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When people are starting a business, it’s likely that they’ll consider the tax benefits of different company structures. In some cases, founders may create a limited liability company (LLC) specifically for its tax benefits.

Here, we’ll delve into the tax benefits of LLCs for business owners, as well as other pros and cons.

💡 Recommended: How To Incorporate

What Is an LLC?

An LLC is a type of business structure available in the United States. A kind of hybrid, it combines some characteristics of corporations with others from a partnership or sole proprietorship.

According to the IRS, LLC owners are called “members.” Depending on the state in which you set up the LLC, members may be individual people, other LLCs, or corporations. There is no maximum number of members that a company can have, and most states allow LLCs with just one member. Check your state for specifics.

Recommended: Pros and Cons of LLCs

Tax Benefits of Forming an LLC

As mentioned above, company founders may choose an LLC structure especially for its tax benefits. Here, we go into detail about what those benefits are.

Limited Liability

An LLC, as its full name implies, provides limited liability to its members. This means that, if the company fails, the owners’ and investors’ private assets are not at risk and can’t be seized to repay company debts.

Flexible Membership

As noted previously, an LLC can have one member or many, and those members can be individuals or companies. This business structure gives owners significant freedom when starting their company.

Management Structure Options

LLCs can be managed by a member (owner) or by a hired manager. A member-managed LLC may be chosen if the company has limited resources or few members. An owner may select a member with management experience to oversee the business, or they may want all members to actively participate in the company’s operations.

A hired manager is someone who is not a member but has the appropriate experience and skill sets to run the LLC. An accountant or financial advisor can go into detail about the tax benefits of member-manager vs. hired manager approaches. (Here’s what to know if you’re filing taxes for the first time.)

Pass-Through Taxation

LLC member-owners have some control over how their business will be taxed. If there is only one member, it will automatically be treated like a sole proprietorship, and if there is more than one, like a partnership. In those cases, business income will pass through the business to the member-owners, and they’ll only get taxed once. Members will report income and losses on their personal tax returns, while the LLC itself is not taxed. (Learn how business income differs from other types of income.)

Because income and losses are reported as part of members’ personal financial pictures at tax time, taxes will be owed at each member’s personal tax rate.

Alternatively, the LLC owners may decide to be taxed as a corporation. If they choose an S-Corp structure, pass-through taxation still applies.

Recommended: How Long Does It Take Taxes to Come Back?

Heightened Credibility

When someone opens an LLC, it shows that they’ve gone beyond just hanging a shingle. Instead, they went through the decision making and paper filing processes involved in setting up the LLC.

Limited Compliance Requirements

According to the U.S. Small Business Association (SBA), another form of business structure — the corporation — has the strictest requirements. In contrast, LLCs have some but fewer.

In general, an LLC should maintain a current operating agreement, hold annual meetings, ensure that they have appropriate shares recorded for each member, and keep records if membership interests transfer. (Find out if you can use a personal checking account for your business.)

Recommended: How To Form an LLC in Georgia

Disadvantages of Creating an LLC

So far, the LLC sounds like the ideal low-maintenance company structure. However, there are several caveats to be aware of.

Cost

Forming an LLC can cost a few hundred dollars, which may be more than what a small business wants to spend. (An online budget planner can help business owners set budgets and track spending.) The company will also need to file annual reports along with annual fees and taxes. These taxes and fees may cost a miniscule amount or several hundred dollars annually.

No Stock Ownership

When a corporation wants to raise funds, they sometimes issue shares of stock. An LLC cannot issue stock.

Recommended: How to Start Investing in Stocks

Transferable Ownership

Some states may require that an LLC be dissolved if there is a change in ownership. If the people starting the business expect to take in outside investors over the years, a corporation might be a better choice.

How to Form an LLC

Once you’ve decided to start an LLC, you’ll want to choose and reserve a company name that doesn’t conflict with currently existing ones. Typically, an LLC must have what’s called a registered agent — someone who will handle official documents for the company.

Then, you’ll need to document the nuts and bolts of the operating agreement that describes the structure of the company. This can include who owns what portion of the company and who gets to vote on which issues. You’ll detail how profits and losses will be addressed, how the company will be managed, when meetings will be held, and how to handle the business if a member leaves the company or dies. This document should also describe what should happen if the company goes out of business.

How LLCs Are Different From Other Business Entities

An LLC is formed to be a legal entity that’s separate from its owners and is responsible for its business debts. Here’s how an LLC differs from other company structures.

LLC vs Sole Proprietorship

Profits in an LLC are only taxed once because of the pass-through taxation structure. This is reported on and addressed through owners’ personal tax returns by filing a Form 1040, Schedule C, listing profits or losses. As an LLC owner, you may be taxed as a sole proprietor, a partnership, or a corporation.

A sole proprietorship is owned by one person and is the simplest structure available. A sole proprietorship also involves pass-through taxation with the business owner paying taxes on the business’s profit. There isn’t as much flexibility in filing as a sole proprietor as there is with an LLC.

LLC vs S-Corp

An LLC is a business structure. An S-corp, meanwhile, is a tax classification. Many businesses decide to have their LLC taxed as an S-corp. The nuances can be complicated, so it makes sense to consult your personal accountant or other professional before making this decision.

LLC for Rental Property

If you create an LLC to buy rental homes, you’ll have the benefits of no personal liability and pass-through taxation. There can be a flexible ownership structure, personal anonymity, and fairly simple reporting.

However, it may be harder to finance rental property as an LLC. There can also be significant fees to get the LLC up and running. LLCs for rentals can be more complex at tax time, and property transfers can also be more complicated.

