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A merchant account is a specialized bank account that allows a business to accept credit card, debit card, and electronic payments. While the process may seem simple from a customer’s perspective, several steps take place behind the scenes before a payment reaches your business bank account.

Understanding what a merchant account is, how it works, the different types available, and the fees involved can help you choose a payment processing setup that fits your business.

How a Business Merchant Account Works

Business merchant accounts are a type of business bank accounts designed specifically to accept customer payments, usually by credit card, debit card, or a form of electronic payment, such as digital wallets. The merchant account temporarily holds the accepted funds before transferring the cleared money to your primary business bank account.

Merchant Account vs Business Bank Account

Your bank merchant account is a temporary holding area which accepts customer payments and clears them. Once funds are clear, they can be sent to your main business bank account.

That business bank account is a dedicated account that handles company income and expenses. It may be linked to business credit cards or debit cards.

A business bank account can be a checking account or a savings account. Business checking accounts can provide checking services, while business savings accounts can be dedicated to holding surplus income and act as a cash cushion to cover operating expenses if needed. Business savings accounts can also allow you to earn interest on your savings.

Recommended: Small Business Lines of Credit

How Funds Move Through a Merchant Account

The journey through a bank merchant account starts when a customer makes a purchase with a card or their digital wallet. The transaction request is sent through a payment processor to the customer’s issuing bank, where the transaction is approved or denied based on available funds.

Once payment is approved, funds are held in the business’s merchant account temporarily until they clear. At this point, the business receives a final deposit into its primary business banking account.

Do I Need a Merchant Account?

If you want to accept credit and debit cards, as well as electronic payments, including digital wallets, you will need to open a merchant account or at least gain access to the functionality of one. You can open your own account or choose to use an end-to-end merchant services provider that can give you this kind of access as part of the services they offer.

Recommended: What Can You Use a Business Loan For?

Types of Merchant Accounts

There are two types of merchant accounts — dedicated accounts and aggregated accounts. Understanding the difference between them can help you choose the option that best fits your needs.

Dedicated Merchant Accounts

Dedicated merchant accounts are made specifically for your business to process credit card, debit card, and electronic payments. These accounts can be useful for businesses looking for personalized customer service and a greater ability to negotiate rate and scale.

A dedicated account may work well for businesses that process a high volume of transactions as merchant account providers may offer discounted transaction fees based on sales volume.

Industries that are at greater risk for fraud or chargebacks (the reversal of a credit or debit card transaction) might also consider having their own dedicated accounts.

Aggregate Merchant Accounts

Aggregate merchant accounts are usually provided by third-party merchant services providers. They allow your business to accept payments through a master account owned by the payment provider and shared by multiple businesses.

Because your business doesn’t need to set up its own account and merchant identification number, setup is typically very fast, allowing your business to accept payments right away.

These accounts are often best for small businesses that have relatively low sales volumes.

Recommended: Small Business Loans

Merchant Account Fees to Know

There are several different fees associated with merchant accounts that you should be aware of.

•   Setup fee: Many merchant account providers offer account setup free. Others may charge a one-time fee of up to $200.

•   Transaction fees: The biggest expense associated with a merchant account is typically the result of the ongoing transaction fees. You’ll be charged a transaction fee every time a transaction is processed. These could range from 1.5% to 3.5% for most businesses. Businesses with larger sales volumes may have more leverage to negotiate these fees down.

•   Monthly and annual fees: Some providers will require you to pay a minimum payment processing amount each month. If you don’t hit that target you’ll be charged the difference between the minimum and the amount you paid. Some providers will also charge an annual fee for their services.

•   Chargeback fee: If one of your customers disputes a charge and it’s reversed, your payment process may ask you to pay a chargeback fee that could be as much as $50.

•   Batch fee: Your business transactions on any given day are bundled into a “batch” at the end of the day. A small batch fee of up to $0.30 may be charged.

Recommended: Business Loan vs. Credit Card: Which Should You Use?

How to Get a Merchant Account

You can open a merchant account with a traditional bank or a merchant services provider. To open a dedicated account you’ll need to provide your business tax ID number or your Social Security number, as well as government identification. You’ll also need to have a dedicated business account where cleared payments can be sent.

