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Starting a new business requires a good idea, customers to whom you can sell your product or service, and money to get you off the ground. A personal loan to start a business can be one option for funding, especially if you don’t yet qualify for a small business loan or you qualify for a personal loan with a low interest rate.

Here’s a look at the pros and cons of using a personal business loan to start your business as well as some alternatives to look into.

What Is a Personal Business Loan?

Personal loans to start a business are offered by some banks, credit unions, and online lenders. The borrowed funds are paid back with interest in regular monthly installments. While most loans will specify what you can spend the money on — a mortgage must be used to buy a house, for example — the sum you receive from a personal business loan can be spent in a variety of ways. It’s important to check with your lender about whether their personal loans can be used for business expenses, as some lenders do not allow it.

Your personal loan interest rate is based on a combination of financial factors, including financial history, income, and credit score. Generally speaking, the higher a person’s credit score, the more likely they are to receive a personal loan with favorable terms and interest rates. Applicants with lower credit scores may find it more difficult to qualify for low-interest rates. That’s because lenders tend to see them as at greater risk of defaulting on their payments and, to offset that risk, they might charge a higher interest rate.


💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.

Why Might You Use a Personal Loan to Start a Business?

Taking out personal loans for business may present a number of benefits compared to some other alternatives.

Ease of Qualification

Banks offer personal business loans based on personal income and credit score. When you apply for a business loan, you’ll likely be asked for quite a bit of information during the application process, including your personal and business credit score, annual business revenue and monthly profits, and how long you’ve been in business. The longer your business has existed, the more likely you are to have a record of revenue and profit, and the more likely you are to qualify.

If your business is brand new, it can be tricky to get a business loan right off the bat, and it may be easier to qualify for a personal loan.

Faster Funding

How long it takes to get approved for a personal loan and receive funding will vary by lender. Online lenders are typically faster than banks and credit unions. However, you are likely to receive funding within seven business days.

By contrast, the process for a business loan can be much slower. For example, it can take 60 to 90 days to receive funding from a Small Business Administration (SBA) loan.

Can Have Low Interest Rates

Personal loan applicants with a positive credit history and a healthy credit score may be able to qualify for a low interest rate. In general, interest rates on personal loans can be much more competitive than those on other types of credit.

Credit cards, for instance — although not an inherently bad choice for business credit — can have higher interest rates than other types of lending options. They may also have penalties and fees that personal loans may not have, such as penalty annual percentage rates (APRs) that go into effect if you make a late payment, over-limit fees if you spend more than your credit limit, annual fees, and more.

Flexibility and Versatility

Personal loans have few restrictions on how you’re allowed to use the money you borrow. That means you can spend on anything from buying or renting a building to marketing materials to purchasing inventory, as long as your lender doesn’t restrict the personal loan funds to non-business purposes.

Recommended: 11 Types of Personal Loans & Their Differences

What Are Some Risks of Using a Personal Loan to Start a Business?

Despite the potential advantages of using a personal loan to help you start your business, there are also potential drawbacks to consider.

Some Lenders Don’t Allow Personal Loans for Business

Some lenders do place certain restrictions on how you spend your personal loan. Being upfront about your intentions to use it for business expenses and asking if that is allowed is a good idea. In some cases, it may not be. However, it’s far better to be honest about how you plan to use a loan than risk breaching the loan agreement. If you end up using a loan in a prohibited way, your lender could force you to repay the full amount of the loan with interest.

Can Mean a Smaller Loan

Personal loans generally offer borrowing limits as low as $1,000 and as high as $100,000 for larger personal loans. For small businesses, this might be plenty. But if you’re a larger business that needs more money, you may be better off looking for a loan that can better meet a business’ financial needs.

Can Have Shorter Repayment Terms

Lending periods for personal loans will vary. Typically you can find loans with term lengths of 12 months to five years, sometimes a bit longer. When compared to some small business loans, this is a relatively short period of time. Consider that for SBA loans, maximum terms can be as much as 25 years for real estate, 10 years for equipment, and 10 years for working capital or inventory.

Personal Credit Score and Assets Could be Affected

If you take out a personal loan and are unable to make monthly payments, you are putting your personal credit at risk. Missed payments may have a negative effect on your credit score, which can make it more difficult for you to access funding in the future.

Recommended: What Is Considered a Bad Credit Score?

May Qualify for Fewer Tax Deductions

In general, the interest you pay on a personal loan is not tax deductible. However, it may be if you use it for business purposes. This can get a bit tricky. You may only deduct interest on the portion of the loan that is used for business expenses. So if you use any of that money to remodel the bathroom in your home, for example, interest on that portion can’t be deducted.