Recommended: What Is a Professional Limited Liability Company?

How to Choose the Right Business Type

Consider how simple or complex your proposed business will become. Do you plan to basically run the business yourself, or will it ideally turn into something bigger? What kind of legal protections will you need based on your business plans?

Entrepreneurs should also weigh the tax benefits of LLCs and sole proprietorships. The two structures, along with partnerships and S-corps, feature pass-through benefits, meaning that profits are taxed only when they’re paid to the company owner(s). A C-corp, meanwhile, is taxed as a company as well as when shareholder payouts are made.

Consult your accountant or financial advisor for specifics on your situation.

No matter what business structure you choose, it’s important to keep track of your finances. SoFi’s spending app provides you with an easy-to-use online budget planner so you can stay on top of your finances.

The Takeaway

Limited liability companies (LLCs) come with plenty of advantages and a few disadvantages. As its name implies, the owners’ and investors’ private assets are not at risk if the company should struggle financially. Owners of the LLC are referred to as members. Membership may range from one individual to multiple individuals to other companies.

A major benefit is pass-through taxation, where income passes through the company to its members, who report it on their personal taxes. One disadvantage of LLCs for very small businesses is the startup cost and annual fees, which can run to several hundred dollars a year. Consult a professional to find out whether an LLC is the right fit for your business plan.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

What are the tax benefits of having an LLC?

With an LLC, you’ll have flexibility in deciding the structure under which your company will be taxed. There are more tax benefits of an LLC, including pass-through taxation, which means you’ll only get taxed once at your individual tax rate.

What are the benefits of a limited liability company?

They can include limited liability, meaning that owners aren’t personally responsible for company debts; flexible structures; pass-through taxation; more credibility; and fewer compliance requirements compared to a corporation.

What is the best tax option for an LLC?

Each situation is unique, so consult your accountant or financial advisor for specifics.

Photo credit: iStock/hh5800

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

SORL-Q424-006

If you own a rental, you might be considering buying more properties. But if you don’t have a lot of cash to make that purchase, should you pursue business financing?

Getting a small business loan to buy rental property can help you grow your business while conserving the cash available in your bank account for renovations, repairs, and business operations.

There are disadvantages to be aware of too.

Lender Options for Rental Property Business Loans

If you’re looking for a loan for a new rental property, where do you begin? First, familiarize yourself with the most common small business loan terms and requirements. There are many lenders to choose from, each offering their own financial products.

Recommended: Small Business Loans for Business Expansion

Loan Types for a Rental Property Business

There are several types of small business loans you may want to consider as you begin shopping for financing for rental property.

Term Business Loan

Banks and real estate lenders offer a variety of options. Some loans are specifically for rental properties, while others are aimed at fix-and-flip investors.

These financing options can include:

•   Short-term business loans to cover day-to-day expenses

•   Long-term business loans for building renovations and real estate purchases

•   Bridge loans to address immediate business needs

Business Line of Credit

A home equity line of credit (HELOC) may be useful if you need capital for renovations now and more down the road. With a HELOC, you can take out cash up to a maximum draw. Once you repay it, the money is available to borrow again.

Alternative Loans

If you don’t qualify for the above options, you may be glad to know that there are alternatives that can get you access to cash.

Alternative loans can include the following lending products:

•   Merchant cash advances

•   Equipment financing

•   Small business auto loans

Wondering why a Small Business Administration (SBA) loan for rental property isn’t on this list? The SBA specifically prohibits the use of SBA loans for investment properties.

Recommended: Business Consolidation Loans

Interest Rates for Rental Property Loans

So what’s the going interest rate on a small business loan for a rental property? They can vary widely, depending on the lender and your qualifications.

It’s a good idea to shop around with multiple lenders and compare rates to ensure you get the best deal.

The Differences Between Rental Property Loans and Conventional Home Loans

You might be wondering how a business loan to buy rental property compares to a personal home mortgage.

How High Interest Rates Are

Lenders specializing in business loans for rental property may be happy to lend to investors like you, but they may also charge you a higher interest rate than they would for a home mortgage.

In fact, interest rates for commercial real estate loans can be one-half to three-quarters of a percentage point higher than your home mortgage. That may not sound like much, but over time, it can really add up.

The reason for the higher rates is that lending to a real estate investor, who may have multiple mortgages at once, is generally riskier than lending to someone who wants to live in their home and has only one mortgage.

Recommended: Peer-to-Peer Business Loans

How Hard They Are to Obtain

For that same reason — the inherent risk that real estate investment involves — rental property lenders may be pickier with offering commercial real estate loans than with personal mortgages. During the application process, you may be asked to provide your credit report, personal income verification, bank statements, and tax returns to show lenders that you’re financially capable of paying the mortgage each month.

You may also be required to offer a larger down payment on the property or to demonstrate greater cash reserves and income to show that you can afford to pay the loan.

Finally, lenders may not be as lenient if you fall behind on payments as they might if you lived in the home carrying a loan.

Recommended: First-Time Business Loans

Requirements and Eligibility for Rental Property Loans

There are often more stringent requirements to qualify for a small business loan for rental property. During the application process, you will typically be asked for business entity documents (if your real estate investment company is an LLC or corporation), a voided check, and a scope of work.

Credit Scores

Just as with any business loan (or personal loan, for that matter), your credit score will help determine your eligibility for a rental property loan, as well as what rate you pay. The higher your score, the lower the rate you may be offered.

