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Getting a Personal Loan While Self-Employed: How to Apply

One downside of leaving a traditional 9-to-5 for a life of self-employment is navigating your personal finances as a sole proprietor. From invoicing to estimating taxes, it’s all on you — because you’re the boss now.

Qualifying for a personal loan while self-employed could also present some challenges. Self-employed individuals may have a need for a personal loan, but may find it difficult to produce traditional documentation, like W-2s or pay stubs, used to verify income. But, that doesn’t necessarily mean you’re out of luck. Here’s a look at some ways to get a personal loan when you’re self-employed.

How to Get a Personal Loan if You’re Self-Employed

A personal loan is a type of installment loan that can be used for nearly any personal expense, including home improvements, a work sabbatical, or consolidating your credit card debt. If you’re considering making a big purchase, like buying an engagement ring, a personal loan can be an alternative to using a credit card, if you don’t have the means to pay the balance off right away.

Personal loans are typically unsecured, meaning a lender won’t require collateral. However, they can also be secured, usually by the asset purchased with the loan. Unsecured loans are usually approved based on the financial standing of the borrower.

In addition to looking at an applicant’s credit history, lenders will also typically consider a potential borrower’s income when deciding whether to not o approve a loan and, if so, what the rates and terms will be. Those who are self-employed may find it more difficult to show proof of income, especially if their income fluctuates from month to month and year to year.

Self-Employed Loan Requirements

Loan requirements for self-employed individuals will be similar to the typical loan requirements for any borrower as determined by the lender. In addition to evaluating factors like the applicant’s credit score, many lenders will require proof of income.

Traditional documentation used to verify income includes pay stubs and W-2s. However, self-employed people may have some difficulty producing these documents, because they often aren’t W-2 employees. It is possible for self-employed individuals to show proof of income, but it may require a little more legwork.

In general, lenders are looking for borrowers who have income stability and it can help if the borrower has been working in a single industry for at least two years. A shorter employment history could indicate that you are a borrowing risk.

Recommended: Typical Personal Loan Requirements Needed for Approval

Showing Proof of Income When Self Employed

Those who are self-employed have a couple of options for showing a lender they have sufficient and reliable income. Here are a few options that self-employed individuals could provide as documentation to prove their income.

Tax statements: Self-employed individuals can use their tax returns from the prior two or three years to offer proof of income. These forms include your wages and taxes for those tax years. Lenders often view tax documents as a reliable source of income proof because they are legal documents.

Bank statements: Bank statements could be used if there is a regular history of deposits that illustrate consistent income.

Profit and loss statement: If you own your own business, this document provides an overview of your costs, expenses, and revenue.

Court-ordered agreements: These may include things like alimony or child support.

Keep in mind that each lender will likely have their own application requirements, so be sure to read those too. Contact the individual lender if you have specific questions on the types of documentation they’ll accept.

Consider Having a Cosigner

In the event that you are still struggling to gain approval for a personal loan with your self-employed proof of income, one option is to consider adding a cosigner. A cosigner is someone who agrees to pay back the loan should you, the primary borrower, have any trouble making payments.

A cosigner can be a close friend or family member, ideally one who has a strong credit history who will strengthen your loan application.

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Why It’s Difficult for the Self-Employed to Get a Personal Loan

It can be more challenging for self-employed individuals to provide proof of income to lenders, which can make it more challenging for them to get approved for a personal loan. But it’s important to note that each loan application is unique, and employment status is just one consideration.

For example, a self-employed individual who has a stellar credit history and who has been self-employed for a few years may be in a better position to apply for a personal loan than someone who has just transitioned into managing their own business.

The Income Challenge

Proving consistent and stable income is the biggest challenge for self-employed individuals. Because you may not be guaranteed the same payment each pay period, lenders may request specific documentation in order to verify the fact that you have enough cash coming in to make payments on the loan. Some lenders may request tax returns for several years in order to verify your income.

Consistency Matters

Consistency in income is another major hurdle for the self-employed. It’s not uncommon for self-employed people to experience fluctuation in their income. While some slight fluctuation may be acceptable to a lender, for the most part they are looking for consistent payments getting deposited into your account, even better if there is an increasing trend over time.

Personal Loan Alternatives When Self-Employed

Personal loans aren’t the only option for self-employed individuals looking to borrow money to pay for expenses. Other options to consider include a credit card, cash advance, or a home equity loan.

Credit Cards With 0% APR Promotions

Credit cards can have high-interest rates, but with a 0% APR promotion, a credit card could be a great tool to pay for an upcoming expense. Just be sure to pay off the credit card before the promotional period ends and interest starts accruing.

Recommended: Average Credit Card Interest Rates

Cash Advances

A cash advance is a short-term loan generally offered by your credit card which allows you to borrow cash against your existing line of credit. Cash advances can provide an avenue for you to get quick access to cash, but there may be additional fees and a high-interest rate for borrowing. Be sure to read all the terms and conditions outlined by your credit card company before borrowing a cash advance.

Home Equity Loans or HELOCs

If you are a homeowner, you may be able to tap into the equity you’ve built in your home using a home equity loan or home equity line of credit (HELOC). A home equity loan is an installment loan where the borrower receives a lump sum payment and repays it in regular payments with interest.

A HELOC, on the other hand, is a revolving line of credit that the borrower can draw from and, once it is repaid, continue drawing from during a specified period of time.

