Line of Credit vs. Credit Card: Which Is Right for You?

As your small business grows, from time to time you may wish you had a reservoir of cash to draw on to cover unpredictable small needs or help tide you through seasonal lulls. Fortunately, there are at least two options that fit the bill: a business line of credit and a business credit card.

Both can help you cover immediate costs and can also boost your business’s credit history (provided you make your payments on time). Which is the better choice? The answer depends on your company’s individual situation and needs.

When you’re considering a business line of credit versus a credit card, there are a few differences it may be helpful to take into account. Let’s take a closer look.

Key Points

•  A business line of credit provides access to a larger pool of funds for short-term needs, whereas business credit cards are better suited for smaller, frequent purchases.

•  Lines of credit often come with more flexible repayment terms and typically lower interest rates. Credit cards require minimum monthly payments and often have higher interest rates if balances are not paid in full.

•  Business lines of credit are ideal for managing cash flow or financing larger expenses, while credit cards are convenient for everyday expenses, online purchases, and travel.

•  Both options are revolving credit, allowing businesses to borrow up to a limit, repay, and reuse the funds, but credit cards usually come with rewards or cashback benefits.

•  Lines of credit may require stronger credit scores and financial documentation, while credit cards are easier to obtain but may come with higher fees for cash advances or exceeding credit limits.

💡 Recommended: Invoice Financing vs Factoring

What Is a Business Line of Credit?

A business line of credit, sometimes called a commercial line of credit, is a convenient, flexible way to cover expenses like working capital, bills, inventory, and other small, last-minute expenses.

Unlike a small business loan, a line of credit gives you access to a defined amount of funding with a maximum set by the lender. You’re charged interest only for the amount you borrow, rather than on the entire amount available. Typically, you can withdraw funds from your credit line and repay as needed, as long as you don’t exceed the approved credit limit.

Business lines of credit are highly flexible, so they may be useful for many types of businesses. If your business has seasonal ebbs and flows, a line of credit may help you maintain a healthy cash flow. But even if your business is growing steadily, it can be helpful to have a line of credit to tap into if you spot an unexpected opportunity you haven’t budgeted for but would like to pursue. And if your lender reports to one of the major credit agencies, paying back what you owe on time can benefit your business’s credit rating and possibly your own.

Recommended: Understanding Working Capital Lines of Credit

Pros of a Business Line of Credit

A business line of credit has many potential benefits, including:

•  Easy access to funds: Compared to some other options, such as SBA loans, business lines of credit offer the borrower earlier access to money. Once you secure a line of credit, the money is basically on tap for you to withdraw and use as needed.

•  You use (and pay interest on) only what you need: With a business line of credit, you’re only charged interest on the amount you use. And, as long as you stay within your limit, you can use the funds at will.

•  Flexibility: The funding is not purpose-specific. You are free to spend the funds for business purposes more or less as you see fit, so using the credit line can be a flexible way to address any of your business’s needs.

Cons of a Business Line of Credit

While a line of credit can be beneficial, it may also have drawbacks in some situations, such as:

•  Low maximums: The sum of money you have available to you with a line of credit may be less than you’d get with a small business loan. A business line of credit may not provide enough capital for a large or expensive endeavor.

•  Short terms: A business line of credit also usually has shorter repayment terms than other options — typically three to 18 months. That means that if you withdraw a lot on your credit line, paying back what you borrowed can deplete your monthly funds quickly.

•  Variable payment amounts: The payment amount can fluctuate from month to month based on how much you owe. In addition, some credit lines come with variable interest rates. As a result, you may not have a fixed payment amount to budget for.

•  Impact on your personal credit: Any missed payments may affect your personal credit history, especially if you’ve issued a personal guarantee to secure your business’s line of credit.

What Is a Business Credit Card?

A business credit card is another way a company can get access to funds as needed and pay back only what’s borrowed (plus interest). Much as you would for a personal credit card, you apply with a credit card company, and, if approved, you receive a card (or cards) that you can use to make business-related purchases. You’re then expected to make regular payments until the money you’ve taken out is paid back, with interest. Like a line of credit, a credit card will also come with a maximum, beyond which you can’t withdraw more money.

A business credit card can also be a way for your business to build its business credit (as long as you verify that the credit card company reports to one of the major commercial credit bureaus). Just keep in mind that, even if your business credit card is in your company’s name, it can potentially still affect your personal credit score. Some business credit card issuers will report late payments and serious delinquencies to consumer credit bureaus.