If you want to work with a payment aggregator, you can typically sign up online in a matter of minutes.

The Takeaway

A merchant account can be an essential part of accepting payments, but the right setup depends on your business’s transaction volume, payment needs, and budget. Dedicated accounts may offer more flexibility for established or higher-volume businesses, while aggregated accounts can provide a faster, simpler option for smaller businesses.

Before choosing a provider, compare transaction and account fees along with the services included to understand the full cost of accepting payments.

Ready to grow your business? SoFi Small Business Loans can give you fast access to the capital you need. Check your eligibility in minutes.

With SoFi Small Business Loans, it's fast and easy to get the financing your business needs to thrive.

FAQ

What is the difference between a merchant account and a payment gateway?

A payment gateway is the digital tool that securely collects payment information, encrypts it, and sends it to be verified by the customer’s bank. Once the information is verified, the gateway then sends confirmation back to your business that the transaction can be completed. A merchant account serves as a temporary holding account for the payment while it is cleared and before it is transferred to your business account.

Can a small business open a merchant account at a bank?

A small business can open a merchant account with a traditional bank to accept credit card, debit card, and electronic payments.

How long does it take to get approved for a merchant account?

Approval for a merchant account can take anywhere from one day to a few weeks, depending on how complicated your business is and whether it is low- or high-risk.

What industries have trouble getting a merchant account?

Businesses in industries deemed high risk may have trouble getting a merchant account. These are businesses at high risk for chargebacks, or those that face stiff regulations or financial instability.

Is a merchant account the same as a merchant services provider?

No, a merchant account is not the same as a merchant services provider. The merchant services provider is often the institution that provides the infrastructure businesses need to accept payments. A merchant account is the account in which card and electronic payments from customers are temporarily held until they’re cleared and moved to the business’s primary account.

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Photo credit: iStock/shapecharge

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.

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The registered agent for a limited liability company (LLC) is the person designated to receive official legal documents, notices from the government, and tax documents for the business. If your business is an LLC, you can choose to be your own registered agent, or you can hire another person to perform the role. Understanding a registered agent’s responsibilities can help you determine whether this is a good idea and ensure your business stays in good standing with the state.

What Does a Registered Agent for an LLC Do?

Every state, as well as Washington, D.C., requires a limited liability company (LLC) to designate a registered agent. But what does a registered agent for an LLC do? The agent receives official correspondence on behalf of the business, including legal notices, tax documents, and communications from the state.

Having a registered agent helps ensure that important documents reach your business promptly. Missing a legal notice or state communication could result in missed deadlines, loss of good standing, penalties, or fines.

A registered agent usually must have a physical address in the state where the LLC is registered and be available during regular business hours to receive official correspondence.

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What Documents Does a Registered Agent Receive?

A registered agent may receive a variety of documents on behalf of your LLC, including:

•   Legal documents such as summonses or complaints notifying the business of a lawsuit, court orders, and subpoenas

•   Government correspondence such as small business tax forms and mail from the secretary of state

•   Compliance-related material, including enforcement letters and compliance warnings

•   Notice of garnishment proceedings against an employee

Registered Agent Requirements by State

Every state requires LLCs to designate a registered agent, although specific requirements and procedures can vary. For example, states may use different terminology or have different rules for who can serve as a registered agent and how changes must be reported.

If your LLC was formed in one state but plans to grow its business by expanding to another state or conduct business in other states, you may need to register as a foreign LLC in those states. This process, known as foreign qualification, generally also requires you to designate a registered agent in each state where you qualify to do business.

Do I Need a Registered Agent for My LLC?

Yes, you do need a registered agent for your LLC. Every LLC registered in the United States must have a registered agent.

Recommended: Business Loan Requirements

Should I Be My Own Registered Agent for an LLC?

You can serve as your own registered agent for your LLC if you meet your state’s requirements. For the owners of many small businesses and single-member LLCs, acting as their own registered agent can be a straightforward way to handle the responsibility.

However, being your own registered agent also means taking responsibility for being available to receive official documents and making sure those documents are handled promptly. There are both pros and cons to consider before deciding whether to take on the role yourself.