Businesses are able to deduct interest from bank loans, vehicle loans, credit card debt, and lines of credit.

Personal Business Loans vs Small Business Loans

Borrowing money to pay for business expenses is a decision that takes some consideration. There are different reasons you might want or need a business loan, there are many lenders to choose from, and there are different lending options to compare. Here are some things to think about if choosing between a personal loan for business or a small business loan.

Factor to Consider	Personal Loan for Business	Small Business Loan
Use of funds	Some lenders may not allow personal loan funds to be used for business purposes	Specifically for business purposes — cannot be used for personal use
Qualification	Personal creditworthiness determines approval, interest rate, and loan terms	Lenders will require business financials, proof of time in business, and other details, in addition to possibly taking personal credit into account
Interest rate	Depending on your creditworthiness, interest rate may be lower than other forms of credit, such as credit cards	Depending on the type of loan, interest rates on SBA loans may be lower than some personal loans
Loan amount	Up to $100,000 depending on the lender.	SBA maximum loan amount is $5 million. Some lenders may approve working capital loans for up to several million dollars
Funding time	Depending on the lender, loan funds may be disbursed as soon as the day of approval or in up to seven days	The SBA loan timeline is between 60 and 90 days from application to disbursement. A working capital loan from a traditional lender may be approved quickly and funded shortly after approval
Tax deductibility	Interest is not generally tax deductible	Interest may be tax deductible in some cases

Recommended: Business Loan vs Personal Loan: Which Is Right for You?

Alternatives to Personal Business Loans

Personal loans may not be the best option for everyone and are not the only way you can fund your small business. You may also want to consider small business loans or a business line of credit.

Small Business Loans

Small business loans are offered through online lenders, banks, and credit unions. There are a variety to choose from that may be designed for specific purposes. For example, a working capital loan is designed to help you finance the day-to-day operations of your business. An equipment loan can help you replace aging technology and buy new equipment.

SBA loans are guaranteed by the Small Business Administration, whose aim is to help small businesses get off the ground and grow. That means if you aren’t able to make your payments, the SBA will step in and cover 85% of the default loss. By reducing risk in this way, the organization helps businesses get easier access to capital.

Shopping around for the best small business loan rates is a good way to compare lenders and find the one that works best for your unique financial needs.

Business Lines of Credit

A business line of credit is revolving credit, much like a credit card. You are allowed to borrow up to a certain amount, and you only pay interest on the amount you are currently borrowing — making this option more economical than a term loan for some business owners. As you repay the funds, the amount of credit available to you reverts back to the original limit and you can borrow the money again.

Another advantage to a line of credit over a term loan is the ability to use a check to pay vendors who may not accept credit cards.

Credit Cards

Credit cards, with a current average interest rate of more than 22%, tend to have higher interest rates than other types of funding. For example, the average finance rate for personal loans is about 12.49%, according to the Federal Reserve.

Also, credit cards are revolving credit. If you don’t pay off the balance each month, you can fall deeper into debt. Whereas, installment loans offer fixed monthly payments with a fixed end date.

Business credit cards may be a good choice for some business owners, though, to keep personal and business expenses separate. They may also offer rewards, perks, and bonuses that make them an attractive option.

Recommended: Breaking Down the Different Types of Credit Cards

Merchant Cash Advance

Funding for a merchant cash advance (MCA) is based on a business’ past credit card receipts. Technically not a loan, an MCA is an advance on future revenue. The business repays the MCA lender a percentage of its monthly sales revenue until the debt is paid in full.


💡 Quick Tip: Generally, the larger the personal loan, the bigger the risk for the lender — and the higher the interest rate. So one way to lower your interest rate is to try downsizing your loan amount.

The Takeaway

Can you use a personal loan to start a business? Short answer: Yes. Taking out a personal loan is one way to fund your small business needs, as long as your lender allows the funds to be used for business expenses. There are alternatives, though, including lines of credit and SBA loans.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

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Photo credit: iStock/fizkes

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

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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.

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Business bank accounts can help owners keep professional transactions separate from personal banking and aid in their business cash management. These accounts often come with special conditions and requirements, and they may have various fees.

Here, we’ll take a closer look at these accounts, their pros and cons, and what it takes to open one. Read on to dive into the details about business bank accounts.

What Is a Business Bank Account?

There are three main types of business banking accounts: checking accounts for everyday use, savings accounts for intermediate and long-term savings, and merchant accounts for accepting debit and credit card payments. In this article, you’ll learn about business checking and savings accounts, available from both online and brick-and-mortar banks.