Recommended: Checking and Understanding Your Business Credit Score

Pros of a Business Credit Card

Business credit cards are not just for companies with big storefronts or businesses with multiple employees. Qualifying individuals who have a side hustle, such as photography or tutoring, can also benefit from them. Depending on what card you get, the benefits may vary, but they can include the following:

•  Rewards: Unlike lines of credit, business credit cards may offer perks like sign-up bonuses and/or reward systems that give you things like airline miles for using your card.

•  Relatively easy to get: Since credit card issuers often target small businesses, the cards are typically easily accessible. You may not need a business credit history of even a profit minimum. The main requirement is your personal credit history. So, even in situations where you don’t qualify for a business loan, you might still have the option of a business credit card.

•  Flexibility: Like a line of credit and other types of business loans, a business credit card will let you use the funds for any business expense.

Cons of a Business Credit Card

Business credit cards also have some drawbacks. Here are some you may want to consider:

•  High threshold for sign-up bonuses and/or rewards: While the sign-up bonuses or cash back perks may be tempting, you usually have to spend a significant amount before you can earn them.

•  Fees: There may also be a complicated fee system tied to your card. Annual fees, transactional fees, and foreign currency purchasing fees can all be included in the card’s terms and conditions, depending on which card you choose. While lines of credit may also have fees, typically credit card fees are higher.

•  High APRs: In general, business credit cards tend to have higher annual percentage rates (APRs) than many other kinds of funding, including lines of credit.

•  Payment problems could impact your personal credit score: Business credit card issuers will often report negative payment history to both commercial and consumer credit bureaus. If your business fails, the credit card company will likely view you as personally liable for unpaid debt, especially since many of them ask you for a personal guarantee.

Key Differences Between Line of Credit and Credit Card for Businesses

Both lines of credit and business credit cards are types of revolving debt that can provide your business with the option to spend money up to a set limit. However, there are a number of key differences between them that you should be aware of. Understanding these differences can point you towards the right fit for you.

Maximums

Typically, both lines of credit and business credit cards provide smaller amounts of money than many other kinds of loans. However, business credit cards tend to have lower maximums than business lines of credit. If you’re looking for a larger amount of money, a business line of credit might be a better bet.

Interest Rates

In general, interest rates tend to be lower for business lines of credit than for credit cards. If you think you’ll end up carrying a balance, that can be an important distinction, since you’ll likely end up paying more in interest on a credit card.

Collateral

Business credit cards are typically unsecured, meaning you don’t have to provide any collateral to “secure” your debt. Business lines of credit, on the other hand, can be secured (require collateral) or unsecured (no collateral required). If you don’t have collateral to put up or don’t wish to put up collateral — and can’t qualify for an unsecured line of credit — you may want to consider whether a credit card could work for you.

Annual Fees

Both business lines of credit and business credit cards generally come with annual fees. Typically, business credit cards charge higher annual fees than business lines of credit, but that’s not always the case. Some banks offer business credit cards with no annual fees.

Cash Advances

You can usually use either a credit line or a credit card to access a cash advance. However, cash advances with a credit card tend to involve higher fees and higher APRs than advances from a line of credit. Also, you can typically get a larger cash advance from a line of credit than you can from a credit card.

Rewards

Business credit cards may offer rewards for spending money on your card, while lines of credit typically don’t offer rewards. Different cards will have different types of rewards. You might find a business credit card that offers extra cash back for spending money in certain categories (like office supplies), for example, or one that offers extra points for business travel.

While rewards can be appealing, some reward cards come with high annual fees, so you will want to make sure the rewards you’ll earn by using the card will more than make up for the fee.

The Takeaway

Business line of credit versus business credit card — which is best? No answer fits every company across the board. Both business lines of credit and business credit cards can be valuable credit tools. Credit lines generally offer higher credit limits and lower APRs, but credit cards often come with valuable rewards and some have a 0% APR introductory period.

Whichever loan product you’re leaning toward, it can be a good idea to shop around and compare different financing options to find the best fit for your business.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.


With one simple search, see if you qualify and explore quotes for your business.

FAQ

What is the main difference between a line of credit and a credit card?

A line of credit offers a pool of funds that can be drawn upon for larger, short-term financial needs with flexible repayment options. A credit card is designed for everyday expenses, offering convenience and rewards but often with higher interest rates if balances aren’t paid in full.

Which option is better for managing irregular cash flow?

A line of credit is better for managing irregular cash flow, such as covering payroll or seasonal expenses, due to its typically larger limits and lower interest rates. Credit cards are less suitable for such purposes because of their smaller limits and higher interest.

Can a business have both a line of credit and a credit card?

Yes, a business can benefit from having both. A line of credit provides backup for larger cash flow needs, while a credit card is useful for day-to-day transactions and earning rewards on purchases.


About the author

Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.



Photo credit: iStock/milan2099

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.