Pros of Being Your Own Registered Agent

Many people decide to be their own registered agent to save money on the service fees required to hire an outside agent. Becoming your own registered agent also gives you more immediate access and control over your legal mail. So It’s possible that you’ll become aware of issues more quickly.

Being your own registered agent might also potentially provide your business with an added layer of confidentiality since no third parties come into contact with your official mail.

Cons of Being Your Own Registered Agent

Being your own registered agent can present limitations as well. For instance, you have to be available during normal working hours, five days a week, to receive mail. Appointments, meetings, or travel that takes you away from the office can create gaps in coverage.

You must also stay on top of the mail you receive or risk falling behind or missing important documents.

As a business owner, you may also want to limit your clients’ visibility into correspondence they receive. For instance, it could be awkward to be meeting with a client in the office and receive a legal summons or tax notice. Interactions like these could damage your credibility.

Finally, when you act as your own registered agent, your physical address becomes part of the public record, which can limit your privacy.

Recommended: LLC Business Loans

Registered Agent Service vs DIY: How to Decide

Your business budget, privacy needs, and flexibility will largely determine whether it makes sense for you to choose to be your own registered agent. Standard fees for a registered agent run from about $100 to $300 per year. If that’s too much and you have the time, or if you’re concerned about privacy issues, you may want to act as your own agent.

If those aren’t issues for you, you may decide it’s easier to have someone take care of the responsibility.

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

How To Change Your Registered Agent

If you decide to change your registered agent, start by selecting a new person or service that meets your state’s requirements. Then file the appropriate change-of-agent form or other required paperwork with the relevant state.

Keep your existing registered agent in place until the change is officially effective to help avoid a gap in coverage. Once the state has processed the change, you can end your relationship with the original agent.

The Takeaway

A registered agent is responsible for receiving important legal and government documents on behalf of an LLC. While you can often serve as your own registered agent, doing so requires you to meet your state’s requirements and remain available to receive official correspondence.

For business owners who value convenience, flexibility, or privacy, hiring a professional registered agent service may be worth the annual cost.

Ready to grow your business? SoFi Small Business Loans can give you fast access to the capital you need. Check your eligibility in minutes.

With SoFi Small Business Loans, it's fast and easy to get the financing your business needs to thrive.

FAQ

How much does a registered agent service cost for an LLC?

Usually, registered agent service costs between $100 and $300 per year. Costs can vary depending on whether there are other services from your provider you choose to opt for as well.

Can I use a P.O. box as my registered agent address?

You cannot use a P.O. box as your registered agent address. You must instead use a physical address.

What happens if my LLC doesn’t have a registered agent?

Failing to designate a registered agent causes a number of problems, including preventing you from registering your LLC, causing a loss of good standing in your state, triggering fines and penalties, preventing you from responding promptly to lawsuits, and stopping your business from expanding into new states.

Can a registered agent be in a different state than my LLC?

No, your registered agent must be located in the state where your LLC is registered.

Is a registered agent the same as a business owner?

A business owner does not have to be the registered agent for their business, though business owners often do choose to fulfill this role themselves.

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Photo credit: iStock/MangoStar_Studio

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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What is an unincorporated business? Or an incorporated one? Incorporated and unincorporated businesses refer to two forms of business structure. Each one has its own set of rules, benefits, and implications. Incorporated businesses have liability protection and are legally separate from their owners, while unincorporated ones are not separate and don’t have liability protection.

What Does Incorporated vs Unincorporated Mean?

Incorporated vs unincorporated refers to whether an entity is legally recognized as an independent body separate from its owners or members. Incorporated means the business is legally separated, so it exists independent of its owners. Unincorporated means there’s no legal separation, so the owners are personally liable for the business’s debts and obligations. This unincorporated vs incorporated distinction can apply to businesses, government agencies, nonprofits, or even community groups.

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Incorporated vs Unincorporated Businesses

There are differences in the way incorporated and unincorporated businesses are structured. These can affect taxation, liability, and management formalities.

Incorporated Business Structures

Incorporated businesses are considered legal and tax entities separate from their owners. That means they come with limited liability protection, which protects the owner’s personal assets from business liabilities.