Business Loans

Small business loans can be used to pay for business expenses. Self-employed individuals may be able to qualify for loans backed by the U.S. Small Business Administration (SBA), as well as private small business loans offered by banks, credit unions, and online lenders.

It is important to keep your personal and business expenses separate as a self-employed person. If you are using the money for a personal expense, you’ll want to avoid borrowing a business loan. Also keep in mind that many lenders don’t allow you to use personal loans for business expenses.

The Takeaway

The challenge for self-employed individuals applying for a personal loan will generally be providing proof of income. Alternatives to traditional proof of income documents include tax or bank statements.

Fortunately, many lenders understand that a full-time job isn’t the only qualifier of financial stability and will also consider factors like your credit score, education, financial history, career experience, monthly income versus expenses, and whether you have a cosigner.

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

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

FAQ

Can you get any loans if you’re self-employed with no proof of income?

It is possible to get a loan if you are self-employed. However, with zero proof of income, it may be challenging to gain approval for a loan. To improve your odds of approval, you may consider adding collateral to the loan or applying with a cosigner.

Are there any loans for self-employed people with bad credit?

While a strong credit history can help strengthen a loan application, it’s not impossible to qualify for a loan with bad credit. If you can show a consistent and stable income history, that could help improve your application. If that’s not enough, another option may be to add a cosigner.

Can self-employed freelance workers get personal loans?

Yes, self-employed freelance workers can qualify for a personal loan. Instead of providing W-2 documents to verify their income, they will need to provide alternatives such as tax documents or bank statements. Applicants who have been working in a specific industry as a freelancer for two years or more may be viewed more favorably by lenders. Those with a strong credit score and history may qualify for more competitive rates and terms.

If a self-employed freelancer is struggling to get approved for a personal loan they could consider adding a cosigner to help strengthen their application.


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

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

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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Tax Deductions for Business Donations

Can a business deduct charitable donations? Yes, small business donations to charities are often deductible.

Exactly how these deductions are treated will depend on your business structure, what you are donating, and the charity receiving your donation. In some cases, charitable contributions may only be deductible for the individual owners rather than the business itself.

Read on for a closer look at how tax deductions for business donations work, including how much you can give and how to report your company’s charitable giving on your tax return.

What Donations Are Tax-Deductible?

Not all donations are eligible for tax deductions. To qualify for a tax deduction, the donation must meet certain criteria. Here are some guidelines to keep in mind.

•  Qualified charities The recipient of your donation must be a qualified charitable organization recognized by the Internal Revenue Service (IRS). These include nonprofit organizations, religious institutions, educational institutions, and certain government agencies. You can search for an organization’s eligibility to receive tax-deductible charitable contributions using the IRS’s Tax Exempt Organization Search tool.

•  Cash and property donations Cash donations are generally deductible, as well as donations of tangible property (such as equipment, inventory, or real estate). Typically, the fair market value of the property at the time of the donation is used to determine the deductible amount.

•  Services and time While the value of your time or services rendered to a charitable organization is not tax-deductible, certain out-of-pocket expenses directly related to volunteer work may be deductible.

No matter what type of donation you make, It’s important to keep detailed records of your donations, including receipts and acknowledgments from the recipient organization, to substantiate your tax deductions.

Recommended: Are Business Legal Fees Tax Deductible?

Benefits of Donating to a Charity as a Business

There are numerous benefits to donating to a charity that go beyond your tax return. Here’s a look at how philanthropy can positively impact your small business.

Positive Brand Image

Charitable giving demonstrates that your company gives back to the community and is in business for more than profit. Supporting charitable causes enhances your company’s reputation and demonstrates your commitment to social responsibility. This can attract customers who value businesses with a philanthropic focus.

Employee Morale and Engagement

Your company’s culture is likely important to both current and future staff, and employees generally feel good about working for a company that gives back. Engaging in charitable initiatives can boost employee morale and foster a sense of pride in working for your company. It can also encourage teamwork and improve employee retention and recruitment efforts.

Networking and Community Relations

Small businesses often depend on their communities to keep them afloat. Aligning your business with nonprofits in your area allows you to connect with like-minded individuals, other businesses, and community leaders. Building relationships within the community can lead to new opportunities, partnerships, and increased visibility for your business.

Should You Donate to Nonprofits As a Business?

Deciding whether or not to donate to nonprofit organizations as a business depends on a number of factors. Here are some you may want to consider.

•  Alignment with your business values: If you decide to donate to nonprofits as a business, it can be a good idea to choose causes that resonate with your company’s mission, values, and target audience. Authenticity in your charitable efforts can help strengthen your brand and make a more significant impact.

•  Financial capacity: You’ll want to assess your business’s financial health and determine how much you can comfortably allocate to charitable giving. It’s important to strike a balance between your philanthropic goals and maintaining a sustainable business operation.

•  Research and due diligence: Before donating to a nonprofit organization, it can be wise to research its mission, financial transparency, and impact. You’ll want to ensure that the organization is reputable and uses funds efficiently to achieve its stated objectives.

How Much Can You Deduct From Your Taxes?

The amount you can deduct depends on your business structure, the organization you are donating to, and your taxable income.

Technically, C corporations are the only business structure that can directly take a deduction for a charitable donation. C corporations can generally deduct any cash (plus the fair market value of any property) given to a charity up to 10% of the company’s taxable income. Any amount not deducted in the current year may be carried forward for a max of five years.