Some lenders require scores of 620 or higher. Lenders may look at your business score, your personal score, or both. Borrowers who meet a lender’s minimum credit score for business loans may get approved for financing.

Debt-to-Income Ratio

Another important factor in applying for a rental property loan is your debt-to-income ratio, also known as your DTI. This is the ratio of how much debt you have against your total income. The higher the ratio, the more risk you present to lenders. Most want to see a DTI ratio of 36% or lower.

Your Down Payment

Most lenders will require you to make a business loan down payment with your purchase. Some lenders will let you borrow with little to no money down (expect those to charge higher interest rates).

You may be required to put down a minimum of 20% of the purchase price.

Recommended: Typical Small Business Loan Fees

The Takeaway

Business loans for rental property can be helpful when purchasing your next apartment building investment, but they’re not without drawbacks.

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 get a small business loan for a rental property?

Yes, there are specific loans designed for real estate investors with rental properties. However, they tend to have higher rates of interest.

What type of loan do I need for a rental property?

There are several different loans available to you for rental property, from standard term loans to lines of credit. After reviewing these options, you can choose one that’s right for you.

Can a limited liability company (LLC) get a mortgage?

Yes, a real estate investment company operating as an LLC (or a corporation) may be eligible for a commercial property mortgage. Contact lenders for further details.

SOSMB-Q226-014

There are 696,710 small businesses in Maryland, accounting for 99.6% of all businesses in the state. Collectively, Maryland’s small business owners employ over 1.2 million individuals, which represents nearly half of the state’s private workforce.

A large portion of Maryland’s small businesses are concentrated in the professional, scientific, and technical industries, thanks to the proximity of these industries to government agencies that offer grants and contract money for scientific research and studies. However, there are Maryland grants available for small and midsize businesses in a wide range of industries.

Here’s a look at five grants you may want to check out, plus other ways to find business funding.

Grants for Small Businesses in Maryland

If you’re looking for a small business grant to grow or start your business in Maryland, here are some options to consider.

Partnership for Workforce Quality (PWQ) Grants

•   Program description: The PWQ program provides eligible small and midsized manufacturing and technology companies with matching grants to train employees in new technologies and production processes.

•   Incentive: Receive matching grants of between $5,000 and $200,000 to reimburse up to 50% of the costs of qualified projects.

•   General requirements:

◦   Be a Maryland-based employer

◦   Have at least 10 full-time employees

◦   Be current on your state tax obligations and not in default with any Maryland Department of Commerce program

◦   Priority will be given to manufacturing and technology companies

•   How to apply: Contact your Maryland Department of Commerce regional representative to apply for PWQ funding.

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Build Our Future Grant Pilot Program

•   Program description: The Build Our Future Grant Pilot Program provides Maryland-based private companies with grants for infrastructure projects intended to support innovation in an eligible technology sector.

•   Incentive: Receive up to $2 million in a fiscal year and use the funds for an eligible infrastructure project in select industries, including advanced manufacturing, artificial intelligence, cybersecurity, and life sciences.

•   General requirements:

◦   Be a Maryland-based company in good standing with the state

◦   Propose an infrastructure project that advances innovation and growth in an eligible technology sector

◦   For a grant award up to $1 million, you must provide matching funds that are at least 200% of the grant amount

◦   For a grant award exceeding $1 million and up to $2 million, you must provide matching funds that are at least 400% of the grant amount

•   How to apply: You can submit your application on the Build Our Future Grant Pilot Program website. However, the Phase 1 deadline for 2026 applications has now passed.

Recommended: How Do You Open a Business Checking Account?

ExportMD Program

•   Program description: The ExportMD Program can reimburse some of your international marketing expenses if you own and operate an eligible Maryland small or midsize business.

•   Incentive: Receive up to $5,000 in reimbursement for eligible business expenses, including the cost of travel related to international marketing, website development, and registration costs for virtual trade shows.

•   General requirements:

◦   Be an established Maryland business in operation for at least 12 months

◦   Be in good standing with the Maryland Department of Assessments and Taxation

◦   Meet the federal definition of small business for your industry

◦   Be planning an international business initiative to commence and conclude within six months of the application deadline

◦   Recipients of the ExportMD grant in the last yea​r are not eligible

•   How to apply: Contact the Maryland Department of Commerce if you’re interested in the ExportMD Program.

Maryland Agricultural and Resource-Based Industry Development Corporation (MARBIDCO) Grants

•   Program description: MARBIDCO offers several grant incentive programs for farm, forestry, and seafood businesses, including the Maryland Urban Agriculture Commercial Lending Incentive Grant, which allows eligible farmers to seek financing to support the upfront costs of their businesses, such as real estate, farm equipment, and agricultural supplies.

•   Incentive: Eligible farmers can receive up to $15,000 for equipment and working capital and $35,000 for real property (but no more than 25% of the project’s total cost and no more than 33% of the approved commercial loan).

•   General requirements:

◦   Be a beginning urban farmer with 10 or fewer years of experience in commercial farming

◦   Be a commercial food/fiber growing operation in an incorporated municipality recognized by the State of Maryland

•   How to apply: Contact MARBIDCO to find out about and apply for any available grant programs.

Recommended: Comparing Personal Loans vs Business Loans

Maryland Manufacturing 4.0 Grant Program

•   Program description: ​The Maryland Manufacturing 4.0 grant program provides matching funds to small and midsized Maryland manufacturers to adopt new technologies and digital business practices.

•   Incentive: Eligible manufacturers can receive between $25,000 and $500,000 in matching grants for the purpose of implementing a proposed modernization project.