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.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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10 Steps for Starting a Small Business

If you’re interested in exploring your entrepreneurial side and breaking free of the traditional 9-to-5, you might consider starting a small business. But it’s not something to venture into without mapping out a strategy for success first.

There’s some groundwork that needs to be laid when you’re working toward owning a business. That includes refining your concept, taking care of the legal aspects of starting a new company, and getting your finances in order.

If you’re looking for a checklist of steps to follow when you’re starting your new business, this guide can help. Keep reading for 10 steps on how to start a business.

Key Points

•  Starting a small business begins first with having an idea and doing the essential research around it to make sure it’s viable.

•  Once you have your business idea, you can draft a business plan, weigh your financing options, and determine your business structure.

•  Next, you should make your business a legal entity and open up a business bank account.

•  From there, plan your workload, hire employees, and focus on running and growing your new business.

•  Financing options for starting a small business include cash savings, angel investors, small business grants, and small business loans.

💡 Recommended: How to Get a Loan to Buy a Business

1. Research Your Idea

At the core of every successful business is a great idea. Depending on the type of business you’re interested in starting, you may have what you believe is a winning concept for a product or service you’d like to offer.

Before you get too far along in the process of starting your new business, however, it’s important to do some market research. Specifically, you should be thinking about these questions.

•   How original or unique is this concept?

•   Are there other businesses with a similar product or service?

•   How successful are those businesses and who are the biggest competitors?

•   What’s the long-term outlook for this product or service like?

•   How much demand is there overall for what I plan to offer?

At this stage, the goal is to determine whether owning your own business is viable, based on what you envision for your products or services.

Recommended: 23 Small Business Ideas

2. Identify Your Target Customers

Part of conducting market research when starting a small business involves finding your target customers. These are the people who are most likely to buy your product or service.

Creating an avatar that embodies your ideal customer can help. As you create your avatar, try to paint as clear a picture as possible and consider things like:

•   Basic demographics, such as age or gender

•   Income and employment

•   Education level

•   Geographic location

•   Hobbies or interests

It’s also important to consider what problems your ideal customers are facing that your business can help to solve. Being able to solve problems and offer solutions is one of the keys to owning a business that has staying power.

Recommended: Business Growth Strategies

3. Draft a Business Plan

A business plan is an important document to have when starting a new business. This is essentially a roadmap or playbook of how you plan to start, run, and grow the business over time.

There are different formats business plans can take, depending on the scale of the company you’re trying to start. A traditional business plan includes an executive summary and description of the company. But it also covers things like:

•   Market research and analysis

•   Organization and management structure

•   Details about the products or services you plan to offer

•   Marketing and how you plan to promote the business

•   Estimated startup and operational costs

•   Key financial ratios, such as estimated profit and loss

Broadly speaking, your business plan should identify what your goals for the business are and how you plan to go about achieving them. Writing a business plan can help you get organized in the early stages of starting a small business and give you a reference that you can check your progress against.

💡 Recommended: Stages of Business Growth

4. Plan Your New Business Budget

One of the most important steps in how to set up a business involves estimating your costs. The cost to start a business has two dimensions: estimating how much money you’ll need to get the business up and running and how much you’ll have to spend on an ongoing basis to maintain it.

When calculating startup costs, consider everything you may need to spend to get off the ground. That may include things like:

•   Leasing a space if you’re starting a brick-and-mortar business

•   Utility, cellphone, and internet service deposits

•   Purchasing or leasing equipment

•   Hiring and training staff if you plan to have employees

•   Purchasing necessary business licenses and/or paying registration fees

•   Marketing and promotion costs

•   Production costs to create your products

•   Website hosting and/or ecommerce setup

Those are the bigger expenses you may need to plan for when starting a new business. Once the business is open, your small business accounting will include ongoing costs such as:

•   Rent or lease payments

•   Utilities

•   Payroll if you have employees

•   Supplies and equipment

•   Marketing and advertising costs

•   Basic living expenses

If you plan to stick with your current job while owning your own business in the early stages, then you may have steady income that can cover your living expenses. But those may not be enough to cover your business expenses until your venture begins turning a profit. For that reason, it’s important to consider the next step in the process.

5. Weigh Financing Options

When deciding how to start your own business, finances are a focal point. You need to know what you’re set to spend — and how you plan to pay for it.

Bootstrapping could be a possibility if you have a sizable amount of cash tucked away in savings that you could tap into. But that may not be a reality, in which case you’ll need to explore other options for small business financing. There are two broad categories of business financing: equity and debt.

Equity Financing Explained

With equity financing, you exchange an ownership stake in the business for funds from investors. This is typically how angel investing or venture capital investing works.