It also means that this kind of business must file its own tax returns. Corporations pay income tax on their profits at the corporate tax rate. C corporations are subject to double taxation, meaning that the corporation is taxed on its profits and shareholders pay personal income tax on dividends. S corporations and limited liability companies (LLCs) are pass-through entities, which avoid double taxation.

Due to the demands of their business structure, incorporated businesses also generally need to adhere to more formalities, like holding meetings, keeping records, and filing reports.

An incorporated business could be a corporation or an LLC. LLCs can apply for specific LLC business loans.

Additionally, since corporations are separate from their owners, an LLC owner can even loan money to their own LLC.

Recommended: Startup Business Loans

Unincorporated Business Structures

With an unincorporated business, the owner or owners are personally liable for the business’s debts and legal obligations.

Unincorporated businesses are also pass-through entities, which means that business income is reported on the owner’s personal tax return. Unincorporated businesses usually have fewer requirements about observing business formalities.

An unincorporated business could be a sole proprietorship or a partnership. Sole proprietors can apply for specific loans for sole proprietors.

Recommended: Partnership Business Loans

Incorporated vs Unincorporated Areas

Incorporated areas are locations where a charter or other legislation creates official recognition by the state or local government of a municipality. This entity then has defined powers over the Incorporated area, such as providing public services or levying taxes. Depending on the relevant state law, the town or city might operate under a general law framework or home rule.

Unincorporated areas don’t have a municipal government created by incorporation. They fall directly under county or township oversight. State laws govern zoning, policing, and public services. In unincorporated areas, county commissioners make decisions about land use, road maintenance, emergency services, and code enforcement.

Incorporated vs Unincorporated Nonprofits

Incorporated vs. unincorporated nonprofits are similar to incorporated vs. unincorporated businesses. Unincorporated nonprofits rely on informal agreements, and governance tends to be more fluid, rather than having a centralized board of directors.

Incorporated nonprofits form a legal entity, usually a 501(c)(3), with its own rights and obligations. Generally, governance must operate through a board of directors, corporate bylaws, and recorded minutes. Incorporated nonprofits are typically required to file annual reports, maintain tax-exempt status, and adhere to state nonprofit laws and federal regulations.

Recommended: How to Get a Small Business Loan With Just an EIN

Which Is Right for Your Business?

There are a few factors that you may want to consider when deciding whether incorporated or unincorporated is better for your business.

Potentially one of the most important of these factors, your funding needs may dictate whether an unincorporated or incorporated business is a better choice for you. Investors often prefer corporations because they may provide a better potential return on investment through dividends and stock appreciation.

On the other hand, if your business’s funding needs are small or you prefer to use loans or personal funds, an unincorporated structure may work better. Instead of investors, you could access funding through small business loans.

Other factors to consider may include:

•   Liability concerns

•   Tax implications

•   Operational flexibility and control

•   Legal and administrative concerns

The factors that will be most relevant to your decision will depend on the nature of your business and industry.

The Takeaway

Incorporated vs unincorporated businesses have different liability, taxation, management requirements, and options raising capital. Understanding the full implications of each business structure may help you decide what makes the most sense for your business.

Ready to grow your business? SoFi Small Business Loans can give you fast access to the capital you need. Check your eligibility in minutes.

With SoFi Small Business Loans, it's fast and easy to get the financing your business needs to thrive.

FAQ

What is an unincorporated business?

An unincorporated business means a business that hasn’t been registered as a legal entity separate from its owner. The business and its owner or owners are considered the same legal entity.

What are the main risks of staying unincorporated?

With an unincorporated business, meaning there’s no legal separation between the owner and the business, the owner or owners are personally liable for the business’s debts and legal obligations. If the business has financial difficulties or faces lawsuits, the owner’s personal assets, including their house, car, and savings, are at risk. Unincorporated businesses may also face challenges raising capital.

Can an unincorporated business become incorporated later?

Yes, an unincorporated business can later become incorporated through a formal process, which typically involves selecting a business name, filing articles of incorporation, and paying any required fees.

How does incorporation affect taxes?

Incorporated businesses are considered tax entities separate from their owners and must file their own tax returns. Corporations pay income tax on their profits at the corporate tax rate. C corporations are subject to double taxation. That means the corporation is taxed on its profits and shareholders pay personal income tax on dividends. S corporations and LLCs are pass-through entities, which avoids double taxation.