If you are organized as a pass-through business, the rules are different. A pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates.

Pass-through businesses can make donations, but the business owners/shareholders have to report the donations as a personal charitable deduction on Schedule A (Form 1040). This provides a tax benefit only if you are able to itemize your deductions.

If you are organized as a pass-through business, your contributions will be subject to the same charitable contribution rules that apply to individuals. You are generally limited to making a cash gift of 60% of your adjusted gross income (AGI) and a non-cash gift of 30% of your AGI.

Whatever your organizational structure, other specific limitations may apply depending on the type of donation and the receiving charity. Consulting with a tax professional or referring to IRS Guidelines can help you determine the exact limits for your situation.

Recommended: What Are the Tax Benefits of an LLC?

Ways to Donate As a Small Business

Small businesses have various options for making charitable donations. Here are some common ways to donate:

•  Cash donations Direct financial contributions to nonprofit organizations are a straightforward and common method of giving. These can be one-time donations or recurring contributions.

•  Goods and services Rather than donating cash, you can provide goods that are valuable to the charitable organization. Another option is to volunteer your company’s time. Whether it’s working in a shelter’s kitchen, delivering meals, or providing professional services to a charitable organization, there are many ways to volunteer. (Note that donating business services or volunteer hours generally does not qualify for a charitable deduction on your taxes.)

•  Sponsorships and partnerships Partnering with nonprofit organizations through sponsorships or collaborative initiatives can be mutually beneficial. Your business can support their events or programs in exchange for recognition and marketing opportunities. For example, you might sponsor a local sports team by paying for uniforms or maintaining the fields. In return, you may be able to get your company’s name and logo displayed on both. (Keep in mind that if you donate to a local organization and, in exchange, they advertise your business, the IRS generally considers this a deductible business expense and not a charitable deduction.)

•  Employee giving programs Implementing employee giving programs, such as payroll deductions or matching gift programs, allows your employees to contribute to charities of their choice. Matching their donations can enhance employee engagement and demonstrate your commitment to social causes.

IRS Guidelines for Small Business Donations to Charity

To be compliant with the IRS’s guidelines for making donations to a charity as a small business, here are four tips to keep in mind.

1.   Maintain detailed records. It’s important to have a paper trail of your charitable contributions, including receipts, acknowledgments, and documentation of any non-cash contributions. These records will be crucial for substantiating your tax deductions during an audit.

2.   Verify the organization’s nonprofit status. As mentioned above, it’s key to confirm that the organization you plan to donate to is a qualified charitable organization recognized by the IRS.

3.   Obtain written acknowledgments. For cash or other donations of $250 or more, you must obtain written acknowledgments from the recipient organization. These acknowledgments should include the donation amount, a description of any goods or services received in return, and a statement confirming that no significant goods or services were provided in exchange for the donation.

4.   Follow appraisal requirements. If you donate property valued at more than $5,000, you generally need to obtain a qualified appraisal and include Form 8283 with your tax return. (If you donate a household or everyday item valued at $500 or more, you may also need an appraisal.)

How Much Should Your Business Be Giving?

Determining the appropriate amount for your business to donate depends on several factors.
For starters, you’ll want to consider your company’s financial health. While donating money to a charitable organization has numerous benefits, you’ll want to make sure that the amount you give doesn’t impair your company’s cash flow. You may want to consult with a financial advisor or accountant who specializes in small business taxes and philanthropy. These professionals can help you determine a suitable giving strategy based on your specific circumstances.

As you consider how much to give and where, you may also want to factor in the impact you can have on the recipient organizations and level of support you can maintain. You might, for example, decide to focus on making one or two meaningful contributions rather than just spreading your resources thin.

It’s generally a good idea to establish a clear and transparent “giving policy” that outlines your business’s philanthropic goals, target causes, and guidelines for donation amounts. This policy can serve as a framework that can help guide all of your giving decisions moving forward.

The Takeaway

As a business owner, you have the opportunity to make a positive impact on society while also receiving potential tax benefits. Understanding the guidelines and benefits of business donations is essential for maximizing both your philanthropic efforts and potential tax savings.

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.

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

FAQ

How does the tax code define a deductible business donation?

A deductible business donation is a contribution of cash, property, or services made by a business to a qualified charitable organization. To be deductible, the donation must meet specific criteria, including the eligibility of the recipient organization and the nature of the donation.

Is there a limit that companies can donate?

The internal revenue service (IRS) does not impose a specific limit on the amount that companies can donate. However, there are limitations on the amount that businesses can deduct as charitable contributions. Generally, corporations can deduct up to 10% of their taxable income for charitable donations. Other restrictions may apply depending on the type of donation and the organization receiving the donation.

How does a business show proof of a donation for taxes?

To provide proof of your donation for tax purposes, you’ll need to keep accurate records. This includes receipts, acknowledgments from the recipient organization, bank statements, canceled checks, and/or any other record of the donation. It is important to retain these records and have them readily available in case of an audit.

Can a business claim a tax deduction for volunteer time donated to an organization?

No, a business cannot claim a tax deduction for the value of volunteer time donated to a nonprofit organization. While the time and services provided by employees or business owners are valuable contributions, they are not considered tax-deductible expenses for businesses. Expenses related to volunteering, such as travel costs, may be deductible, however.

Does donating to foreign organizations change my deductions?