The upside of this type of business financing is that there’s nothing to pay back. This can be a real advantage as you’re attempting to achieve a positive cash flow while you get your startup off the ground. And whether the business succeeds or fails, with equity you’re not obligated to make investors whole financially. So the investor shoulders much of the risk in this financing equation.

The trade-off, however, is that each equity investor owns part of your business and as such, can have a say in how it’s run. That may not be ideal if you’d prefer to have complete control over business decision-making.

Debt Financing Explained

Debt financing is just what it sounds like: debt you take on to fund your business. For example, that can mean:

•   Small business loans

•   Small business lines of credit

•   Small business credit cards

•   Personal business loan or lines of credit

You borrow a set amount of money and agree to pay it back to a lender, typically with interest. Small business loans can be found at traditional banks and credit unions or through online lenders.

Starting a small business with debt may not be a perfect solution, but you don’t have to give up any of your ownership. And you can compare loans for small businesses or personal loan options to find one that fits your budget and offers the best repayment terms, based on your credit profile.

Recommended: How to Apply for a Small Business Loan

Small Business Grants

There’s also a third potential funding option you may consider in lieu of debt or equity financing. Small business grants can provide funding to start a new business with no repayment required. Getting small business grants can be time-consuming and competitive, however, so if you need money to start a new business quickly you may want to explore loans instead.

6. Choose a Business Name

When selecting a name for your small business, consider what kind of brand reputation you want to build and what you want to be known for. You may choose your own name or something that embodies what your business is all about.

Before finalizing your choice of name, do your homework. Specifically, make sure the name isn’t trademarked or otherwise being used by any other business entity, as this could create legal headaches later. If you plan to launch a website or social media accounts for your business, you’ll also want to check to see if your business domain name and social media handles are available.

Recommended: Commercial Real Estate Loans

7. Determine Your Business Structure

Choosing a legal structure is next on the list of steps to starting a business. A legal structure is how your business will operate. The most common business structures are:

•   Sole proprietorship

•   Partnership

•   S-corporation

•   C-corporation

•   Limited liability company (LLC)

Your choice of business structure matters for a few reasons. First, it determines what kind of liability you have in situations where your business is sued. With a sole proprietorship, for example, you and the business are treated as one and the same. So if you’re sued by a customer or supplier, then your personal assets could be attached if a judgment is entered against you in civil court. An LLC, on the other hand, shields your personal assets.

Your choice of business structure can also affect taxation and how you pay taxes. Again, with a sole proprietorship, you and the business are treated as one and the same for tax purposes. Corporations, however, are taxed differently. So, depending on how much profit you anticipate the business generating, one structure may be better than another.

A third consideration has to do with getting business funding. If you plan to take out one or more business loans, then your business structure may influence what type of financing you’re able to qualify for and how much you can borrow.

Recommended: EBITDA Explained

8. Make Your Business Legal

If you have a business name and structure, the next step is making your business legal. This may include:

•   Registering your business with state and local agencies

•   Obtaining an Employer Identification Number (EIN) from the IRS and a state tax ID if needed

•   Securing any licenses or certifications required to operate

•   Filing trademark or patent applications for business names or products, if applicable

What, if any of these steps, are required for starting a small business will depend largely on where you plan to do business. Some states may require a separate tax ID to go along with your federal tax ID, while others don’t, for instance. Depending on what type of business you plan to operate, you may need a special license before you can open your doors.

If you’re unsure what you need to do to register, contacting your local chamber of commerce or your state’s business development agency can be good places to start. Keep in mind that you may need to pay certain fees to register or obtain necessary licenses when starting a small business.

Recommended: Amortization vs. Depreciation

9. Open a Business Bank Account

Once you’ve registered your business and made it legal, you can open a business bank account. Having a separate bank account can make sense when owning your own business for a few reasons.

First, this is a good way to keep business and personal expenses separate. When you’re paying your household bills and business expenses out of the same account, it can get confusing as to which funds are going where. It’s easier to keep track of business cash flow and personal cash flow when they’re in separate accounts.

Next, having a business bank account can make filing taxes easier. If you plan to deduct certain business expenses, then having all of those expenses linked to a single account can minimize headaches when filing taxes. Separate business and personal bank accounts may also be necessary if you want to avoid mingling funds because you’ve chosen something other than a sole proprietorship as a business structure.

When comparing business bank accounts, pay attention to fees you may pay, as well as minimum deposit or minimum balance requirements. Also consider whether the account offers access to merchant services if you need help with things like payroll or accounting.

10. Hire Staff and Plan Workload

Not all startups will require employees, especially in the beginning. But if yours does, it’s a good idea to figure out what areas you’ll need help in and for how many hours you want employees to work. If you’re running a coffee shop, for example, you will likely need at least one other barista to help you.