What is the difference between an incorporated and unincorporated area?

There are several differences between an incorporated and an unincorporated area. Incorporated areas are locations where a charter or other legislation creates official recognition by the state or local government. Incorporated areas have municipal governments that have defined powers. Unincorporated areas don’t have a municipal government created by incorporation. They are overseen by the county or township. State laws govern their zoning, policing, and public services.

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Photo credit: iStock/miniseries

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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If you own a small business, you likely know that payment processing is crucial to keeping your enterprise running smoothly. In fact, fees on U.S. card swipes (both credit and debit) totaled a record $198.25 billion in 2025, showing what a major role processing plays in the economy.

To help you manage this aspect of your business as effectively as possible, consider this guide to small business payment processing and learn about how it works, what kind of fees to expect, and more.

What Is Small Business Payment Processing?

Small business payment processing is the method that allows merchants to accept non-cash transactions. It’s the system that allows for credit card, debit card, and digital wallet payments to be accepted and securely transferred from the purchaser to the seller. Like small business loans and other financial products, it can be an important part of launching and growing your enterprise.

How Payment Processing Works

Here’s a more in-depth look at how payment processing works for small businesses.

•   The customer initiates payment at a point-of-sale terminal with their chosen payment method.

•   The details of the transaction are transmitted to the card-issuing bank for validation. If verified, the card-issuing bank sends an authorization so the transaction can proceed.

•   The transaction is then batched with others to be completed, usually at the end of the business day. This involves the payment processor moving funds from the customer’s card-issuing bank to the merchant’s account, such as a small business checking account. The merchant’s financial institution then credits the connected account with the funds for the transaction, subtracting any transaction fees.

Payment Options for Small Businesses

If you run a small business, you likely know that there are multiple ways you can accept payments. Consider these two main avenues: in-person and online.

In-Person Payment Methods

In-person payment methods often involve a few ways that a customer can pay for goods or services. As a small business owner, you might accept cash, checks, or digital wallets and credit and debit cards via a point-of-sale (POS) terminal. It can be a wise move to accept several options since customer needs may vary.

When it comes to accepting card and digital wallet payments, there are two resources you may want to consider:

•   Merchant account providers: These are banks and certain other companies that offer merchant bank accounts. These accounts come with a suite of tools that allow a business to accept card and digital wallet payments. Many small business owners may already have this kind of account.

•   PSPs (or payment service providers) are another option. These are businesses like Stripe and Square that aggregate business accounts and allow these companies to accept payments without setting up a merchant account.

Online Payment Methods

If you want to accept payments online, you likely have choices, as noted above. You may have or open a merchant bank account that provides you with methods for accepting card and digital wallet payments as part of their offerings to help you manage and grow your business.

Or you might select a payment service provider, a business that allows you to accept payments online without having a merchant account.

Recommended: Cash Flow Loans: A Guide for Small Businesses

Payment Processing Fees: What to Expect

It is common to pay processing fees when you are a small business owner. These charges typically land in the 1% to 3% range. Mastercard- and Visa-branded credit cards dominate the market, controlling 80% of the market, and their swipe fees were 2.36% in 2025.

It can be wise to factor in such costs as part of your business overhead when budgeting.

Depending on your particular situation, you may want to look into a small business line of credit for flexibility in managing your small business expenses from launch through scaling.

Best Payment Processing for Small Businesses

The best payment processing for small businesses is the one that best suits your small business needs. There are many factors to consider; then, it can be helpful to research options and tap your trusted network of friends and advisors before making a decision. Here are some considerations:

•   Do you do most of your business in-person or online/mobile?

•   Do you have a custom website that processing will be integrated into? Is yours a social-media-driven business?

•   Do you offer subscription models?

•   Is your business domestic or international?

•   Are you (or do you anticipate being) a low- or high-volume business? How quickly do you plan to scale your business?

•   What is your budget for processing fees?

•   What security protocols are you most interested in?

•   Do you already have a relationship with a financial institution for your business?

While there are a number of considerations, knowing your key needs and concerns for payment processing can help you evaluate your options and choose the best partner.

Recommended: Business Loan vs Credit Card: Which Should You Use?