Donating to foreign organizations can affect your tax deductions. Generally, donations to qualified U.S. charities are tax-deductible, while donations to foreign organizations may not be eligible for the same tax benefits. However, certain donations to specific foreign organizations may qualify for deductions. Consult a tax professional to understand the details.

How does the tax code treat in-kind donations, such as donated goods or property?

The tax code generally treats in-kind donations as deductible contributions. The deductible amount is typically based on the fair market value of the donated item at the time of the donation, so it’s important to properly document and value any goods or property you donate. If the value exceeds $5,000, you generally need to get a qualified appraisal. A tax professional can offer guidance on this.


Photo credit: iStock/SDI Productions

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.

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

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

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

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15 Types of Business Loans to Consider

Small business owners often rely on various types of business loans to help them manage cash flow, cover daily expenses, expand, remodel, or invest in equipment or property. Many factors contribute to the type of small business loan you choose, including your industry, how much cash you need, your business’s financials, and what you need funding for.

With many business loan options to choose from, how can you decide which one is right for you? In this guide, you’ll learn about the 15 types of small business loans that can help you meet your business and financial goals.

Recommended: Revenue-Based Business Loans

1. Term Loans

Many of the small business loan types available come in the form of term loans. With these loans, you receive a sum of money upfront and agree to repay the funds, with interest, over a set period of time. Banks and alternative lenders offer term loans in varying amounts depending on the type of business loan, applicant’s qualifications, and terms and conditions.

There are long- and short-term business loan options available. What you receive will depend on your business needs and qualifications. Typically, long-term business loans are more difficult to qualify for since they present more risk to the lender.

Advantages: Predictable payments over the life of the loan and higher borrowing amounts.

Disadvantages: May require collateral to secure the loan.

Who it’s good for: Small businesses with strong credit and a desire to expand.

Recommended: Personal Loan Alternatives

2. SBA Loans

An SBA loan is guaranteed by the U.S. Small Business Administration and offered by approved sources, including banks and some online lenders. The SBA has numerous loan programs with loan amounts up to $5 million available for everything from working capital to commercial real estate investments.

Advantages: High borrowing amounts and moderate interest rates.

Disadvantages: May be difficult to qualify and the application process can be lengthy.

Who it’s good for: Borrowers with strong credit who don’t need cash quickly.

3. Business Line of Credit

A business line of credit is a type of business funding that gives borrowers access to cash up to a set credit limit determined by the lender. Like a credit card, a line of credit charges interest only on the money that you withdraw. Most lines of credit are revolving, while others may end after you’ve spent and paid off the full credit amount.

Advantages: Flexible borrowing for short-term expenses.

Disadvantages: Lower borrowing limits and typically higher interest rates.

Who it’s good for: Businesses that need funding for small ongoing expenses, assistance managing cash flow, or emergency expenses.

4. Equipment Financing

An equipment loan can be used to purchase or upgrade necessary business equipment. The equipment acts as collateral for the loan, and the length of the loan is often equal to the expected lifespan of the equipment. Rates vary depending on the type of equipment and your business’s qualifications.

Advantages: Allows small businesses to build equity without having to put down additional collateral.

Disadvantages: Loan can only be used for the purchase of equipment.

Who it’s good for: Small businesses that want to invest in equipment rather than lease.

5. Merchant Cash Advance

Like a business line of credit, a merchant cash advance offers a borrower cash upfront, but payments are made to the lender with a percentage of future credit card sales. Automatic withdrawals can be set up directly from your bank account on a daily or weekly basis.

Advantages: Fast cash, often within 24 to 48 hours of applying.

Disadvantages: Frequent payments with potentially high fees; lack of regulatory oversight could result in undesirable lending practices.

Who it’s good for: Borrowers that struggle to qualify for other types of business loans.

6. Inventory Financing

Inventory financing loans are asset-based and used to purchase necessary inventory, maintain consistent cash flow, or support working capital. The inventory serves as collateral and lenders base financing on a percentage of the inventory’s value.

Advantages: Helps prep for seasonal highs with no need for additional collateral.

Disadvantages: May require assessments (with fees).

Who it’s good for: Small businesses with high inventory turnover or seasonal demands.

7. Invoice Factoring

Invoice factoring allows you to get fast cash upfront in exchange for unpaid customer invoices, which the factoring company is then responsible for collecting. This type of business loan can help B2B companies that deal in customer invoices and irregular billing cycles maintain regular cash flow.

Advantages: You don’t have to wait for customer invoices to be paid for access to business funding.

Disadvantages: Can be costly and you don’t control collection practices.

Who it’s good for: Small businesses that process invoices regularly and have customers who reliably pay their invoices.

8. Online Business Loans

Online business loans are types of alternative business loans offered by lenders that aren’t traditional banks or credit unions. The types of small business loan products vary from lender to lender, but they typically have a quick application and approval process.

Advantages: Usually have a speedy application and approval process.

Disadvantages: May have higher costs than a traditional bank loan.

Who it’s good for: Small businesses who want more business loan options and faster funding.

9. Microloan

Microloans are business loans, typically for $50,000 or less, that are often given by nonprofit organizations or mission-based lenders. These can be great types of loans to start a business or for newer businesses in underserved communities.

Advantages: Credit requirements tend to be lower than with traditional loans, and microloans may come with additional services, such as counseling.

Disadvantages: Lower borrowing amounts typically with above-market interest rates.

Who it’s good for: Startups and newer businesses that don’t have established business history.

