation to fully understand your needs and how much you can afford. You may also be able to use this amount when seeking pre-qualification or joining a P2P platform.

2. Compare P2P Lending Platforms

Research different loan products offered on P2P lending platforms, taking note of the different loan amounts, interest rates, qualifications, and restrictions. Remember that P2P loans are typically for smaller amounts, which means loan terms may be short.

3. Apply Through Your Chosen P2P Lending Platform

Lending platforms have different approval requirements, but most will likely assess your credit score and history. From there, they may assign you a credit rating and interest rate that lets investors know your risk level as a borrower.

4. Set Up Your P2P Loan Listing

If you’re approved to join the P2P platform, the next step is to create a loan listing or a loan request. Although the setup process may be different on each P2P platform, you’ll usually be asked to provide information regarding your business, how much money you need, and why you need it.

Investors will then have the chance to review your loan request. Depending on your listing, there may be several investors who each lend a small amount or one or two investors who lend a large amount. Once the bidding period ends, the funds are transferred to you.

Alternatives to Peer-to-Peer Business Loans

P2P business lending offers loans for a variety of business purposes, but if you need additional funding, consider these other financing options:

Restaurant Loans

Restaurant loans serve the needs of restaurant owners looking to start, renovate, or expand their small business.

Commercial Real Estate Loans

Commercial real estate loans are granted to business entities (individual or group) that need funding to purchase a property for commercial use.

Franchise Financing

If you’re preparing to open a franchise, a franchising loan can help cover expenses such as franchise fees and the capital needed to start a business. In addition to general lenders, there are franchise companies that specialize in loans specifically for franchise owners.

Equipment Financing

Equipment loans are used to purchase equipment necessary for business operations. Loan terms typically depend on the equipment’s life expectancy, with the equipment acting as collateral for the loan. Interest rates can vary depending on business revenue and risk factor.

Microloans

Microloans are those given for smaller amounts, generally $50,000 or less, to support small businesses without access to other types of funding. They are usually offered by nonprofits, government agencies, or individual lenders for a variety of business expenses and often focus on specific borrower types, such as female entrepreneurs, underserved communities, or veterans.

Working Capital Loan

A working capital loan is used to cover everyday expenses such as payroll, monthly bills, and repairs. Many small businesses rely on working capital loans to manage short-term cash flow fluctuations caused by seasonality, economic changes, or business expansion.

Business Line of Credit

A business line of credit is a short-term loan option that gives borrowers access to a set amount of credit, determined by the lender, for covering unexpected business expenses and investing in growth opportunities. Some lines of credit are revolving, while others end once you pay off the loan amount.

U.S. Small Business Administration (SBA) Loans

SBA loans are short- or long-term business loans ideal for helping a business start or expand. They are partially guaranteed by the SBA, making them less risky for lenders. SBA loans have competitive rates and terms for creditworthy borrowers.

Recommended: How to Get a Small Business Loan in 6 Steps

The Takeaway

P2P business lending may offer borrowers flexibility when choosing the right loan for their needs. Whether you’re just getting started or you’ve been in business for years, P2P business lending might help you get the capital you need promptly.

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

Should small businesses choose P2P lending?

P2P loans can be a good choice for small businesses that need a flexible, accessible financing option. However, if you need a larger sum or a longer repayment period, a P2P loan may not be suitable. Evaluate your needs carefully to decide which loan type is best for you.

Who can apply for a P2P business loan?

Any business can apply for a P2P loan, including those that may not qualify for traditional loan options. However, every lending platform has different requirements, so it’s best to research a variety of platforms to ensure they provide what you need and that you are eligible to apply.

What documents do I need to apply for a P2P business loan?

The documents needed upon application vary by platform, but can include bank statements and financial documents, identifying documents, and the reason for the loan. Always investigate a platform’s requirements to ensure eligibility and that you have everything you need to apply.

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.

SOSMB-Q126-036

Small business loans can be used for a variety of business expenses. But it’s not just up to the business owner. Depending on the lender and type of loan, some business loan lenders may place restrictions on what you can and can’t use the loan proceeds for.