•   General requirements:

◦   Be an existing business in good standing with the state of Maryland

◦   Have a company that has operated for at least two years

◦   Be a manufacturing sector employer under the North American Industry Classification System (NAICS)

◦   Have between three and 250 total full-time employees

◦   Be in good standing with the federal Occupational Safety and Health Administration and Maryland Occupational Safety and Health regulations

◦   Demonstrate an ability to implement a proposed modernization project

◦   Demonstrate an ability to meet the matching funds requirement

•   How to apply: Download the Maryland Manufacturing 4.0 Grant application on the state Department of Commerce website and apply during an open grant period.

Who Provides Small Business Grants in Maryland?

State and local government agencies, including the Maryland Department of Commerce, offer a variety of small business grants in the Old Line State.

Recommended: Can a Personal Loan Be Used to Start a Business?

Do You Have to Pay Back a Small Business Grant?

Generally, no. Unlike small business loans, you usually do not need to repay the funds you receive through a small business grant. That said, small business grants typically come with terms and conditions, and you may be responsible for paying back the grant if you violate those terms.

You typically have to sign a funding agreement to accept a small business grant. Using the grant for an illegitimate purpose may violate the agreement and require business owners to pay back the grant.

In addition, small business grants may require you to spend the money by a certain date. You may also have to provide proof of payment and a written statement detailing how you’ve spent the grant.

Who Is Eligible for Small Business Grants in Maryland?

Local business owners or operators of an enterprise with fewer than 500 employees may be eligible for small business grants in Maryland.

The SBA’s Office of Advocacy generally defines a small business as an independent business having fewer than 500 employees. A small business with just a few employees — even self-employed individuals — may be eligible for small business grants.

What Industries Does Maryland Support With Grants?

Maryland offers grants supporting a variety of business sectors, including:

•   Advanced manufacturing

•   Aerospace

•   Agriculture

•   Artificial intelligence

•   Biotechnology

•   Blue technology

•   Cybersecurity

•   Defense

•   Energy and sustainability

•   Life sciences

•   Manufacturing

•   Quantum

•   Sensors and robotics

Maryland Resources for SMB Owners Looking for Funding

Here are some resources for small- and medium-sized businesses looking for funding in the Old Line State.

Maryland Small Business Development Center (SBDC)

The Maryland SBDC is a statewide program that can provide Maryland’s small business owners with the following services at no cost:

•   Access to customized research reports

•   Individualized business consulting

•   Online and in-person training events for Maryland small business owners

SBA District Office in Maryland

The SBA is a federal agency that provides resources and support to small business owners. The SBA has two district offices in Maryland:

•   SBA Baltimore District Office. This SBA district serves the city of Baltimore and all Maryland counties, except for Montgomery and Prince George’s counties.

•   SBA Washington Metropolitan Area District Office. This SBA district serves the District of Columbia, two counties in Maryland (Montgomery and Prince George’s), and three counties in Northern Virginia (Arlington, Fairfax, and Loudoun, plus the cities of Alexandria, Fairfax, and Falls Church).

Alternative Funding Sources for Small Businesses in Maryland

If you don’t qualify for small business grants in Maryland, you’re not necessarily out of funding options. Here are some other ways you may be able to get the capital you need to launch or grow your business in Maryland.

Maryland Microloan Lenders

Community-based nonprofits may offer microloans of $500-$50,000 to underserved small business owners in Maryland, such as women and minorities. Interest rates tend to be low (even zero in some cases), and the qualification criteria are often less stringent compared with other business loans.

Microloans can provide an infusion of cash to get a startup off the ground or grow an existing business. However, you may need to provide a microlender with a personal guarantee and collateral to secure funding.

Maryland SBA Loans

The SBA offers a range of loan programs to help small businesses secure funding. These loans are partially guaranteed by the SBA, which reduces risk for lenders and increases accessibility for businesses. The 7(a) loan program is one of the most popular and provides funds for working capital, equipment purchases, and debt refinancing. SBA loans typically offer longer repayment terms and lower interest rates compared to conventional business loans.

Maryland SMB Term Loans from Private Lenders

Many banks, credit unions, and online lenders in Maryland offer term loans to small businesses. Online alternative lenders often have more flexible eligibility criteria than traditional banks, making them a good option for businesses that are just starting out. However, interest rates tend to be higher.

With term loans, you receive a lump sum of money up front then repay it over a set period of time, often with a fixed interest rate. You can use the funds for various purposes, including business expansion, equipment purchases, and working capital.

Recommended: What to Know About Short-Term Business Loans

Business Lines of Credit

A business line of credit provides businesses with flexible access to funds up to a predetermined limit. Unlike traditional loans, a line of credit allows businesses to borrow only what they need when they need it. This flexibility can be helpful for managing cash flow, covering unexpected expenses, and taking advantage of growth opportunities.

Business lines of credit typically have variable interest rates and can be secured or unsecured, depending on the lender and the borrower’s creditworthiness.

Equipment Financing

Equipment financing is specifically designed to help businesses acquire necessary equipment. The equipment itself serves as collateral for the loan, making approval easier. This type of financing can be used to purchase machinery, vehicles, technology, and other essential equipment. Terms for equipment financing vary based on the lender and the type of equipment but generally feature fixed interest rates and repayment terms of 3-10 years.

Recommended: Small Business Loans in Maryland

The Takeaway

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 do you get a small business grant in Maryland?

To find a small business grant in Maryland, you might start by contacting the state’s Economic Development Administration and your local Small Business Development Center. You typically need to submit a grant application as a qualified small business owner to be considered for a small business grant in Maryland.