10. Commercial Real Estate Loan

A commercial real estate loan is used to purchase or improve a building or property that’s used for business purposes. Getting one may help a small business expand their business and build equity.

Advantages: Business loan options designed specifically for commercial real estate needs.

Disadvantages: Can be difficult to qualify for.

Who it’s good for: Established small businesses who want to transition from leasing to owning their commercial property or expand their business.

11. Working Capital Loan

A working capital loan can be any type of loan product used to cover everyday expenses, such as payroll, monthly bills, and repairs. These are common loan types for small businesses that need assistance managing cash flow fluctuations as they build their business.

Advantages: Quick access to funding for maintaining positive cash flow.

Disadvantages: Short-term and, depending on the type of financing, may be more costly than a longer-term option.

Who it’s good for: Small businesses with seasonal revenue or ones that want to expand and need cash to handle daily expenses during growth.

12. Restaurant Loans

Restaurant loans can be helpful in starting, expanding, or supporting various aspects of a restaurant business. These types of business loans can be from traditional banks, alternative lenders, or P2P lenders, and they come in a variety of forms, including term loans, business lines of credit, equipment loans, etc.

Advantages: Numerous business loan options to choose from.

Disadvantages: You need financial stability to ensure repayment of long-term loan options.

Who it’s good for: Startups and established restaurants that want to expand, remodel, or manage cash flow during business fluctuations.

13. Franchise Financing

Franchising loan options are offered by a number of sources, including traditional banks, online lenders, franchise financing companies, and sometimes even the franchisors themselves. These types of business loans can help to cover the many costs associated with opening a franchise location.

Advantages: Loans may be easier to obtain than they are for an independent small business.

Disadvantages: It may be expensive to start a business under a larger franchise.

Who it’s good for: New franchise owners who need help covering franchise fees and other startup costs.

14. Peer-to-Peer Lending

Peer-to-peer (P2P) business lending allows borrowers to get funding directly from other individuals (lenders), eliminating the need for a financial institution to act as a middleman. Borrowers and lenders can quickly connect using online platforms that facilitate the entire loan process.

Advantages: Quick and easy access to funding that may be easier to qualify for; potentially lower APRs compared to traditional lenders.

Disadvantages: Less regulation compared to traditional loan types, and application review is based largely on personal credit score.

Who it’s good for: Small businesses that don’t qualify for other types of small business loans.

15. Alternative Lending Options

Alternative small business loans are any offered by lenders other than a traditional bank or credit union. This category may include:

•  Crowdfunding

•  Angel investors

•  Venture capitalists

•  Contributions from friends and family

•  Grants

Advantages: Many alternative business loan options are faster to get than traditional loans.

Disadvantages: Depending on the type of loan, borrowing limits may be lower and interest rates higher.

Who it’s good for: Small business startups or borrowers with poor credit who don’t qualify for a bank or SBA loan.

Recommended: Comparing Personal vs Business Loans

Choosing the Right Loan for Your Business

As you consider different types of business loans, take the time to assess your business. The following five questions can help you clarify your needs and qualifications so you can start to narrow in on the types of business loans that may be right for your operation.

1. What Industry Is Your Business in?

Certain types of small business loans are better suited for certain industries, and some lenders have rules about which industries they will lend to. For example, some lenders choose not to lend to cannabis companies, and some types of loans, like invoice factoring, are typically better suited for B2B operations. Check that potential lenders work within your industry before applying.

2. How Much Funding Do You Need?

Know how much money you need before choosing a loan type or a lender. If you are planning on making specific purchases or renovations, you may want to get pricing or estimates. This will show a lender that you understand your business needs and also help narrow your search to loans that match your funding needs.

3. What Are Manageable Loan Terms for Your Business?

Loan terms can refer to different things. Most often, loan terms refer to how long the loan repayment period will last if you’re making timely payments to your lender. Ask yourself if your business is in a position to take on long-term loans, or if you should consider short-term options.

A term loan, for example, sets a specific amount of time. If you have a five-year loan term, that means you’ll be making regularly scheduled payments for five years. The term also affects your monthly payment. Typically, the longer the term, the lower the monthly payment. However, with long-term loans, more interest is paid over the life of the loan than with short-term loans.

Loan terms can also refer to additional features or business loan options that come with the loan. When you search for lenders, ask questions about additional terms and conditions on the loan to make sure it aligns with your needs and ability to pay.

4. How Soon Do You Need Money?

How quickly you need funding may influence how expensive a particular type of business loan is for you. Typically, the faster you get the money, the more expensive the loan, due to interest rates and loan fees. Essentially, you pay extra for the convenience of getting the money quickly. If you’re able to wait, it may help you secure a less expensive loan.

5. What Are the Costs of Different Business Loan Types?

The cost of a small business loan goes beyond interest rates and monthly payments. While those are important in determining if you can responsibly pay back the loan, it’s also good to know if the type of business loan you choose has additional costs.

These may include:

•  Origination fees

•  Prepayment penalties

•  Balloon payments

•  Late payment fees

•  Factoring fees

•  Monthly service fees

•  SBA guarantee fees

Do your research to ensure you understand all of the costs associated with the type of business loan you’re interested in so there aren’t any unpleasant surprises down the road.

The Takeaway

Long- and short-term loans are available for small businesses, with your business needs setting the type of loan you desire. Your credit profile will be key in what you qualify for, as well as length of time in business, revenue, and business plan.

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


Get personalized small business financing quotes with SoFi's marketplace.