At this point, you may be able to start figuring out what tasks will need to be done each day and each week, how long they’ll take, and who can do them. In your coffee shop, someone will have to get there early to prepare the tables, make the coffee, and set up. And at the end of the day, someone will have to stay late to clean up and close down the shop.

Depending on how much project management is involved in your particular startup, you may want to use task management software to track what needs to be done and who will do it. You should already have budgeted for payroll, but it’s also important to figure out when and how often each employee will be coming in and what exactly each will be working on.

Additional Considerations

When starting a business, beyond the basics of writing a business plan and figuring out funding, several crucial factors can impact your long-term success. Paying attention to areas like accounting software, marketing strategies, and legal compliance can streamline operations and protect your business from costly mistakes.

Accounting Software

One item a new small business should consider investing in is accounting software. Proper financial management is essential for tracking expenses, monitoring cash flow, and filing taxes accurately.

Marketing Agency

A well-executed marketing strategy is key to attracting and retaining customers. If you lack in-house expertise, hiring a marketing agency can be a smart investment. Working with professionals ensures that your marketing campaigns are data-driven and optimized for performance, leading to better brand visibility and customer engagement.

Legal and Regulatory Compliance

Ensuring legal and regulatory compliance is crucial for avoiding penalties and legal issues. Depending on your business type and location, you may need permits, licenses, or registrations. Consulting with a business attorney can help you navigate contracts, intellectual property, and local business laws.

The Takeaway

After reading through this list of steps to starting a business, it can seem like a lot. But breaking down each step into smaller, actionable tasks can make the process less daunting.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.


With one simple search, see if you qualify and explore quotes for your business.

FAQ

What is the easiest small business to start?

The easiest small business to start typically requires low startup costs and minimal specialized skills, such as freelance services (writing, graphic design, virtual assistance), online retail, or consulting in a field of expertise. These businesses can be started from home with flexible hours.

What type of small business is most successful?

Service-based small businesses, like accounting, IT support, and digital marketing, tend to be the most successful due to low overhead and consistent demand. Businesses in healthcare, home improvement, and e-commerce also perform well, as they address essential or growing market needs, leading to higher profitability and long-term stability.

Do I need a business license?

Yes, most businesses require a business license to operate legally. The need for a license depends on your industry, location, and business type. Local, state, or federal authorities may issue the required licenses, ensuring your business complies with regulations, taxation, and zoning laws. Always check specific local requirements.

When should I hire employees?

You should hire employees when your workload exceeds your capacity, hindering growth or customer satisfaction. Signs include consistently missing deadlines, turning away clients, or lacking specialized skills. Hiring can help scale your business, improve efficiency, and allow you to focus on high-value tasks that drive growth and profitability.


About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.



Photo credit: iStock/svetikd

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.

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


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


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

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Retail vs Corporate Banking: What's the Difference?

Retail vs Corporate Banking: What’s the Difference?

The main difference between retail vs. corporate banking lies in what type of services they provide and to whom. Retail banking is consumer-focused while corporate banking, also referred to as business banking, is designed to meet the needs of businesses.

Banks can offer both retail and business banking services to attract both types of clients. Understanding how each one works makes it easier to distinguish between retail vs. corporate banking.

What Is Retail Banking?

Retail banking refers to banking services and products offered to retail customers, meaning individuals. Retail banking can also be referred to as consumer banking or personal banking. The kinds of products and services offered by retail banks are designed for personal money management — such as checking and savings accounts, certificates of deposit (CDs), debit cards, and more.

In the U.S., the Office of the Comptroller of the Currency (OCC) is responsible for overseeing banks at the national level. Banks with assets in excess of $10 billion are also regulated by the Consumer Financial Protection Bureau (CFPB). In addition to federal regulation, retail banks can also be subject to regulation and oversight at the state level. These organizations help ensure that services are being provided in keeping with the law and that charges are not excessive.

Recommended: How Do Retail Banks Make Money?

Services Offered Under Retail Banking

Retail banks typically offer products and services that are designed to help everyday people manage their finances. This is the key distinguishing factor between retail vs. business banking. For example, some of the services retail banks may offer include:

•   Deposit account services: Retail banks can allow consumers to open checking accounts, savings accounts, money market accounts, and other deposit accounts to hold their money safely and securely.

•   Mortgage lending: Homeowners often require a loan to purchase a home, and many retail banks provide mortgages to qualified borrowers.

•   Secured and unsecured loans: In addition to home loans, retail banks can issue other types of loans, including auto loans, personal loans, home equity loans, and lines of credit.

•   Credit cards: Credit cards offer convenience for making purchases; many of them also offer rewards to consumers for using them. Retail banks may issue credit cards to creditworthy customers.