How hard is it to get a business loan in Maryland?

You typically need to have been in business for at least two years and have strong financials to qualify for a business loan from a bank. Online alternative lenders tend to have more flexible qualification criteria for small business loans but generally charge higher interest rates.

What is the easiest SBA loan to get approved for?

There’s no guarantee you’ll get approved for any SBA loan, but SBA microloans may be one of the easier ones to get if you’re a new business owner. Startups may be eligible for SBA microloans of up to $50,000. If you’re looking for a streamlined application process, you may want to look into an SBA Express loan.

Photo credit: iStock/RgStudio

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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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SOSMB-Q226-015

While minority businesses have often faced barriers in accessing capital, there are now a growing number of small business loan programs designed specifically for minority entrepreneurs. Many of these funding opportunities also offer additional resources, including business training, mentors, and workshops.

Minority-owned businesses are those with 51% or more ownership by people who are Black, Hispanic, Native American, Asian Inidan American, Asian Pacific American, or who belong to another racial or ethnic group. In many cases, women-owned small businesses can also qualify.

Read on to learn about minority and Hispanic business loans, grants, and other resources that may help open doors for your small business.

What Are Minority Small Business Loans?

Any business owner, regardless of ethnic or racial background, can apply for a small business loan. However, there are also small business loans designed to provide more access to financing for businesses in underserved markets. These minority small business loans often offer competitive rates, yet have more flexible qualification requirements than traditional business loans. These lenders are looking to support businesses like yours and help put them on an even playing with other small businesses.

Who Is Considered a Minority Business Owner?

Generally, to be considered a minority business owner, a person must own a for-profit business that is at least 51% owned by people who are Black, Hispanic, Native American, Asian Pacific American, Asian Indian American or part of another racial or ethnic group.

Women minority business owners may additionally qualify for small business loans for women.

Similarly, veterans who belong to a minority group may also qualify for small business loans for veterans and minority business loans.

How to Qualify for Small Business Loans for Minorities

Specific qualifications for individual loans will vary from one lender to another, but the primary criteria is that a majority (at least 51%) of the business must be owned and run on a daily basis by people belonging to a minority.

The U.S. Small Business Administration (SBA) recognizes these groups as minorities:

•   African Americans

•   Asian Pacific Americans

•   Asian Indian Americans

•   Hispanic Americans

•   Native Americans

For many loans, women are also considered minorities.

Recommended: Micoloans for Women-Owned Small Businesses

Finding Minority Business Funding Options

As you’ll see below, there are many options when it comes to minority business loans. Often the biggest challenge is knowing which to apply for.

Before applying for a business loan, you’ll want to look closely at the qualifications, including what type of business owner the loan is targeted to; the time in business, annual revenue, and credit scores required; and if there are any restrictions on how the funds can be used.

Once you find loan options that may be a good fit for your business, it can be a good idea to compare what different lenders offer before making your decision. Then you can apply for the small business funding that works best for your business.

Minority Business Loan Options

Below are some minority loan options, including both startup loans and possibilities for more established businesses.

Minority SBA Loans

The U.S. Small Business Administration (SBA) offers several loan programs, some of which are designed specifically for underserved communities.

8(a) Business Development Program

While it’s not a loan program, the SBA’s 8(a) Business Development program aims to help disadvantaged small businesses (many of which are owned by minorities) by awarding at least 5% of all federal contracting dollars to these businesses. Disadvantaged business owners who participate in the SBA’s 8(a) Business Development program also have a better chance of qualifying for SBA loans.

To qualify for the 8(a) program, your business must be at least 51% owned and controlled by U.S. citizens who are economically and socially disadvantaged, and have been in operation for two years or more. In addition to securing federal contracts, approved businesses can also get business assistance, mentorships, and free training.

Community Advantage Loans

Another SBA small business loan option is the SBA’s Community Advantage Loan program, which is specifically designed to meet the needs of business owners in underserved communities. To qualify for an SBA community advantage loan, which provides up to $350,000 in capital, business owners need to have good credit and a strong business plan. However, the business’s balance sheet and amount of collateral will not affect eligibility.

To find a Community Advantage Loan in your area, you can ask your current financial institution for a list of local lenders that participate in the program or consult this SBA chart.

Microloans

If you’re looking for a smaller loan to either start or expand a business, you may want to check out the SBA’s microloan program. The program is administered by an intermediary network of nonprofit community-based lenders, rather than traditional banks.

Through these lenders, the SBA aims to reach lower-income communities and minority-owned businesses that are often overlooked by traditional lenders. These microloan options come with low interest rates, six-year terms, and up to $50,000 in capital.

Accion

Accion’s mission is to “build a financially inclusive world with access to economic opportunity for all.” The organization does this through free events, training, and workshops, as well as by offering minority business loans.

Its Accion Opportunity Fund provides working capital for minority businesses of $5,000 to $250,000, and is quick and easy to apply for online. To qualify, your business must have been open for at least two years, and you must have at least $100,000 in annual revenues.

Accion also offers online resources and networking opportunities (in Spanish and English) to help minority business owners learn and scale their companies.

US Bank’s Business Diversity Lending Program

U.S. Bank is a nationwide bank with an eye on supporting diversity and minority businesses. Its Diversity Lending Program supports woman-, minority-, and veteran-owned businesses by lending qualified applicants up to $250,000.

Specific requirements vary depending on which kind of financing a business owner is accessing.