Let’s look at both what a business loan can be used for and what it can’t.

1. Daily Operations

There’s a cost to running a business, and it’s not always the large, one-time expenses like new computers that can break the bank. Paying rent or a mortgage, utilities, and payroll each month can eat up a large portion of your revenues.

Luckily, a small business loan can be used for any of the daily operations of running a business, including inventory, marketing and advertising, maintenance and repairs, payroll, legal fees, office supplies, and more.

2. Equipment

Equipment might be something as large and complex as a crane or as simple as computers for your staff. If you have a company vehicle, that is also considered equipment, and you can use a loan to pay for it.

There are small business equipment loans specifically to help with these expenses. To put what equipment financing is in a nutshell, you use the equipment you’re purchasing as collateral for the loan, which can help you secure lower interest rates.

3. Business Improvements/Enhancements

A business loan can provide the capital you need to improve or enhance your business. These may include additions to your store space or remodeling your existing space, for example. As long as the enhancement or improvement is to your business (you can’t use it to put a new roof on your home), it qualifies as a business expense.

4. Production

If you sell products, you might need to purchase supplies to create your finished product.

For instance, maybe you sell custom clothing. Production expenses would include things such as fabric, thread, packaging, and labels. You could even include the cost of shipping your finished products in this category. A short-term business loan is a great way to cover these expenses until you recoup your investment.

5. Debt Refinancing

If you’ve taken out high-interest loans in the past, you might be paying more than you should in interest and business loan fees. Some business loans allow you to use the funds for debt refinancing.

Debt refinancing is taking out one loan to pay off another that has a higher interest rate. You can also use one loan to consolidate multiple loans so that you have one low interest rate for your entire debt.

6. Inventory

An inventory loan is a small business loan that’s designed for purchasing inventory. This kind of business funding is flexible, since you can use it to pay for different kinds of supplies needed to run your business.

7. Marketing

You will have trouble establishing your business if you can’t attract customers. Marketing will help you get the word out about your business and gain customers.

Branding, sales, and engagement are all enhanced through marketing. Funding a well-planned campaign with the use of a small business loan can make a big difference.

8. Business Expansion

Many loans are intended to help a business grow. This could mean more staff, more inventory, or more products offered. A small business expansion loan could be used to help you purchase a second location or expand your existing one. The building is typically used as collateral to secure your loan, which could get you a better interest rate.

9. Acquisition

If the opportunity arose today to buy a competing company and capture more of the market, could you afford it? Many businesses don’t have the capital on hand to make an acquisition and therefore have to miss out on what might have been a significant opportunity to grow.

A business loan gives you the ability to jump on such good fortune. And since acquiring another business should expand profits, you may be able to pay back the loan easily.

10. Startup Costs

Some of your largest expenses will happen upon launching. From renovating commercial space to stocking up on supplies and products and hiring staff, these expenses can be in the tens of thousands, if not hundreds of thousands. Many new entrepreneurs don’t have that kind of cash lying around, which is where financing is helpful.

Remember, most investments you make in your business will be recouped if and when you hit profitability. Consider which expenses are necessary to start your business off on the right foot and which are just nice-to-haves (for example, maybe you don’t need that $5,000 espresso machine in the break room just yet).

Recommended: Equipment Financing for Bad Credit

What Not to Use Business Loans For

Now you have a grasp on what business loans can be used for, but what about what they can’t be used for? The biggest no-no is typically personal expenses.

What Counts as a Personal Expense?

Below are three scenarios in which a business loan can’t be used.

Using a Business Loan to Purchase a Personal Home

If you need property for your business, that’s allowed. A home for your personal use, however, is not.

Using a Business Loan to Purchase a Personal Vehicle

This is also against the rules. You can form a business entity to purchase a car if it’s strictly for your business, but that is a whole procedure of its own.

Using a Business Loan to Pay Off Personal Debt

Business loans can’t be used to pay off personal debt, such as credit cards, mortgages, student loans, and more.