•   Certificates of deposit: Certificates of deposit (or CD accounts) are special types of deposit accounts that allow you to earn interest on your money for a set term.

Banks may also offer insurance to their retail clients. Private banking may also be available for higher net-worth customers.

Retail banks usually make money by accruing interest on the money they lend via loans and other vehicles. They may also charge various fees for banking services, including overdraft fees, loan origination fees, and checking account fees. Some retail banks have physical branches, while others operate exclusively online.

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No account or overdraft fees. No minimum balance.

Up to 3.80% APY on savings balances.

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What Is Corporate Banking?

Corporate banking is the branch of banking that offers its services and products to business entities. That includes large corporations as well as small and medium-sized business operations. Corporate banks may also serve government agencies and entities. While services may include deposit accounts, these banks also may offer credit and asset management, lines of credit, payment processing, and tools that facilitate international trade.

Like retail banks, corporate banks can charge fees for the various services they provide. Banking services can be directed toward a corporate audience in general or be tailored to target the needs of specific industries, such as healthcare or companies that operate in the tech space.

Recommended: When Would I Need a Business Bank Account?

Services Offered Under Corporate Banking

The services offered by corporate banks are designed to suit the needs of businesses large and small. The kinds of services a corporate bank can offer include:

•   Deposit account: Business banking can include many of the same deposit options as retail banking, such as checking accounts, savings accounts, and money market accounts.

•   Debt financing: Corporate banks can offer debt financing options to startups and established businesses that need capital to fund expansion projects and growth.

•   Trade lines of credit: Trade financing can make it easier for businesses to cover day-to-day operating expenses. Examples of trade financing that corporate banks may offer include merchant cash advances, purchase order financing, and accounts receivable processing.

•   Payments processing: Corporate banks can act as payment processors to help businesses complete financial transactions when providing products or services to their customers.

•   Treasury management: Treasury management services can help businesses keep cash flowing steadily and smoothly.

•   Global banking: Businesses that are interested in expanding into foreign markets may rely on business banking services to reach their goal.

Key Differences Between Retail and Corporate Banking

Retail and corporate banking both have the same goal: serving the needs of their customers. But the way they achieve this goal differs. Here are some of the most noteworthy differences between retail banking vs. business banking.

Business Model

Retail banking’s business model is built around meeting the needs of retail banking clients. Banks that operate in the retail space are primarily concerned with three things: deposits, money management, and consumer credit.

Corporate banks, on the other hand, base their business models around products and services that are utilized by business entities. That includes offering business bank accounts, providing avenues for securing capital, and offering financial advice.

Customer Base

Retail banks are geared toward consumers who rely on financial products like personal checking accounts, savings accounts, or unsecured loans. A retail bank can offer accounts to different types of consumers, including specialized accounts for kids, teens, students, or seniors. But generally, they’re consumer-facing and work with everyday people to help them manage their money.

That’s a difference between retail vs. corporate banking: The latter is business-centric. For example, a corporate bank may offer services to companies with a valuation in the millions. Or it may cater to smaller businesses that need help with things like payment processing or cash flow management. Some business banks may serve companies both large and small.

Processing Costs

As mentioned, both retail and corporate banks can charge fees for the services they provide. These fees are designed to make up for the bank’s own handling costs for processing transactions. Both types of banks can also charge interest on loans, lines of credit, and credit cards. These are some of the ways that banks earn money.

In general, retail banks tend to have lower handling costs which means lower fees for consumers. Corporate banks, on the other hand, typically have higher processing costs which means their clients pay more for their products and services.

Value of Transactions

Since retail banks serve everyday consumers, the average value of transactions processed tends to be lower compared to that of corporate banks. A corporate bank, for example, might process a transaction valued at several million dollars for a single customer. Someone who’s adding money to their personal checking account vs. a business checking account, meanwhile, may be depositing a few hundred or few thousand dollars.

Profitability

Here’s another key difference between business banking vs. retail banking: Business banking tends to generate more profits. That’s because corporate banks typically deal in higher value transactions than retail banks.

The Takeaway

The difference between retail vs. business banking is quite straightforward: Retail banking serves individual customers’ needs, while corporate banking serves the needs of companies of all sizes, as well as other organizations.

For most people, retail banking is a good choice to manage and optimize their financial lives. For instance, you can use a retail bank account to pay bills, deposit your paychecks, transfer money to savings, and make purchases or withdrawals using your debit card.

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 3.80% APY on SoFi Checking and Savings.

FAQ

Is corporate banking better than retail?

Corporate banking is not necessarily better than retail banking; they’re designed to serve different audiences. Corporate banking is usually a wise choice for a business entity, while retail banking is designed to serve individuals with their personal banking needs.