The Business Consortium Fund

The Business Consortium Fund (BCF) says its mission is “to expand capital access for small businesses across the United States to advance a more inclusive and equitable business environment.” It focuses on minority business enterprises operating in the supply chains of the nation’s largest corporations and government organizations.

A loan officer can guide you through the qualification process and loan options.

Indian Loan Guarantee Program

Run by the U.S. Department of the Interior, the Indian Loan Guarantee and Insurance Program (ILGP) is designed to help American Indian and Alaska Native businesses overcome barriers to conventional financing at reasonable rates.

To qualify, you must be an individual who is an enrolled member of a federally recognized American Indian or Alaska Native tribe or group and own at least 51% of your business. You must also have at least 20% equity in the project you want financed, and that project must benefit the economy of a reservation or tribal service area.

State and Local Loans for Minorities

Loans targeted to minority business owners are often offered at the state and local levels. In many cases, these loans focus on specific industries or for specific uses. It’s worthwhile to research your state’s minority-focused loan programs, grants, and resources.

CDFI Loans

The Community Development Financial Institutions Fund (CDFI Fund), which is part of the U.S. Treasury, gives funds to companies and organizations throughout the U.S. that help underserved people and communities. Minority business owners can reach out to local banks and nonprofit groups that have received CDFI funds to discuss and apply for low-cost business loans.

Office of Hawaiian Affairs Mālama Loan

If you are a business owner of Native Hawaiian ancestry, you may be eligible for an OHA Mālama Business Loan. Approved applicants can borrow $2,500 to $149,999 with repayment terms of up to seven years. You must be a resident of Hawaii, be registered with the OHA Hawaiian Registry, have a credit score of 600 or higher, and a debt-to-income ratio of 45% or less.

Recommended: The Best Metros in the U.S. for Underrepresented Business Owners

Minority Business Loan Options vs Conventional Small Business Loans

There are a wide variety of business loans available to minority businesses, including loans specifically targeted to underserved communities and conventional loans that are available to all small businesses. Which type of financing is best for your business? There are pros and cons to each. Here’s how they compare.

Business Loans for Minorities with Bad Credit

For many small businesses, low credit scores can be an impediment to getting business financing. And small business loans for minorities with bad credit can feel particularly hard to come by. For minority small business owners, as well as for nonminorities, there are various ways to try to get a loan (or a loan with better terms) even with a low credit score. These can include:

•   Providing collateral to secure the loan

•   Offering a personal guarantee

•   FInding a cosigner with better credit

•   Offering a larger down payment

•   Approaching an online or alternative lender (though the rates and terms may be less favorable)

Focusing specifically on small business loans for minorities with bad credit, a number of the loans we’ve discussed above already have relatively lenient requirements for credit scores, including SBA Microloans and Indian Loan Guarantee Program loans.

Recommended: Business Loans with Bad Credit

Grants for Minority Business Owners

A minority business loan isn’t your only option for funding. It may also be possible for your business to qualify for a small business grant for minorities.

The chief benefit to business grants vs. loans is that grants, unlike loans, don’t have to be repaid. Make sure to explore both minority business loans and grants to find the best source of capital for your business.

Grants.gov

Grants.gov is the largest database of federal grant opportunities. While most grants are not specifically targeted to minority small business owners, awards are available for all types of entrepreneurs, especially those focused on healthcare, U.S. defense, and environmental protection.

USDA Rural Development Grants (RBDG)

The USDA’s Rural Development Grant is available to businesses in rural communities that have fewer than 50 employees and less than $1 million in gross revenue. Businesses cannot apply directly, but must partner with a nonprofit or other entity eligible to apply. (Check with your USDA State Office to see if they can help you find one.)

This type of small business grant varies in size and can be used for a wide range of projects that aid business development in rural areas, including training, technical assistance, acquisition or development of land, building construction or renovations, equipment purchases, and pollution control.

Recommended: 30 Small Business Grants and Databases for Women in 2025

Small Business Resources for Minorities

Here’s a look at some other resources available for minority business owners.

MBDA

The Minority Business Development Agency (MBDA) advocates for minority-owned businesses and offers workshops, events, research, and conferences to help underserved entrepreneurs. Its Enterprising Women of Color Initiative is aimed at helping minority women succeed in business.

US Minority Chamber of Commerce

The U.S. Minority Chamber of Commerce (UMCC) has locations in many cities and actively promotes the economic growth, development, and interests of minority-owned businesses. Members have access to events, training, and other business resources to support them in their growth.

The Takeaway

Whether you’re looking to start a minority business or expand an existing one, you’ll likely need access to capital to turn your vision into a reality. There are multiple sources for funding and search tools that can help you as you hunt for the money to make your small business dreams become a reality.

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 can you use minority business loan funds for?

Some minority loans for business have strict requirements about what you can and can’t use them for, but often you can use them for a range of business purposes, including working capital, purchasing inventory, hiring staff, and buying equipment.

Can you get minority business loans with bad credit?

Some minority loans have less stringent credit requirements than traditional bank loans and look at other criteria, such as annual revenues, to determine eligibility.

Do you need a business plan to apply for a minority business loan?

Typically, yes. Lenders (both minority-focused and conventional) often want to look at an applicant’s business plan.

What can I spend a minority grant on?

It depends on the grant. Some grants may stipulate what you can spend the money on (such as a project that benefits an underserved community), while others offer more flexibility.

Who qualifies for minority-owned business loans?