How to Choose the Right Payment System for Your Small Business

If you’ve considered your needs, as described above, your next step may be to assess payment processing providers so you can make your decision. You might consider these points to help you make a choice.

•   Consider your current sales figures, such as transaction volume, typical size of sale, and which payment methods are most popular. Determine which payment processor syncs with your business model and your plans to scale.

•   Dig into the details of the all-in costs of different payment processing options so you can work to determine which option is the best financial fit. It’s also worth looking into how flexible a contract with a payment processing system is. Would there be a charge, say, for ending services early?

•   Check reviews. As with most purchases and partnerships, it can be wise to fully vet contenders. Payment processing systems may offer demos and free trials, which can inform your decision.

•   When you have a couple of top contenders, it may be helpful to create a pros and cons list so you can compare your alternatives in terms of services offered, pricing, and other key features.

Recommended: 10 Things Business Loans Can Be Used For

The Takeaway

Payment processing is a key aspect of managing a small business. This kind of payment system for a small business allows customers to securely pay for goods and services with credit and debit cards and digital wallets. Fees are typically involved for this service. Understanding the process and the charges involved can play an important role in running and growing your business.

Ready to grow your business? SoFi Small Business Loans can give you fast access to the capital you need. Check your eligibility in minutes.

With SoFi Small Business Loans, it's fast and easy to get the financing your business needs to thrive.

FAQ

What is the cheapest payment processing for small businesses?

The cheapest payment system for small businesses will depend on several factors, such as the size of your business and the features and flexibility needed. It can be wise to compare what services your financial institution (if you currently hold a merchant account) offers vs. third-party providers to determine the most cost-effective option.

What is the difference between a payment gateway and a merchant account?

A payment gateway and a merchant account are business tools that together allow your business to accept online credit card payments. A payment gateway transfers card details from the website to the banks involved so payments can be transferred, while a merchant account is responsible for receiving and holding funds.

How do I start accepting credit card payments for my small business?

To start accepting credit card payments for your small business, you can set up a traditional merchant account with the appropriate tools to enable transactions, or you can use an aggregator such as Square or Stripe.

What is interchange-plus pricing?

Interchange-plus pricing is a method of passing the broken-out cost of every card swipe (the interchange fees) along to your business versus packaging it into a blended rate. This transparent pricing strategy shows you the wholesale interchange fee, the network assessment fee, and a fixed processor markup. It can allow you greater insight into your small business costs.

Are digital wallets a good payment option for small businesses?

Digital wallets, such as Apple Pay and Google Wallet, can be a wise payment option for small businesses. They are popular among many consumers and can offer fast, convenient transactions with high-level security.

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Photo credit: iStock/VIJ

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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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An invoice and a bill are both ways that a seller requests payment from a customer, but an invoice is typically business-facing and offers a deeper dive into what goods or services were provided. A bill, on the other hand, is an immediate request for payment and may be more commonly used in consumer-facing transactions.

Here, learn the finer points of invoices vs. bills so you can help keep your business running smoothly.

What Is an Invoice?

An invoice is a document prepared by a seller for a customer, usually in business-to-business, or B2B, transactions. It typically contains a detailed list of goods and/or services provided, the unit cost, and the total amount due.

Understanding invoicing can be a valuable asset as you manage and grow your business. It supports key decisions, such as what is selling strongly, how your profits are tracking over time, and whether to scale your enterprise (say, by taking out a small business loan).

Key Elements of an Invoice

An invoice typically contains the following key elements:

•   Name, address, contact information, and other details pertaining to the seller and the buyer

•   An invoice number and the date of the transaction

•   A breakdown of the items or services provided, with details on per-unit and total costs

•   Any discounts, rebates, taxes, or other charges applied to the sale, which allow the final total to be calculated

•   Terms of payment, such as due upon receipt or Net 30 days, and what forms of payment are accepted (such as credit card, check, or bank transfer)

The resulting document allows both parties to track the transaction, manage expectations, and reconcile costs. An invoice can also be an important record at tax time or when working through legal matters.

What Is a Bill?

A bill shares many features of an invoice, but it is typically a kind of document that is used in B2C, or business-to-consumer, transactions. First and foremost, it’s a request for payment of the amount due. Here are the usual details.