SBA 504 Restrictions

Small Business Administration (SBA) loans are helpful to many entrepreneurs, but they have many rules. If you take out the 504 loan from the SBA, there are restrictions on what you can and can’t use the proceeds for that are stricter than the rules for many other loans. You cannot use the loan to pay for:

•   Start-up costs

•   Office supplies

•   Business acquisition

•   Working capital

•   Inventory

SBA 7(a) Restrictions

You can, however, use an SBA 7(a) loan for the expenses excluded by the 504.

With 7(a) loans, you cannot use the loan proceeds for an illegal business or to pay delinquent taxes.

Bottom line: Read the fine print before taking out a loan so you can be sure what you want to use it for is approved.

Recommended: Business Loan Down Payment

Reasons to Get a Business Loan

Taking out a small business loan may provide your business with more opportunities. If there’s a way to accelerate your business’s growth, such as a faster computer or acquiring another business, having access to working capital can make that happen.

There are many types of business loans, so even if your business is new and not yet established or you don’t have great credit, there’s likely a financing option for you, whether that’s invoice financing, short-term loans, or a merchant cash advance.

Needs can vary. Perhaps you are best served by a smaller microloan — or by a million-dollar business loan.

The point is, it’s always a good idea to look to the future. Revenues can be like hills and valleys, and if you hit a dip, you want to ensure you have the cash you need to pay your staff and bills.

The Takeaway

A small business loan can be used for almost anything that makes your company stronger. But different loans come with different rules as well as different rates, so you need to shop around to find one that will work for you and your business’s needs.

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

Can you use a business loan to pay off personal debt?

No, for tax and other reasons. Paying off personal debt with a business loan is against the rules if you’re getting a loan through the SBA. Other lenders strongly disapprove to the extent that if a lender finds out about a business owner using a business line of credit for personal use, they may call in the balance of the note.

Can you use a small business loan to purchase a house?

If the real estate is needed for your business, then it could fall within the rules of what is allowable. You can’t buy a house for personal use or as an investment with a small business loan.

What can SBA loans actually be used for?

SBA loans, depending on the type, can be used for many things, such as a startup, business expansion, equipment purchases, working capital, inventory, or commercial real estate purchases.

Photo credit: iStock/panida wijitpanya

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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.

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If you want to start a business, one thought may go through your mind (particularly if you’re funding your business out of pocket): “If I didn’t have to repay my student loans, I’d have more money to put toward my business.”

No doubt about it, student debt can be steep. The current average federal student loan debt per borrower is $39,547, while the total average balance, including private loans, may be as high as $43,333. This leaves many student loan borrowers who feel stymied by their debt wondering how to get their business ideas off the ground.

If student loans gobble up a chunk of your cash every month, refinancing might free up funds to put your fledgling business on the right track. Read on to learn how refinancing student loans can benefit the launch of your new business.

What Is Student Loan Refinancing?

Before diving into the definition of student loan refinancing, let’s discuss the components that make up a student loan: principal, interest rate, and loan term.

•   Principal: The principal is the original amount that you borrowed, which you will repay with interest over time.

•   Interest rate: The interest rate is a percentage of the loan principal that you pay monthly on top of a portion of the principal. This is charged by the lender and is how they earn money while lending you cash.

•   Loan term: The loan term is the amount of time over which you will repay your loan.

Student loan refinancing means replacing your existing student loan with a new one. You can refinance either federal or private loans with funds from a private lender. However, there are two important points to keep in mind if you are considering refinancing. The following factors can help you determine if refinancing is a good fit for you:

•   When you refinance federal loans with a private loan, you forfeit federal protections and benefits, such as deferment and forbearance options.

•   If you refinance for an extended term, you may end up paying more in interest over the life of the loan, even if your monthly payment is lower.

💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

Benefits of Student Loan Refinancing

Some of the key reasons to refinance your student loans include the following:

•   Potentially lowering your interest rate: Reducing your interest rate on your student loans can save you a lot of money over time because you won’t pay as much in interest per monthly payment. Check with various lenders to ensure you’re getting the lowest interest rate possible. You can usually get the best rates by having a strong credit score and a steady source of income. Your credit score is the three-digit number that reflects how well you’ve paid back debts in the past.