Photo credit: iStock: FG Trade

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.

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

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Guide to Financial Projections

You’re thinking about the future of your business. How much will sales grow from this year to the next? What will revenues look like in five years? Or, maybe you’re in the startup phase of a venture and want to know how long it will take before your business becomes profitable.

You don’t have a crystal ball, but you can make an educated guess about what the future looks like for your business. These “guesses” are called financial projections. They use existing or estimated financial information to help you predict your business’s future income and expenses. They often involve playing with different scenarios so you can see how changes to one aspect of your finances (such as higher sales or lower operating expenses) might affect your profitability.

Here’s what you need to know about making financial projections.

What Are Financial Projections?

Similar to creating a budget, financial projections are a forecast of what your business revenues, expenses, and profits will look like in the future. Typically, the projection will use internal or historical business data, along with a prediction of how external factors might change in the future.

Financial projections can help owners of existing businesses make informed decisions, attract investors, and qualify for different types of business loans. For a startup, financial projections are an important part of preparing a business plan.

You will likely want to create both short-term and long-term financial projections for your business. A short-term projection usually covers a year and is broken down by month. A long-term financial projection typically covers the next three to five years and is broken down by year.

How Do Financial Projections Work?

Financial projections use the data you already have about your income and expenses to predict what they may be in the future.

A financial projection also typically creates a “what if” scenario, where something about your company or industry is different in the future. For example, if your business is currently open five days a week and you’re wondering what would happen if you added another day, that would be a financial projection.

The process of making financial projections for your business generally involves creating three statements:

•  Income statement projection

•  Cash flow projection

•  Balance sheet projection

Once you’ve made all three statements, you can compile your data into a report format, then share it with your team members, as well as external parties (such as investors or lenders).

Recommended: Revenue Based Business Loans

What Are Financial Projections Used For?

At a base level, financial projections can be useful to you internally in your company. You can make decisions based on projections for certain scenarios. For example, If you think that demand for your product or service will increase in the future, creating a financial projection with that in mind can help you plan for that potential outcome.

You can also use financial projections to monitor business performance. Comparing your projections to your actual financial statements on a regular basis can help you see how well your business is meeting your expectations.

Financial projections are also useful if you’re currently exploring small business loans. For one reason, you can include them when you apply for a loan to demonstrate how the funds you want to borrow will help you increase revenues over time. For another, financial projections can help you determine how much capital you need — and can afford — to borrow.

Finally, if you want to bring on investors, they will likely want to see a financial projection that outlines variables such as expenses, revenue, and growth patterns to make sure that investing in your company will be profitable.

7 Steps To Make Financial Projections

Here’s a look at seven key steps involved in making financial projections.

1. Collect Your Financial Records

The first step is to collect all of your financial records. If you’re creating a projection for a startup, you can use data and research on your industry. Though projections are estimates, the more data you use, the more reliable your estimate is likely to be.

You’ll need three financial statements — a balance sheet, income statement, and cash-flow statement — for any financial projections you create. You can use data from your accounting software in order to prepare financial projections. However, the software probably won’t help you in the preparation itself. Fortunately, there are free templates and tools for making financial projections for both existing businesses and startups available online.

2. Create a Sales Projection

Next, you’ll want to project how much your business will make in sales. If your business is already in operation, you can use past performance records (such as how your sales did in the same season or time of year in the past) to project sales over the next period. However, you’ll also want to factor in any expected changes in the economy, industry, or supply chain. New businesses will need to conduct research to get an accurate gauge on what upcoming sales might look like.

3. Create an Expense Projection

It’s generally easier to predict upcoming expenses than the buying habits of your current and potential customers. For an existing business, you’ll want to look at all of your ongoing fixed expenses, such as rent or mortgage, utilities, and payroll. While it’s impossible to know what may happen in the future — and what large one-time expenses may be coming your way — you may want to simply tack on a 15% cushion to cover unexpected costs. Startups will need to estimate their upcoming expenses.

4. Create an Income Statement Projection

An income statement projection offers a prediction of your net income (or profit) after all expenses have been paid. If your business is already in operation, you can refer to your past income statements to come up with income statement projections for the next one to three years. Take note of how your statements tend to change from one period to the next. You’ll also want to consider factors you expect to change, such as an increase in the cost of supplies, sales price, or demand. If you’re just launching a business, you’ll need to make rough estimates, trying to stay as realistic as possible so you don’t overstate your company’s income potential.

5. Create a Cash Flow Projection

Cash continually flows in and out of a business each month. Cash flow is calculated by totaling your accounts receivable and deducting it from your accounts payable, plus any cash on hand.

Calculating cash flow for the near future (what you expect to come in and expect to go out) is a cash flow projection. This type of projection can be useful for deciding if it’s a good time to invest capital into your business or if now is a better time to save. If you decide the timing is right to take out financing, your cash flow projection can show lenders that you can afford to pay back debt.

Existing businesses can create a cash flow projection using their past cash flow financial statements. A startup will need to do some industry research in order to create a cash flow projection.

6. Create a Balance Sheet Projection

The balance sheet shows what your business owns (assets), what it owes (liabilities), and its net worth at a particular point in time. A balance sheet projection can provide further insight into your company’s financial position and overall health. Existing businesses can use past and current balance sheet totals to predict where the business will be one to three years down the road.

If you are just launching a business, your balance sheet projection will have to be based on industry research, since you don’t have any past records to refer to.