Typically, the business must be at least 51% owned, operated, and controlled by one or more people who belong to a recognised ethnic or racial minority group. Women are also sometimes considered such a group for the purpose of these loans. There may also be other requirements, such as credit scores, time in business, and annual revenues.

Photo credit: iStock/Lyndon Stratford

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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.

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The interest rate of a business loan can vary widely and will depend on the market, the type of loan, and the lender.

On average, the annual percentage rate (APR) for a traditional bank loan ranges from 6.75% to 11.00%. The APR for a business loan from an alternative or online lender, on the other hand, can run anywhere from 14.00% to 99.00%.

The actual rate that a lender will offer is also based on your qualifications as a borrower, such as your personal and business credit score, annual revenue, debt-to-income ratio, cash flow, number of years in business, and whether or not you’re able to secure the loan with collateral.

Here’s what you need to know about business loan interest rates and how to get the best loan at the lowest cost for your business.

5 Factors That Determine Business Loan Interest Rates

Below are some of the key factors that influence interest rates on small business loans.

1. General Interest Rates

One of the biggest factors that affects what interest rate you’ll get on a small business loan is the current market rate. The current market rate is determined by the supply and demand in financial markets, central banks (such as the Federal Reserve), prevailing economic conditions, and inflation expectations.

2. Lenders

When you compare interest rates from different lenders, you’ll generally find that banks offer some of the lowest rates. These loans can be difficult to qualify for, however, and the application and approval process can take weeks or months to complete. Online and other alternative lenders tend to charge higher rates but have more flexible qualification criteria and are faster to fund.

3. Types of Loans

There are many types of small business loans on the market, and each has its own interest rate range. Here’s a look at the average interest rates for common types of business loans as of April 2026:

Bank Small Business Loans

A traditional bank term loan can be difficult to qualify for, but if you do, you’ll see it has some of the better interest rates on business loans, averaging 6.75%-11.00% APR.

If you have strong credit and consistent revenue, have been in operation for a few years, and don’t need the funds right away, a bank or credit union may provide you with the best terms. If you’ve already established a relationship with a particular bank or credit union, say by opening a business bank account, you might want to explore their business loan options.

Online Term Loans

Average interest rates tend to run higher for business loans offered by online lenders, ranging anywhere from 14.00% to 99.00%. However, it’s typically easier to qualify for this type of business loan than it is for a bank term loan. As a result, online term loans can be a good option if your business has poor credit or hasn’t been in operation for very long. Online lenders also offer short-term loans that aren’t typically available from other sources.

SBA Loans

SBA loans are partially guaranteed by the U.S. Small Business Administration and issued by participating lenders, typically banks. Due to government backing, SBA loans offer businesses access to financing with more lenient credit requirements and lower down payment requirements compared to conventional bank loans. SBA loans also come with attractive rates (currently around 11.75%-14.75%) and some of the best repayment periods, some as long as 25 years.

Business Lines of Credit

With a business line of credit, a company can borrow up to a certain amount of money, as needed, and use the funds for virtually any type of business expense. As the business repays the funds, they become available to borrow again.

A line of credit can be a great option for small businesses facing frequent cash flow issues. It can also be a good thing to have in your back pocket in case of emergencies.

Advertised rates for lines of credit are almost always low, but your business’s characteristics will determine how much you’ll pay. Generally, the APR for a business line of credit can start around 10.00%, but it can go much higher. Like a credit card, though, you only pay interest on what you use.

Invoice Factoring

Invoice factoring is a short-term financing method that allows businesses to sell unpaid customer invoices to an invoice factoring company. You can often get up to 70%-90% of your unpaid invoices up front. The factoring company then collects payment from your customers and gives you the remaining balance, minus fees. While these fees can be hefty — as high as 79.00% — invoice factoring can help a business get past difficult financial times.

Recommended: How to Dispute a Business Credit Report

Merchant Cash Advances

A merchant cash advance (MCA) allows your business to exchange your future earnings for immediate cash. With an MCA, you receive a lump sum of cash from an MCA provider, which you pay back using a percentage of your daily sales. MCAs are typically easier to qualify for than traditional business loans but tend to come with higher costs. Instead of interest rates, MCAs come with factor rates — often around 1.1-1.5.

To determine the cost of an MCA, you multiply the total amount of cash advanced to you by the factor rate. For example, if you get $20,000 and have a factor rate of 1.25, the total cost is $25,000 ($20,000 x 1.25), which includes the $20,000 advanced to you and $5,000 in fees.

Keep in mind, though, that there may be additional fees on top of the factor rate.

Recommended: How Much Down Payment for Business Loan?

4. The Business’s Finances

No matter what type of lender you work with or what type of loan you pursue, your business’s finances will likely be thoroughly studied by an underwriter when you apply for a small business loan.

Here are some things lenders typically will look at when considering whether or not to give you a loan and, if so, at what rate.

Credit Scores: Personal and Business

Each lender has its own criteria for establishing interest rates, but personal and business credit scores are usually one of the main determining factors.

If you recently launched your business and don’t have much credit history, lenders will likely look at your personal credit profile. Generally, a higher score will help you get a lower interest rate.

Lenders often require a minimum personal credit score to qualify for financing. Banks may look for scores of 680 or higher, while online lenders may accept scores in the 500s.

Lenders will also look at your business’s credit score. Instead of ranging from 300-850, business credit scores typically range from 1-100. Dun & Bradstreet’s PAYDEX score (one of the more commonly used scoring models) has three risk categories, as follows:

•   Low risk: 80-100

•   Moderate risk: 50-79

•   High risk: 0-49

If you have a low-risk business credit score, it likely means that you pay your bills on time and maintain a healthy credit utilization ratio. If this is the case, you can expect to receive some of the best rates on small business loans.