What Is a Business Checking Account?

A business checking account works much the same way a personal checking account does. You use it to deposit payments and make withdrawals, usually an unlimited amount. Like personal checking accounts, business checking accounts typically pay low to no interest on your balance.

What Is a Business Savings Account?

A business savings account will pay more interest than a checking account, so it can be a good place to park cash on an interim basis. You will likely be limited on how many transactions you can make per month without a penalty (typically six), and there may be a monthly minimum balance to maintain. Many business owners find using both a business checking and savings account can meet their banking needs.

How Long Does Opening a Business Bank Account Take?

If you open up a bank account — whether it’s checking, savings, or both — the time commitment needed is usually similar to that of opening a personal checking and savings account. It will likely take just a matter of minutes if you have the necessary information on hand.

•   You will need to provide some details about yourself, your business, and any additional business owners involved in your enterprise.

•   You’ll deposit funds.

•  Keep in mind it can take up to seven business days for final approval before you can actually access funds.


💡 Quick Tip: Banish bank fees. Open a new bank account with SoFi and you’ll pay no overdraft, minimum balance, or any monthly fees.

What Is Needed to Open a Business Bank Account?

Whether you open your bank account online or in person, you’ll need documentation of several personal and business details. Different banks may have their own verification requirements, depending on the type of business you own and the type of account you’re looking to open.

Here is a general list of what you might need to open a bank account for your business:

•   Your name, birthdate, and Social Security number

•   Mailing address and all contact information

•   What percentage you own of the business (anyone who owns 25% of the business or more will likely have to disclose personal details and identification)

•   A government-issued photo ID, such as driver’s license or passport

•   Business name and DBA (“doing business as” name) or trade name, if applicable

•   Business address and employer identification number (EIN) (Note: sometimes Social Security numbers suffice)

•   Industry/type of business

Depending on the type of business you own, you may be asked for the following documents:

•   Sole proprietorships may need the business name registration certificate and the business license.

•   Partnerships may need the partnership agreement, business name registration certificate, business license, and the state certificate of partnership.

•   Limited Liability Companies (LLCs) may need the articles of organization, LLC operating agreement, and business license.

•   Corporations may need articles of incorporation, corporate bylaws, and business licenses.

Recommended: Business Cash Management: Tips for Managing Cash

What to Look for in a Business Banking Account

Traditional banks, online banks, and credit unions all offer business bank accounts. All have different fee structures and provide different services. There are many fees and restrictions to consider when choosing a business banking account. But consider this overarching factor: online accounts are usually best for businesses that don’t need to make bank deposits.

Here’s what to compare when you’re looking for an account:

•   Monthly fees, such as account maintenance

•   Any minimum balance requirements

•   No-fee transactions

•   ATM access (for deposits and withdrawals)

•   Transfer, wiring, and payment capabilities

•   Incidental fees (such as, stop payment, overdraft, and nonsufficient funds)

•   Online and mobile banking tools

•   Additional features, such as invoicing, bill pay, or integrations with other business tools (especially tax reporting software)

Benefits of Opening a Business Banking Account

A business account can be a smart tool for a variety of reasons. Business owners may need to keep their personal and business accounts separate for tax and liability reasons. A business bank account also helps you establish a banking relationship that you can draw on in the future for lending or other services that may help your business grow. You will also establish a financial record that can come in handy when it comes time to file taxes and help your concern establish a good credit rating.

Recommended: How to Open a Business Checking Account

Cons of Opening a Business Banking Account

There are very few cases when a business banking account is a bad idea. Some very small sole proprietors may find they don’t need the extra fees and bookkeeping involved. But for most business owners, a separate account can be an efficient tool.

That said, one of the potential drawbacks of a business account is the cost of bank fees. High fees that you may not have anticipated can eat into your business profits. Some fees to look out for include:

•   Monthly fees

•   Transaction fees

•   Monthly balance transfer fees

•   Cash deposit fees

•   ATM fees

•   Wire transfer fees.

These fees add up fast. Be sure to check thoroughly what fees are involved and compare from one financial institution to another.

Pros of a Business Bank Account	Cons of a Business Bank Account
Keeps professional finances separate from personal	May involve additional fees
Establishes a business relationship with a financial institution	May involve more bookkeeping
Creates a financial record that can be useful for tax or credit-rating purposes

Choosing a Business Bank Account

Now that you’ve looked at fees, here are some other considerations as you choose your business bank account:

•   Banking online: Business bank accounts with online-only banks can be great for virtual businesses or any business that is not handling daily cash transactions. Many online banks do not require a monthly minimum balance.