7. Create a Report

Once you’ve done all the above steps and calculations, you can compile your data into a report format that works well for your organization. You may want to include charts and tables to summarize the information and make it easier to digest.

Recommended: Accounts Payable Explained

Limitations of Financial Projections

It’s important to remember that financial projections are an educated guess. You can’t predict the future, and what you project might not actually happen exactly like the projections lay out. That said, financial projections can provide valuable data that can help you understand “what if” scenarios and lead you to making informed decisions.

Another limitation to be aware of is if you run a startup without a history of sales. It’s difficult to forecast the future if you have no past. While you can use industry data, it may not provide an accurate projection, given your company’s unique qualities.

Recommended: What Are Traditional Income Statements?

3 Things To Include in a Financial Projection

Financial projections typically include the following statements.

1. Income Statement

The key sections of an income statement are:

•  Revenue This is the money you will earn from whatever goods or services you provide.

•  Expenses This includes direct costs of producing your goods or services (like materials, equipment rentals, employee wages) and general and administrative costs (such as accounting fees, advertising, insurance, office rent).

•  Total income Your total or gross income is your revenue minus your expenses, before income taxes.

•  Income taxes This is the money your business pays to the government.
Net income This is your total income after income taxes.

2. Balance Sheet

A balance sheet projection provides a summary of your business’s financial data in three categories:

•  Assets These are the tangible objects of financial value owned by your company, including cash, supplies, equipment, and real estate.

•  Liabilities This include any debts your business owes, such as loans, payroll, upcoming payments for materials.

•  Equity This is what you get when you subtract your business’s total assets from its total liabilities.

3. Cash Flow Statement

The three sections of a cash flow projection include:

•  Cash revenues This is an overview of your estimated sales for a given time period.

•  Cash disbursements This lists all of the cash expenditures that you expect to pay during that time period.

•  Reconciliation of cash revenues to cash disbursements This involves subtracting cash disbursements from your total cash revenue. You can carry over any balance from the previous month and add it to your total cash revenue.

The Takeaway

Creating financial projections can give you a picture of what your business’s finances may look like in the future and can help you make strategic decisions. Is this a good time to bring on investors or take out a loan? Will your company be seen as a low-risk investment? Seeing the big financial picture can help you develop a clear plan for next steps for your company.

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


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

FAQ

What is included in financial projections?

Financial projections help forecast the financial performance of a business over a specific period, usually for the next one to five years. They typically include projected revenue, expenses, cash flow, profit margins, balance sheets, and income statements.

Is there a difference between financial forecast and financial projections?

Yes. A financial forecast looks at what your business will look like if all things stay equal in terms of costs and revenues. A financial projection looks at variables that may change, like the price of your products or cost of supplies.

How are financial projections calculated?

Financial projections are typically calculated based on a combination of factors, such as historical sales and expense numbers, market research, sales forecasts, expense estimates, and industry trends. The process involves making assumptions about future business conditions and applying them to the relevant financial models or spreadsheets.

What is the difference between a financial projection and a budget?

Financial projections are forward-looking estimates of a company’s financial performance, providing insights into future revenue, expenses, and profitability. They help in strategic planning and investment decisions. A budget, on the other hand, is a detailed plan that allocates resources, sets spending limits, and tracks actual financial performance to manage day-to-day operations and control costs.

What is the most widely used means for financial projection?

The most widely used means for financial projection is the use of financial modeling and spreadsheet software or specialized financial modeling tools. These software platforms can help you create financial projection reports and charts by incorporating formulas, data analysis, and scenario testing.


Photo credit: iStock/PeskyMonkey

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.

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Guide to Debt Covenants

Debt covenants are written agreements between financial lenders and borrowers that may restrict or guide the business activities of a borrower as a condition of receiving a loan or line of credit.

Borrowers and lenders can mutually agree to covenant terms as part of a loan agreement. Such agreements may contain debt covenants calling for a company’s total debt not to exceed a predetermined ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA). Corporations, including small and midsize businesses, may have debt covenants with creditors or investors.

Debt Covenants, Defined

Debt covenants are written agreements between a lender and borrower that may restrict or guide the actions of a borrower as a condition of a loan agreement. When a business borrows money, a financial covenant in the loan agreement may establish rules or expectations governing debt repayments.

Also known as a bank covenant or financial covenant, this agreement can require businesses to meet certain performance benchmarks and prohibit businesses from incurring additional debt.

For example, a bank covenant may require a company’s earnings to meet a certain threshold relative to debt, a performance benchmark that can help evaluate whether a company has a healthy balance sheet. Small businesses often rely on loans as a critical source of capital.

The terms for small business loans may include debt covenants spelling out possible consequences if the business fails to maintain solid performance as measured by a predetermined accounting ratio. Lenders may repossess and sell a company’s assets or obtain some of the cash flows generated by the asset if a company violates the terms of a debt covenant.

A borrower may disclose any required debt covenant targets and debt covenant realizations in corporate filings.

How Debt Covenants Work

Debt covenants work by giving lenders the authority to oversee a borrower’s business activities as a condition of a loan agreement. Borrowers are expected to make regular debt repayments, and the lender has the authority to enforce any and all debt covenants.

Businesses under a debt covenant must abide by the terms spelled out in the contract. Such bank covenants may define financial standards for the company to meet or restrict businesses from undertaking certain activities during the life of the loan.