Business Income

How much money you bring in each year can be a key factor in determining whether you’ll get approved for a loan, how big a business loan you can get, and what the interest rate will be.

A business with a strong, predictable revenue stream has a good chance of getting approved for a high loan amount with a low interest rate. If you’re just starting out and your monthly revenue is still picking up steam, you may have trouble taking out certain types of business loans.

Time in Business

The amount of time you’ve been in business also impacts the interest rate a lender will offer you. If your business is new, you’ll likely pay more in interest, even if your cash flow is better than more established companies. The magic number many banks want to see is often two years. It’s not uncommon for a new business to fail shortly after opening, so the fact that you’re still standing after two years is a good sign to a lender.

Quantity of Collateral

Lenders often require borrowers to put up a fixed asset (such as property or equipment) to secure a loan. This reduces risk for the lender because if you default on the loan, they can seize your collateral and sell it to make up for their losses.

If you’re applying for an SBA loan or bank loan, for example, lenders will want to know what kind of collateral your small business has to offer and the value of that collateral. It’s possible to get a loan without collateral, but these loans, called unsecured loans, typically come with higher interest rates.

5. Industry

Some businesses are statistically more likely to fail than others. For example, first-year failure rates tend to be higher for companies in food service, finance/insurance, real estate, and professional/technical services.

If your business is considered a risky business to lend to, you may receive a higher rate. In addition, some lenders have certain industries that they won’t lend to (such as firearms businesses) that could affect their reputation.

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Fixed vs Variable Interest Rates

When looking at loans, you may have a choice of getting a fixed or variable interest rate.

A fixed-rate loan has the same interest rate and monthly payment for the life of the loan. This means your first payment will be the same amount as your last payment.

Businesses often choose loans with fixed interest rates so they can easily budget for the payments. In addition, if interest rates are currently low, a fixed interest loan is a way to lock in that rate for the duration of the loan.

A variable-rate loan may have different payments from one month to the next. If the market fluctuates, the rate you pay could go up or down over the life of the loan.

Variable-rate loans tend to have lower rates than fixed-rate loans at the outset. For a short-term loan, a variable interest rate can end up being a good deal for the borrower. But there’s some risk involved, as the rate can increase, and you’ll need to be prepared to make that higher monthly payment.

Pros and Cons of Variable-Rate Business Loans

Pros and Cons of Fixed-Rate Business Loans

Recommended: A Guide to SBA Loans

How to Compare Business Loan Rates

When comparing small business loans, you’ll want to look at more than just the interest rate. In fact, when lenders advertise only a monthly interest rate, it can be deceiving.

A monthly interest rate is simply how much interest you would be charged in one month. It doesn’t include any other charges associated with the loan, which may include one-time charges, such as origination and application fees, or recurring fees, such as a monthly service charge.

To better understand how much money you’ll actually be required to pay over the lifetime of your loan and to make sure you’re comparing loans apples to apples, you’ll be better off comparing annual percentage rates, or APRs. An APR includes not just the interest rate but also the associated loan fees. It gives you the total annual cost of the loan, expressed as a percentage.

Business Loan Fees

Possible fees for business loans include:

•   Application fee

•   Processing fee

•   Closing fee

•   Origination fee

•   Prepayment fee

•   Late payment fee

•   Monthly service fee

How to Calculate Total Business Loan Cost

Not all lenders use an APR when quoting the cost of their business loans. If all you see is an interest rate, you can figure out the total cost of taking out the loan by using one of the many business loan calculators available online. In order to use one of these tools, you’ll need a few pieces of information, including:

•   The loan amount

•   The annual interest rate

•   Other fees associated with the loan (origination fees, closing costs, etc.)

•   The loan term

From there, you can see the loan’s total cost as well as what your monthly payments will be.

The Takeaway

The average small business loan interest rate depends on the overall market rate, the type of loan, the lender, your business’s financials, and the industry your business is in. Overall, traditional bank loans tend to offer better rates than other loan products. However, they may not be the best fit for your business if it’s new, doesn’t have a strong or well-established credit profile, or needs financing relatively quickly.

To get the best rate on a small business loan, it’s important to shop around and compare offers, take steps to build your business credit profile, and consider using collateral to secure the loan.

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’s the difference between a fixed and a variable business loan rate?

A fixed business loan rate remains the same throughout the term of the loan, which means your first and last payment will be the same. A variable business interest rate, meanwhile, fluctuates based on market conditions, potentially offering lower initial rates but with the risk of increasing over time.

How do you qualify for a low business interest rate?

To qualify for a low interest rate, your business will generally need to have a good credit score, a strong cash flow, and have been in business for two years or more. Offering collateral can also lead to a lower interest rate.

What is a good interest rate on a small business loan?

A good interest rate on a business loan depends on the type of loan you’re looking to get. For example, a good interest rate on a bank term loan might be 6.75%, while rates on SBA 7(a) loans currently start at 11.75% annual percentage rate.

What is the minimum interest charged by business loans?

Each loan type comes with its own interest rate range. An SBA 7(a) loan of $50,001-$250,000, for example, comes with a base interest rate (current prime rate) plus a maximum of 6.00%.

Why are SBA loan rates so high?

SBA loan rates are tied to the prime rate, which is set by the Federal Reserve. As the Fed has steadily increased the market prime rate, SBA loan rates have climbed accordingly.

Photo credit: iStock/MicroStockHub

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

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

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

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