•   Network: If you’re banking in person, be sure there is a conveniently located branch near your business. Also, find out how many no-fee ATMs are available in your area.

•   Electronic services: Check if online bill pay, electronic fund transfers, and other electronic services that can support your business are available for low or no fees.

•   Electronic payments: Does your bank accept Zelle and Venmo? If so, are there additional fees involved? How long will it take for transactions to post? Electronic payments are increasingly becoming the lifeblood of many businesses.

•   Software compatibility: Is the bank account you’re considering compatible with the bookkeeping software you use? That can make life easier when you need to track or get access to cash flow, outstanding receivables, and other items each month.

Other support: Does the bank offer small business loans, lines of credit, business credit cards, and other financial support for entrepreneurs that you may need in the future?

The Takeaway

While we’re on the topic of bank accounts, have you reviewed your personal accounts lately?

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall. Enjoy up to 4.60% APY on SoFi Checking and Savings.

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SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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.

Our account fee policy is subject to change at any time.

Photo credit: iStock/Deagreez
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Two-thirds of business owners who are mothers say creating generational wealth for their children is a major reason they launched their business, according to a survey of 1,000 mothers and business owners conducted for SoFi in March 2024. Nearly half (48%) also expect their kids to take over some day, intending to pass the business onto the next generation.

Even so, nearly half (42%) of entrepreneurs who are mothers feel they are treated differently by society than entrepreneurs who are fathers.

According to the latest Census data, women own 13.8 million businesses across the U.S., employing 10 million workers and generating $3.9 trillion in revenue. Those businesses make up 39.1% of all U.S. businesses, a 13.6% increase from 2019 to 2023, according to the Small Business Administration.

Many entrepreneurs who are mothers – or mompreneurs, a term that was coined in the 1990s – have a long-term plan to grow their business, with 86% of those who have another job saying they want to devote themselves full-time to their own company eventually. More than half are actively working to educate their children on being entrepreneurs themselves.

The challenges in finding a balance between work and home are genuine, however, with mompreneurs feeling shortchanged on both sleep and time to spend with family and friends. And two-thirds feel judged by others for pursuing their entrepreneurial goals while being a parent to begin with.

Source: Based on a survey conducted between March 18-24 2024, of 1,000 female business owners aged 18 and over who have at least one child and live in the U.S.

Young Children and Businesses?

Our survey showed 29% of the respondents said their oldest child was 6 to 10 years old when they started their business, followed by 15% saying their oldest child was a teenager between 13 and 18. Another 14% started their business when their oldest child was just 3 to 5 years old.

A majority (74%) of our respondents were married or living with a partner, and most of the respondents had one child or two. As for the children’s ages, 51% had kids between 5 and 13, and 34% had teenagers between 13 and 18.

Among our survey respondents, the largest age group (37%) was 35 to 44 and the second largest (27%) was 25 to 34. As for education, the largest group (33%) had a university degree, but those who had a high school degree (28%) came in a close second.

Living in the Present, Envisioning a Better Future

A majority of the mompreneurs in this survey said desires for financial independence and personal growth motivated them to launch their own business.

So has being a mother made it harder or easier to run a business? Survey respondents said being a parent enhanced their entrepreneurial skills in a myriad ways:

•   Improved problem-solving skills: 60%

•   Enhanced multitasking abilities: 51%

•   Increased empathy and understanding: 46%

•   Greater resilience in the face of challenges: 46%

Two-thirds of respondents (66%) said creating generational wealth for their children was a big reason for launching their business.

And nearly half (48%) said they are confident their children will take over their business eventually. Many mompreneurs are already phasing in their kids when it comes to learning about business.

When asked how they involve their children in entrepreneurial activities, the respondents answered this way (multiple selections were possible):

•   Educating them about entrepreneurship: 55%

•   Introducing them to the business environment: 43%

•   Assigning age-appropriate tasks related to the business: 41%

•   Including them in decision-making processes: 31%

Work-Life Balance: Can It Be Found?

Running a business and raising children are tasks that are hard enough, but nearly two-thirds (62%) of survey respondents said they have another job in addition to the business they own. Interestingly, 50% of those with household incomes under $100K don’t have a different job aside from their business, compared to 17% of those with household incomes of over $100K.

Incredibly, for those who had a full-time or part-time job apart from their own small business, 26% still spent between 20 and 30 hours per week on their own company.