What Is the Purpose of a Debt Covenant?

The purpose of a debt covenant is to protect lenders from the possible risk of a payment default while giving borrowers access to credit on the promise they will meet certain conditions.

A bank covenant helps ensure that each party to the agreement has something to gain from the lender-borrower relationship, such as sufficient capital for the borrower and receipt of principal and interest for the lender. Entrepreneurs, for example, may accept the terms of a debt covenant as a condition of obtaining loans without collateral to help create a business venture.

What Happens if a Debt Covenant Is Violated?

A borrower can face serious consequences for violating the terms of a debt covenant, such as the following:

•  The borrower may be required to meet additional collateral requirements

•  The borrower could face a reduction in credit availability

•  The lender could subject the borrower to a higher interest rate

•  The lender could demand renegotiated loan terms less favorable to the borrower

•  The borrower could be forced to implement job cuts, including managerial turnover

•  The lender could liquidate the borrower’s assets

•  The lender could seize the borrower’s business and auction it to the highest bidder

Pros and Cons of Debt Covenants

As mentioned earlier, lenders may use debt covenants in loan agreements to protect themselves from the possible risk of payment default while giving borrowers access to credit on the promise they will meet certain conditions. Here are some pros and cons of bank covenants:

Pros

•  Bank covenants protect borrowers by ensuring their relationship with the lender shall remain in good standing so long as they comply with the terms of the loan contract.

•  Debt covenants give borrowers incentives to comply with the terms of a loan agreement.

•  Bank covenants protect lenders by giving them authority to oversee the borrower’s business activities and the authority to enforce such covenants.

•  Debt covenants give lenders incentives to provide entrepreneurs and businesses with a line of credit or financing for capital.

Cons

•  Tight covenants may increase the likelihood of covenant violations and lead to amplified lender intervention.

•  A tight covenant with a high threshold of rules can increase the likelihood that the lender gains control over the firm.

•  Aggressive enforcement of debt covenants can undermine or depress entrepreneurship.

•  Debt covenant violations may result in costly contract renegotiations between the borrower and lender.

Recommended: Do Business Loans Impact Personal Credit?

6 Common Debt Covenants

Here are examples of common debt covenants:

1. Funded Debt-to-EBITDA Ratio

One of the most common debt covenants is a performance benchmark that may define the maximum ratio of debt a business may carry relative to its corporate earnings before interest, taxes, depreciation, and amortization (EBITDA). A total funded debt-to-EBITDA ratio may establish a ceiling defining how much debt a borrower may carry in relation to corporate earnings. A financial covenant, for example, could include a provision that sets a borrower’s maximum total funded debt-to-EBITDA ratio at 3.75 to 1.

2. Interest Coverage Ratio

A bank covenant may define a minimum interest coverage ratio measuring a company’s consolidated EBITDA to its consolidated interest expense. The Office of the Comptroller of the Currency (OCC), an independent bureau of the U.S. Department of the Treasury, defines interest coverage ratio as a company’s earnings before interest expenses and taxes divided by its interest expense. Creditors can use this ratio to assess a company’s ability to service its debt.

3. Fixed Charge Coverage Ratio

Debt covenants may include a fixed charge coverage ratio, which is the ratio of a borrower’s available earnings to pay fixed charges, such as lease obligations and interest on funded debt. This ratio can help lenders assess a company’s ability to meet its current financial obligations and take on new debt. A company’s fixed charge coverage ratio can be defined as its EBITDA plus fixed charges divided by its fixed charges plus interest expenses.

4. Limitations on Mergers and Consolidations

A bank covenant may place limitations on a company’s ability to initiate mergers and consolidations or the sale of assets. Lenders may impose limitations on mergers and consolidations to help ensure a company maintains its core operations upon receiving a loan.

5. Debt Service Coverage Ratio

A bank covenant may include a debt service coverage ratio, also known as net income to debt service ratio, to assess a company’s ability to pay current debt obligations. Lenders may assess a borrower’s revenue history before approving small business loan applications.

6. Miscellaneous Covenants

Loan agreements may include miscellaneous debt covenants requiring a company to perform certain activities unrelated to its ability to meet debt obligations. A miscellaneous covenant, for example, could require a borrower to submit periodic audited financial statements.

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

Positive and Negative Covenants

Debt covenants can be classified as positive or negative. A positive covenant, also known as an affirmative covenant, is a mandate requiring a borrower to perform or maintain certain functions, such as preparing quarterly and annual financial statements in accordance with generally accepted accounting principles and complying with all requirements of law.
Negative covenants impose restrictions on a company, such as limitations on mergers and consolidations. Lenders may include negative covenants as a condition of startup business loans for bad credit.

Recommended: What Is GAAP?

The Takeaway

A loan agreement with positive and negative debt covenants can give entrepreneurs access to capital in exchange for providing lenders with influence to monitor and constrain the business. Worth noting: Tight covenants may open the door to frequent violations with potentially severe penalties.

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


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

FAQ

What happens if you break a debt covenant?

A breach means one of the parties involved in the contract has violated the promises in some way. Consequences range from paying a fee or penalty charged by the lender to an increased rate on the loan to termination of the agreement.

What is the benefit of a debt covenant?

The borrowers could get loans at very low borrowing costs. Since the creditors have to agree to the conditions imposed by the lenders, the lenders lower their interest rate and borrowing costs to the borrowers.


Photo credit: iStock/skynesher

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

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