Key Elements of a Bill

The key elements of a bill are usually as follows:

•   The seller’s name, contact information, and the date, and often the buyer’s name and contact details

•   The goods and/or services provided, and their cost

•   The total amount due, with any discounts, rebates, taxes, or other charges applied being detailed

•   The terms of the sale, stating when the payment is due and often what forms of payment are accepted

Often, payment is expected upon receipt of a bill or within a short period of time.

Recommended: What Can a Business Loan Be Used for?

Invoice vs. Bill: Main Differences

Invoices and bills are quite similar in that they both document a transaction, spell out the details, and request payment. That said, there are a few key differences.

•   An invoice is usually used in business-to-business settings, while a bill is more commonly found in business-to-consumer transactions.

•   An invoice provides a very detailed description of a transaction, one which is useful in business accounting, tax preparation, and other matters, while a bill often doesn’t reflect as many specific points about the transaction. Rather, it just describes the topline summary of a sale.

•   An invoice may involve a statement of money due and payment terms, but a bill tends to be more of an immediate request for payment that the seller wants to get deposited into their business checking account.

The Accounting Perspective: AR vs. AP

Another way to look at an invoice vs. a bill is to consider the accounting point of view. While both documents reflect a transaction and can trigger a payment, consider this important difference.

The AR Perspective: In terms of Accounts Receivable, or AR, the seller will create an invoice and await the funds to be received. When the money is paid, it will be documented as an AR entry to reflect this influx of cash. This allows a business to see the money it is owed for goods provided or services rendered and make sure it is paid. If not, a business might put the unpaid invoice in for collection.

The AP Perspective: On the other side of the transaction is the Accounts Payable, or AP, viewpoint. In this scenario, the recipient of the invoice has a bill to pay. Assuming this is a B2B transaction, the buyer’s accounts will reflect an AP entry, meaning that cash must flow out to the seller, impacting reserves but keeping current with expenditures.

Keeping cash flowing via AR is key to a business thriving and growing, though other options, such as a small business line of credit, can also be used as an owner scales their enterprise.

Recommended: Understanding Short-Term Business Loans

When to Use an Invoice vs. a Bill

As noted above, there can be a subtle difference between an invoice and a bill. An invoice is usually used in B2B transactions, while a bill is typically used in B2C sales. If you are conducting business-to-business sales, you will likely create an invoice, which spells out all the key details, as well as payment terms.

If, however, you are making a sale to a consumer, you may use a bill, which gives a snapshot of the transaction and requests payment, often immediately or in a short time frame.

Another way that an invoice vs. a bill may be used is that Accounts Receivable issues an invoice to track a sale, while the recipient’s Accounts Payable then sees they have a bill to pay.

Recommended: Are Business Loans Considered Income?

The Takeaway

While they both play an important role in sales, there is a difference between an invoice and a bill. An invoice, which is usually a very detailed document, is typically used in business-to-business transactions, while a bill (which summarizes a sale and requests payment) is more commonly part of business-to-consumer transactions. Understanding how they work can help you better manage your business and its cash flow.

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FAQ

Are an invoice and a bill the same thing?

While they are similar, there is a difference between a bill and an invoice. They both document sales, but an invoice is usually used in a B2B context, while a bill is more commonly used for B2C transactions, often with a more immediate request for payment.

When does an invoice become a bill?

There is a difference between a bill and an invoice and how they relate to one another. When an invoice is issued and an AR department is awaiting payment, the recipient may view it as a bill and pass it along to the AP department to pay it.

What is the difference between an invoice and a receipt?

An invoice is usually a detailed record of a transaction, noting the parties involved, unit pricing, discounts and fees, total price, and payment terms. A receipt, on the other hand, typically documents that payment for a sale has been made.

Do small businesses need to send invoices or bills?

A small business will likely send a detailed invoice if conducting a sale with another business. If it is doing business with a customer, then it will probably issue a bill, documenting the sale and requesting payment in the near term.

What should every invoice include?

Every invoice usually includes the name and contact details of each party, an invoice number, the date, the items purchased (unit pricing), any discounts or additional charges applied to determine the total, and payment terms.

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Photo credit: iStock/yokeetod

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