Something has to give, timewise, and our survey broke it down. When asked what they have to sacrifice to balance entrepreneurship and parenthood, this is what our respondents said (multiple selections were possible):

•   Sleep: 48%

•   Spending time with friends and family: 48%

•   Hobbies: 38%

•   Exercise: 28%

•   Diet: 21%

•   None of the above – I don’t have to make any sacrifices: 16%

Asked what challenges female entrepreneurs who have children face, they answered as follows (multiple selection were possible):

•   Balancing work and family time: 58%

•   Balancing multiple roles: 42%

•   Managing stress and burnout: 40%

•   Access to funding or financial resources: 38%

•   Overcoming societal expectations about mothers who start their own businesses: 26%

•   Navigating discrimination or bias: 18%

Having help at home in the form of a partner or other adults can go a long way, but 37% of respondents, the largest group, said it was mostly them alone left with the mental load of home responsibilities. However, an even split between the respondent and their partner came in a close second at 35%.

When the mompreneurs did get help, the percentages broke down in interesting ways.

Here’s how partners and extended family members offered support (multiple selections were possible):

•   Assisting with childcare during work hours: 30%

•   Providing emotional support: 20%

•   Collaborating on business-related tasks: 16%

•   Helping with housework: 14%

•   Offering financial assistance: 11%

In terms of stress relief, respondents said they balanced self-care with roles as parent and entrepreneur:

•   Participating in hobbies or leisure activities: 51%

•   Scheduled breaks and downtime: 47%

•   Regular exercise or physical activity: 45%

•   Seeking professional help or counseling: 40%

Gender Disparities Revealed

While women-owned businesses are more prevalent in America than ever before, our respondents said that they experience inequity.

More than two in five respondents (42%) said they felt that entrepreneurs who are mothers are treated differently than entrepreneurs who are fathers. Only one in five (21%) said they thought mothers and fathers who owned business were treated equally.

More than 60% of mompreneurs said they felt “judged by others for pursuing entrepreneurial goals while being a parent.”

Making matters worse, the respondents said that this disapproval came into play if they sought financial support to grow their business.

When asked if they felt that being an entrepreneur and parent has affected their access to venture capital or other forms of financial support for their business, they answered:

•   Yes: 43%

•   No: 34%

•   I haven’t tried to secure additional funding for my business: 21%

The Takeaway

Women own 13.8 million businesses in the United States, making up 39.1% of all businesses. Their numbers keep growing, yet nearly half of these mompreneurs feel society treats them differently than owners who are fathers, and balancing work and home is a challenge.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

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

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

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If you’re running a business, you probably know that managing cash is critical to your success — so let’s share some tips on doing that even better. Solid cash flow is vital to keep a business thriving, whether you’re a sole proprietor or the head of a larger enterprise. Even businesses with strong earnings can struggle with cash flow. That’s why cash flow can be a sure sign of how healthy a business is — or is not.

So let us help you optimize that cash flow. We’ll share some smart insights and helpful tips on:

•  What cash management for business is

•  Why it’s so important

•  Ways you can improve your business cash management

Let’s get started.

What Is Business Cash Management?

Simply put, business cash management is basically the way you track and manage the money coming into and going out of your business – usually on a cash flow statement. Positive cash flow means more money is coming in through revenues or borrowing than is being used to pay expenses, such as payroll and rent.

That said, good cash management also means not having too much cash on hand. In that scenario, business owners, while cautious, may be missing out on future earnings growth when they neglect to invest cash back into the business.

Here’s another way to frame this principle: Take a look at your business’s balance sheet and check the ratio of current liquid assets to liabilities. A ratio that’s greater than one indicates good health (you’re not losing money), but if that ratio gets too high, you could be holding onto too much cash or other assets that could better be invested elsewhere.

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The Importance of Cash Management for Businesses

Cash flow is the essence of all businesses. Without cash, a business will struggle to meet expenses, pay suppliers, repay any investors, and, often most importantly, grow the business through marketing and/or new opportunities.

Strong cash management strategies can help business owners avoid taking on debt. It also gives them more control over everyday activities, decisions, and growth opportunities. What’s more, smart cash management is the best way for owners to fulfill their vision for their enterprise while meeting both their short, intermediate and long-term needs. There’s certainly a lot riding on cash management, so let’s dive into ways to optimize it.

6 Tips for Managing Cash Flow

Cash management can be especially challenging for entrepreneurs and small business owners. Yet it is one of the most important financial strategies business owners must master. These six tips can help.

1. Learning Your Cash Flow Cycle

A cash flow cycle is the time it takes to purchase your supplies and materials (or prepare the work that goes into providing a service), transform them into a product, sell your offering, and collect payment that can go into your business bank account. Sounds simple but a lot can go haywire during that process.