Is a current account retail or corporate?

Current accounts can be offered by retail and corporate banks. Generally speaking, a current account is a bank account that allows you to make deposits and withdrawals. A checking account, either personal or business, is an example of a current account.

Why do banks focus on retail banking?

Banks focus on retail banking because there’s a need for it among consumers; many adults might be interested in a checking account, a debit card, and a credit card, for example. The demand for retail banking also allows banks to generate revenue by charging fees for deposit accounts and interest on loans and lines of credit. That said, corporate banking also serves an important need and generates income for banks as well.


About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.



Photo credit: iStock/https://www.fotogestoeber.de


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.

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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3.80% APY
SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider 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, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% 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 members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible 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 an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% 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 Eligible 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 Eligible 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 Eligible 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 Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% 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 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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How to Get a Small Business Grant: 7 Tips to Secure a Grant

Small business grants can make starting a new business or growing an existing one easier. Unlike loans, which have to be repaid, grant money typically does not require business owners to pay it back.

Figuring out how to get a small business grant is the challenge. It can be complicated if you’ve never done it before, and the grant landscape can be competitive. Understanding more about what’s needed to qualify can help when you’re seeking out grant money for your small business.

Below are seven tips that may help you find and secure the small business grant that will work for you.

Key Points

•  To get a small business grant, start by researching grants from government agencies, private organizations, and nonprofits that align with your business goals, industry, and location.

•  Carefully review the eligibility requirements for each grant, ensuring your business meets the necessary qualifications, such as size, revenue, or target demographic.

•  A solid business plan is often required, outlining your goals, strategies, and how the grant will help your business grow or achieve specific objectives.

•  Write a clear, compelling grant proposal that directly addresses the objectives of the grant, explaining how your business aligns with the grant’s purpose and showcasing how the funds will be used effectively.

•  In addition to small business grants, businesses can rely on small business loans to get the funding they need to grow or maintain their business.

💡 Recommended: Startup Funding Options

1. Get Familiar With the Grant Options

One of the keys to getting a small business grant is simply knowing what’s available. Some grant programs that offer funding to any kind of business, whereas others may be more selective as to which types of business owners they support.

For example, when searching for grant opportunities, you may come across:

•  Business grants for women

•  Small business grants for minorities

•  Business grants for disabled entrepreneurs

•  Grants and loans for disabled veterans

•  Grants for immigrant business owners

If your business fits into any of those categories, looking for relevant grants could help you find additional possibilities as you fine-tune your search for grant funding.

💡 Recommended: Minority Business Loans

2. Know Where to Look for Grants

Grant money for small businesses can seem elusive unless you know where to look. A general web search can turn up some results, but there are a number of websites that aggregate different kinds of small business grant opportunities in one place.

Some of the options you might consider include:

•  Grants.gov: This government-run website houses information on more than 1,000 grants as well as additional resources for potential applicants.

•  GrantWatch: This subscription-based website allows you to search for grants using different criteria and provides information about other resources, like grant writer referrals.

•  Minority Business Development Agency (MBDA): This government-run website lists some grant competitions as well as providing other resources for small businesses.

•  Small Business Administration (SBA): The SBA is involved with some grantmaking, particularly in the area of research and development, and also grants funds to community organizations.

•  USDA Rural Business Development Grants: Rural Development provides grants (and loans) to encourage the development of housing, healthcare, first responder services, utilities, and other essential services.

You can also research how to get a small business grant at the local or state level. Your city’s Chamber of Commerce or state business development agency may be good starting points for finding grant opportunities.

Recommended: Small Business Grants vs Loans: 7 Differences

3. Review Individual Grant Criteria

When it comes down to applying for small business grant funding, researching the qualification criteria is critical. This can help you pinpoint the grant opportunities you’re most likely to qualify for, while weeding out ones that aren’t a good fit.

Every grant is different, and again, one of the main criteria for a specific grant might be whether you operate a woman-owned business, belong to a minority group, or have veteran status.

Beyond that, however, consider other minimum qualifications, such as:

•  Time in business

•  Type of industry

•  Annual revenues

•  Number of employees

•  Planned use for grant funding

Some small business grants may be aimed at newer businesses, while others may be geared toward helping established businesses grow. Still, others may place conditions on how grant money can be used to further business activities. These are all things you should know before putting the time and effort into completing the application.

Recommended: Guide to Grant Writing for Small Businesses

4. Know What Registrations You May Need to Apply

Depending on the grant program, you might need some registrations before you can apply. For example, you may be required to have any or all of the following:

•  Federal Employer Identification Number (EIN)

•  DUNS Number

•  SBA certified small business or woman-owned business documentation

•  Business license or articles of incorporation

If you’re applying for grants through a portal like Grants.gov, you may also need to register for an account with the site first. Making sure you have all the necessary registrations in place before you apply can save you time later.