•   Reducing your monthly payment: When you work with a lender to extend your loan term, you may reduce your student loan payments per month. For example, you may extend your loan term from 10 years to 15 years, although the options available to you will depend on your lender. However, as mentioned above, note that extending your term often means you’re likely paying more interest over the life of your loan.

•   Obtaining a single monthly payment: Instead of making multiple monthly payments, you can refinance and make one monthly payment. Sticking to one monthly payment can help you stay organized and make your payments on time. You also don’t have to refinance all of your student loans. For example, if you have five student loans, with a low interest rate on one and a high interest rate on the rest, you could refinance just the high-interest ones. Use a student loan refinance calculator to determine how different refinance scenarios might work to your advantage.

•   Choosing between variable- and fixed-rate loans: Refinancing may allow you to choose between a variable- or fixed-rate loan. A fixed rate means your interest rate stays the same throughout the life of the loan, while a variable rate changes, meaning your interest rate could increase or fall over time.

Note that you can also consolidate student loans, which involves combining several federal student loans into one loan through the Direct Loan Program.

💡 Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest Grad PLUS loans, Direct Unsubsidized Loans, and/or private loans.

How Refinancing Student Loans Can Benefit a New Business

So how exactly does refinancing student loans benefit a new business? Here’s a closer look.

1. Lower Your Loan Payments

As mentioned earlier, refinancing can help lower your loan payments by possibly offering a lower interest rate and/or by stretching out your loan term. Lowering your monthly payments can allow you to devote more financial resources toward your new business. You can also use the extra money to pay for household expenses or financial goals, such as the down payment on a house or your retirement nest egg.

2. More Money to Get a Business Loan

First, let’s clarify that using student loans to start a business is a no-go. Student loan money should go toward education costs, living expenses, and housing. When you refinance, you can lower your monthly repayment amount, which can improve your overall financial outlook. Then, if you apply for a business loan, you may have a more creditworthy profile.

A bank or credit union will review your financial information to evaluate your qualifications for a business loan. If you refinance your student loans and lower your monthly payment, that could help improve your debt-to-income ratio (DTI), which is an important indicator when you apply for a loan. Your DTI is your monthly debt payments divided by your gross monthly income. If you lower a component of your monthly debt (say, your student loan), you can lower your overall DTI, which is a positive.

3. Use Business Income to Pay Student Loans

Are you wondering, “Can my business pay my student loans?” The answer to that is “no,” if you want to pay directly through your enterprise. However, if you launch a business and earn income, you can then use your pay to eliminate your debt, whether that’s from a student loan or another source.

Keep in mind that, as a business owner, you could get tax breaks that other taxpayers can’t claim, but you can’t deduct the principal payments you make on student loans.

Recommended: How to Get Out of Student Loan Debt

The Takeaway

Refinancing your student loans can benefit a new business by potentially lowering your monthly payments, freeing up capital to invest in your venture, and improving your debt-to-income ratio to make you a more attractive candidate for a business loan. The process involves replacing your current loan with a new one, allowing you to potentially secure a lower interest rate, adjust the loan term, or consolidate multiple loans into a single payment.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Can you start a business if you have student loans?

Yes, you can start a business if you have student loans, but it may be harder to access business credit and save cash to put toward your business. No matter what, you must keep up with your student loan payments. Not making your payments can hurt your credit score later, which in turn can hurt your application for a small business loan.

How do I start a student loan?

You can apply for federal student loans by filing a Free Application for Federal Student Aid (known as the FAFSA), which helps determine the amount of federal student aid you can receive. You can also apply for private student loans on lender websites.

Can I get an SBA loan with defaulted student loans?

Through the Small Business Administration (SBA), SBA loans require potential borrowers to keep up to date on student loan payments. Unfortunately, you could become ineligible with defaulted student loans.

Photo credit: iStock/ferrantraite

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.