That’s why it’s important for business owners to constantly update and monitor their balance sheets and profit and loss statements. Ideally, you want to know at any given time what happened in the cash-flow cycle last month. Also important: Knowing your projections for what’s going to happen next month.

Understanding your cash flow cycle can help identify and address inconsistencies such as a late-paying customer or a build-up of inventory. If your business is seasonal or cyclical, you want to be well-prepared for both the intensely busy times…and the lulls.

Recommended: How to Track Your Monthly Expenses: Step-by-Step Guide

2. Getting Payments on Time

Reminding customers to pay on time is one of the easiest but most necessary ways to manage cash flow. Late payments are a fact of life; common, even. Having receivables come in even a day or two past the due date can wreak havoc with your cash flow cycle and your bank account.

Consider setting up email reminders to all customers ten days, seven days, and two days before payment is due. Technology today makes it a snap to pre-schedule email blasts. If the payment is still late or only a partial payment was made, don’t hesitate to follow up with a personal note or phone call.

This simple solution can really work. Customers will pay more attention to timely payments when they know you are paying close attention.

3. Turning Over Inventory Quickly

Having an abundance of inventory on hand at a given time means that a bundle of cash is tied up in that unsold stock. That could be an issue, because those funds might otherwise be working to pay for operations and expenses. What’s more, if all of that inventory bought upfront doesn’t sell as expected, it could mean losses on top of that lack of cash. That could hurt your growth and business valuation.

Many small business owners have learned that, in terms of cash, it’s better to turn inventory more quickly. Of course, this will vary widely depending on your business – perhaps your product is handmade jewelry, perhaps its reconditioned air conditioners. As an example, you might want to boost inventory turn-over from twice a year to five times. More targeted marketing could contribute to this acceleration.

That said, finding the right inventory management to fit with your cash flow cycles takes some time and experience. Recent supply chain issues have shown how challenging inventory management can be. Again, constant monitoring of the cash flow cycle can help guide how you tweak things.

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

4. Understand Invoice Financing

Let’s say you hit a cash management hitch. If you do find yourself in a position where you have too much inventory on hand and you need cash to cover expenses, there is a path forward. Invoice financing companies will advance a full or partial amount of your outstanding invoices. You repay that amount plus interest after the invoice is paid.

This generally should only be considered as a stop-gap measure. Like credit cards, interest payments on invoice financing can add up fast and quickly get out of control. Consider the fact that annual percentage rates for invoice financing products can reach as high as a jaw-dropping 64%.

5. Cutting Costs

Monitoring and cutting costs on expenses is another tool for managing cash flow. After all, if less cash goes to pay overhead, more can be invested in the business. A few suggestions: Relying on online marketing efforts that can be less costly than traditional methods, outsourcing tasks that take too much time and money in-house, and reducing energy costs. You might also want to renegotiate outdated contracts and prices with suppliers. These are all areas business owners can consistently monitor to keep costs low.

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6. Comparing Loans

Sometimes, a business could use a helping hand to smooth out its cash flow. Let’s say you have outstanding accounts receivable — in other words, you know money is due but you don’t have it yet — and you need the cash now. In this situation, taking a business loan can be an option to help bridge the gap.

Cash flow loans (like invoice financing explained above) are short-term loans or lines of credit. These are often used to cover expenses or to take advantage of opportunities that can increase revenue.

A working capital loan is another option that can be used to finance everyday business operations such as rent, payroll, or restocking inventory. These loans are not designed to finance long-term assets or investment. Companies with seasonal or cyclical sales often rely on working capital loans to provide relief during slow periods.

One caveat: Working capital loans are often tied to your personal credit, so missed payments or defaults will affect your credit score. Consider that carefully before you sign on.

In addition, there are a variety of small business loans available that are used to finance long-term expenses such as real estate, equipment purchases, or business expansion. These include SBA loans, business lines of credit, and term loans.

Whatever type of loan you choose, be sure to compare your options carefully. Look at terms, APR, and how much lending you qualify for among several lenders before taking on any short or long-term debt. Spending some time and energy on research will help ensure you get the right form of financing.

The Takeaway

Cash flow management is an essential part of running a successful business of any size. Carefully monitoring cash flow, and learning some simple strategies to maximize it can take your small business to the next level.

Whether your business is a full-time job or just a side gig, it’s important to keep your business cash flow separate from your personal cash flow. In both cases, you’ll want to find a bank account that pays a competitive rate, charges no or low fees, and makes it easy to access your money.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

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Net present value or NPV represents the difference between the present value of cash inflows and outflows over a set period of time. Knowing how to calculate NPV can be useful when trying to determine whether an investment — either business or personal — will eventually pay off.