Recommended: Can You Get a Small Business Loan With Just EIN?

5. Update Your Business Plan

It’s typical for lenders to ask to see a copy of your business plan when you’re applying for loans. For SBA loans, for example, a business plan is a requirement when you want to be considered for funding.

It’s not uncommon to need an updated business plan when you’re trying to get grant money for your small business. If you haven’t updated your business plan recently, or if you’ve never drafted one, that’s one more thing to cross off the list before you apply for funding.

A business plan should contain certain details about how you run your business. The basic format typically includes:

•  An executive summary

•  Company description

•  Market analysis

•  A description of your organization and management

•  Details about your products or services

•  Financial projections and expected growth

Remember that getting a business grant can hinge on how you present your business. Your business plan, along with the details you include in your application, are your chance to make a strong case for why you should receive funding.

Recommended: How Do You Structure a 3-Year Business Plan?

6. Complete the Grant Application

Perhaps the most important step in how to get a small business grant is filling out the application. This part of the process can take days or even weeks, depending on how extensive the application is and what the grant-making organization requires in the way of supporting documentation.

Here are some tips to keep in mind as you fill out the application:

Know your due dates

Grant applications often have deadlines and you don’t want to miss out on a chance to secure funding. Make note of when the application is due and give yourself plenty of time to complete it.

Read it through at least once

Give the application a thorough review so you know what’s covered and what you’ll need to provide when you’re ready to submit it.

Be truthful

Avoid including inaccurate or misleading information on your application, since that could cause you to be disqualified for grant funds.

•  Be thorough. One thing to note about how to apply for small business grant money is that less is not more. In other words, if the application asks for a detailed description of how you plan to use the money, then don’t offer up a one- or two-sentence explanation.

•  Don’t leave anything out. If a grant application asks for specific documentation, such as a copy of your business plan or a recent profit and loss statement, don’t fail to include it. An incomplete application could be rejected right off the bat, so make sure you’re submitting all requested documents.

Before you hand in your grant application, proofread it for spelling or grammar errors and correct any you find. You may also want to have someone who’s experienced with small business grants or grants in general look it over, as well. You could also consider hiring a grant writer to review your application. A second set of eyes may discover overlooked mistakes or areas you could improve.

Recommended: Top Small Business Grants in California

7. Follow Up if Appropriate

Once you’ve sent in your grant application, the waiting game begins. The application review and approval process can take weeks or even months, depending on the grant.

During this time, you may want to reach out to the grant organization and check up on the application. Specifically, you could ask if there’s any additional information or clarification needed as your application is being reviewed.

You don’t want to be a nuisance, but following up could help with getting you a small business grant if it keeps you on the grant-maker’s radar.

The Takeaway

Grant money for small businesses can be a financial lifeline if you’re hoping to launch a new venture or grow a business you already have. Working out the details of how to get a business grant can help you find the best grant options and deliver the strongest application possible.

In the meantime, don’t discount small business loans as an alternative source of funding.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.


With one simple search, see if you qualify and explore quotes for your business.

FAQ

What are the eligibility requirements for small business grants?

Eligibility for small business grants typically depends on factors like the size of the business, location, industry, and the purpose of the grant. Many grants also require that the business meets specific criteria, such as being independently owned or serving a particular community or demographic group.

How do I find small business grants?

You can find small business grants through government websites like Grants.gov, local chamber of commerce listings, and nonprofit organizations. Additionally, private corporations and foundations often offer industry-specific or competition-based grants to support business innovation or community development.

What is the application process for small business grants?

The application process generally involves filling out a detailed proposal or application form, providing financial documents, and outlining how the grant will be used to support business growth or specific projects. It’s important to follow the grant guidelines carefully and submit all required documentation to increase your chances of approval.


About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.



Photo credit: iStock/sakkmesterke

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.

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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NPV Formula: How to Calculate Net Present Value

Net Present Value: How to Calculate NPV

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.

Key Points

•   Net Present Value (NPV) measures the difference between the present value of cash inflows and outflows over time.

•   Calculating NPV helps determine the profitability of investments or projects by considering future cash flows and a discount rate.

•   The NPV formula incorporates the time value of money, emphasizing that money now is worth more than the same amount in the future.

•   A positive NPV indicates that the earnings from an investment are expected to exceed the cost.

•   NPV is used in capital budgeting to assess the return on project investments before committing funds.

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.

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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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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.


About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.



Photo credit: iStock/Sanja Radin

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