In capital budgeting, calculating the net present value can help with estimating the profitability of an investment or expansion project. Meanwhile, investors use the net present value calculation to gauge an investment’s potential rate of return based on the present value of its future cash flows and a discount rate, based on the cost of borrowing or financing.

What Is Net Present Value (NPV)?

Net present value is a measure of the value of all future cash flows over the life of an investment, discounted to the present after factoring in inflows, outflows, and inflation, which can erode the value of money over time.

When applying the net present value formula, you’re looking at whether revenues are greater than costs or vice versa to determine whether an investment or project is likely to yield a gain or a loss.

As mentioned, net present value is often used in capital budgeting. Businesses and governments can use capital budgeting methods to determine how much of a return they’re likely to see on a project before funding it. The NPV formula takes into account the time value of money, a concept which suggests that a sum of money received now is worth more than that same sum received at a future date.

How to Calculate NPV

Calculating net present value is a fairly simple operation.

If you want to calculate net present value using the NPV formula, you’d first need to know the expected positive and negative cash flows for an investment or project. You’d also need to know the discount rate. From there, you could complete your calculations in this order:

•   List future cash flows for each year you expect to receive them.

•   Calculate the present value for each cash flow.

•   Add all present values for future cash flows together.

•   Subtract cash outflows from the present value sum of future cash flows.

You’ll need to know the present value calculation to complete the second step.

NPV Formula

Here’s what the NPV formula looks like:

PV = FV/(1 + k)^N

In this formula, k is the discount rate and n is the number of time periods.

Again, net present value calculations follow a distinct formula. A positive NPV means earnings from the investment should outpace the cost. Negative NPV, on the other hand, means you’re more likely to lose money on the investment.

The application of the formula depends on the number of expected cash flows for an investment or project.

Example of NPV with a Single Cash Flow Investment

If you’re evaluating potential investments with a single cash flow, then you could use this formula to calculate NPV:

NPV = Cash flow / (1 + i)t – initial investment

In this formula, i represents the required return or discount rate for the investment while t equals the number of time periods involved. The discount rate is an interest rate used to discount future cash flows for a financial instrument.

Weighted average cost of capital (WACC) usually serves as the discount rate for calculating NPV. The WACC measures a company’s cost of borrowing or financing.

Example of NPV with Multiple Cash Flows

If you’re evaluating projects or potential investments with multiple cash flows, you’ll use a different net present value formula. Here’s what the NPV formula looks like in that scenario:

NPV = Today’s value of expected cash flows – Today’s value of invested cash

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Tools to Help Calculate NPV

If you want to simplify your calculations you could look for an online net present value calculator. Or you could use the NPV function in spreadsheet software, such as Microsoft Excel or something similar. The NPV function helps calculate net present value for an investment based on the discount rate and a series of future cash flows, both positive and negative.

To use this function, you’d simply create a new Excel spreadsheet, then navigate to the “Formulas” tab. Here, you’d choose “Financial”, then from the dropdown menu select “NPV”. This will bring up the function where you can enter the rate and each value you want to calculate.

What Does NPV Show You?

The NPV formula should tell you at a glance whether you’re likely to make money from an investment, lose money or break-even. This can help when comparing multiple investments to decide where to put your money when you have a limited amount of capital to work with.

It works the same way in capital budgeting. Say a fast-food chain is trying to decide whether to expand into a new market which entails opening up 10 more locations. They could calculate the net present value for each location, based on expected cash flows, to determine whether moving ahead with the project is a financially sound business decision.

What Is a Good NPV?

Generally speaking, a net present value greater than zero is good. This means that the investment or expansion project is likely to yield a gain. When the net present value is below zero, you have negative NPV which means the project or investment is likely to result in a loss.

The higher the number produced by a net present value calculation, the better. But it’s important to remember that the results produced by applying the NPV formula are only as reliable as the data points used in the calculation.

Inaccurate cash flow projections could result in skewed numbers which may produce a net present value estimate that’s above or below the actual returns you’re likely to realize.

Comparing NPV

Here are some ways that NPV stacks up to other types of calculations.

NPV vs Present Value

NPV and present value may sound similar but they measure different things. Present value or PV is the present value of all future cash inflows over a set period of time. Companies use this calculation to estimate values for future revenues or liabilities. When you calculate present value, you’re trying to measure the value of future cash flows today.

Net present value, on the other hand, is the sum of the present values for both cash inflows and cash outflows. With the NPV formula, you’re trying to determine how profitable an investment might be, based on the initial investment required and expected rate of return.

NPV vs IRR

Analysts use IRR or internal rate of return to evaluate proposed capital expenditures. The IRR calculation determines the percentage rate of return at which a project’s cash flows result in a net present value of zero. Like NPV, internal rate of return is also a part of capital budgeting.

Both NPV and IRR measure potential profitability but in different ways. When calculating the net present value of an investment, you’re estimating returns in dollars. With an internal rate of return, you’re estimating the percentage return an investment or project should generate.

Depending on whether you’re trying to target a specific dollar amount or percentage amount for returns, you may apply one or both formulas when evaluating an investment.

NPV vs ROI

Net present value measures expected cash flows for potential investments. You’re looking at future discounted cash flows to determine whether an investment makes sense financially.

Return on investment, or ROI, measures the efficiency of an investment, in terms of the rate of return that the investment is likely to produce. With ROI, you’re looking at the cash flows you’re likely to gain from an investment. To find ROI, you’d add up the total revenues less the total costs involved, then divide that figure by the total costs.

NPV vs Payback Period

The payback period is the period of time required for a return on investment to equal the initial investment. Payback period calculations don’t account for the time value of money. Instead, they look at how long it will take for you to realize a return from an investment that’s equal to the dollar amount that you invested.

Calculating the payback period helps determine how long to hold onto an investment. You might use this method if you’re trying to compare multiple investments to see which one is a better fit for your personal investing timeline. But if you want to get a sense of the total return you’re likely to realize, then you’d still want to apply the net present value formula.

Benefits and Drawbacks of NPV

Net present value can help analyze and evaluate business projects or personal investments. You can easily see at a glance what you could stand to gain — or lose — from making a particular investment. But the NPV formula does have some limitations that are important to be aware of.

Benefits of NPV

Net present value’s main advantage is that it takes the time value of money into consideration. By looking at discounted cash flows you can get a better understanding of the viability of an investment, based on what you’ll get out of it versus what you’ll put in.

This can help with decision-making when choosing investments for your portfolio or making strategic capital investments in a business. Net present value calculations can also help companies with projecting future value based on the investments they make today.

Drawbacks of NPV

The biggest disadvantage or flow associated with net present value is that results depend on the quality of the information that’s being used. If your projections for future cash flows are off, that can produce inaccurate results when using the net present value formula.

NPV can also overlook some hidden costs involved in an investment or project which may detract from total returns. It also doesn’t take into account the margin of safety, or the difference between an investment’s price and its value.

Finally, it’s difficult to use net present value to evaluate projects or investments that are different in size or nature, as the input values are likely to be very different.

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How Investors Can Use NPV

You can use NPV to evaluate stocks and other securities, including alternative investments, based on your time frame and projected profits. With stocks, for example, net present value can give you an idea of whether a company is a good buy or not by calculating NPV per share.

To do that, you’d divide the company’s net present value by the number of outstanding shares in the company to get this number. If the net value per share is higher than the stock’s current market price, then the stock could be considered a good buy. On the other hand, if the net value per share is below the stock’s current market price that suggests you might lose money if you decide to buy in.

The Takeaway

As discussed, Net present value, or NPV, represents the difference between the present value of cash inflows and outflows over a set period of time. Understanding the net present value formula can help with making smarter investment decisions.

As with any tool, most investors use NPV along with other financial ratios and forms of analysis before deciding whether to purchase any asset. If you have questions about how NPV can be used as a part of an investment strategy, it may be worthwhile to consult with a financial professional.

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For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Is a higher NPV better?

A higher NPV isn’t necessarily a good thing or means that an investment is better than another investment. But in general, a good NPV is a number that’s higher than zero.

What is the basic NPV investment rule?

The basic NPV investment rule is that projects or investments should only be pursued if they’ll lead to gains or productive gains.

Is NPV the same as profit?

NPV is not the same thing as profit, although a positive NPV is indicative of profit, while negative NPV is related to a loss.

Is a NPV of 0 acceptable?

An NPV of zero means that a project or investment isn’t expected to produce significant gains or losses. Whether that’s acceptable or not is up to the individual making the investment decision.

When should NPV not be used?

NPV might not be helpful or useful for comparing investments of drastically different sizes, or projects of different sizes.

Is Excel NPV accurate?

Excel’s NPV calculations should be accurate, but they’re only as accurate as the data that’s entered to make the calculation. So, it could be inaccurate, and it’s a good idea to double-check the calculation.

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