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Cash flow disruptions can happen to the best-run small businesses, so it’s smart to have a financial plan to weather these times. Small business cash flow loans are a way to bridge the revenue gap when you’re waiting for invoices to be paid or for other types of funds to come in.

What Is a Cash Flow Loan?

A cash flow loan is a type of financing that allows you to borrow against future revenue. It can be structured in a number of different ways to suit your needs and your business model.

When approving small businesses for loans, traditional banks typically focus on eligibility criteria such as credit, time in business, and financials. These things may still be considered by funders offering cash flow lending to small businesses, but not to the same extent that they would be for a more traditional business loan.

Instead, with cash flow loans, lenders typically judge your ability to repay the loan based on revenue projections. Depending on the financing structure, your loan payments could be based on a percentage of future credit card transactions or your unpaid invoices. Alternatively, you might apply for a business line of credit to help with cash flow or a small business loan with a fixed repayment term.

💡 Recommended: What Is Unearned Revenue?

How Do Cash Flow Loans Work?

There are several types of loans for cash flow, each of which comes with its own structure for receiving funds and repaying them.

Overall, small business loan rates are usually more expensive for cash flow financing than for other types of small business loans (such as SBA loans). But the eligibility requirements are usually more relaxed.

Different Types of Cash Flow Loans

Some of the most common types of cash flow lending for businesses are:

•   Online loan: It’s possible to find online business loans for small businesses that offer help with cash flow. With these loans, typically you’ll receive a lump sum and then make payments on a regular basis. You can find online loans with terms lasting just a few months up to several years, depending on the lender.

•   Merchant cash advance: A merchant cash advance lets businesses borrow a sum of cash based on projected credit card transactions. You’re charged a factor rate instead of interest, which is combined with the amount you borrowed to calculate your total debt. Payments are then automatically deducted as a percentage of your credit card sales. In some cases, payments can also be automatically deducted from a business bank account on a fixed schedule.

•   Invoice factoring: Invoice factoring advances a portion of a company’s unpaid client invoices. Depending on your industry, you might receive anywhere up to 90% of the outstanding invoice amounts. In many cases, the factoring company then takes over the collection process. Once the invoices are paid, you receive the remaining balances, minus the lender’s fees.

Recommended: 23 Small Business Ideas for 2025

Key Features of Cash Flow Loans

Despite their differences, loans for cash flow are similar in several ways:

•   Lenders focus less on credit history.

•   Application focuses on financial data.

•   Processing time varies by lender; can be fast.

•   Collateral is generally not needed.

•   Repayment relies on future revenue.

•   Rate can be more expensive than other loans.

When to Consider a Small Business Cash Flow Loan

Revenue isn’t always steady, even when a business is thriving. Some dips are foreseeable, such as seasonal business cycles. But there are also sudden opportunities or infrastructure problems that may crop up. In these situations, the speed, availability, and flexibility of cash flow loans can be appealing, even if their relatively high APRs are not.

Seasonal or Irregular Revenue Cycles

Businesses with seasonal ups and downs — such as retailers specializing in Christmas decor, Halloween costumes, or warm-weather sporting goods — can typically plan ahead in order to get through the slow times. But delayed or disrupted revenues may call for a cash flow loan to help a business owner get through the lean season.

Business Growth and Expansion

Needing to expand can be an exciting and inspiring stage in building your business. But if the need is sudden or larger than expected, you may require extra capital beyond what you’ve planned for. A small business cash flow loan can be a speedy solution in such cases.

How to Find a Cash Flow Loan

Once you understand the types of cash flow lending for small businesses, you can narrow down your choices to the ones that make sense for your business model.

For instance, merchant cash advances are designed for companies with regular credit or debit card transactions.

Invoice factoring, on the other hand, is suited for companies that regularly invoice customers.

A cash flow loan or line of credit usually suits a broad range of business types. You can use a lender platform to access multiple loan offers and find the one that suits your company.

Also, you may want to consider exploring other funding opportunities, such as small business grants, which don’t have to be repaid.

Recommended: Can You Get a Business Credit Card Before You Open Your Business?

Questions to Ask Before Taking Out a Cash Flow Loan

As with any loan, it’s wise to start by asking yourself some basic questions.

•  Exactly how much money do you need?

•  What repayment amounts and financing terms could your business sustain, if offered?

•  Is a cash flow loan the best option for you? If so, what type?

•  What other funding options should your company explore?

Ask lenders some questions, too, such as:

•  What are the loan terms and criteria?

•  Are there penalties for early repayment?

•  Are there rules limiting what the loan proceeds could be used for?

What Is Asset-Based Business Lending?

Asset-based lending is any type of financing that uses property as collateral to secure the loan. Examples of the kinds of assets that might be used include equipment, inventory, invoices, and real estate.

Because the loan is backed by collateral, interest rates and terms are typically more favorable. Small businesses struggling with credit or revenue may also have an easier time qualifying for this type of financing because it’s less risky to the lender. If you aren’t able to pay back the loan, the lender is able to seize your collateral.

Cash Flow vs Asset-Based Loans

Although asset-based loans may be used for some of the same purposes as cash flow loans, they’re not the same. This table helps summarize some of the similarities and differences.

Loan Application

The biggest difference between cash flow loans and asset-based loans is the lender’s focus when reviewing your application (cash flow versus assets that will be used as collateral).

For both types of financing, you typically don’t have to worry about meeting the definition of a small business the way you would with an SBA loan. Lenders can create their own eligibility criteria rather than adhering to SBA requirements.

Processing Time for the Loan

Processing time varies by lender, but both types of loans typically feature fast funding times. This is especially true if you apply with an online lender.

Collateral for the Loan

Cash flow loans generally don’t require collateral beyond the projections for the revenue that will be used to repay the loan.

Asset-based loans, on the other hand, require some type of collateral to secure the loan. These assets could be in the form of inventory, equipment, or real estate.

Repayment of the Loan

Repayment depends on the structure of the loan. Asset-based loans usually have a fixed repayment schedule, while cash flow loan payments are likely to rely on your future revenue in some way. Often, you’re required to enroll in some type of automatic payment linked to your business bank account or to a point-of-sale system if you’re repaying a merchant cash advance.

💡 Recommended: What Is a Promissory Note?

Can You Get a Cash Flow Loan with Bad Credit?

Cash flow loans are primarily based on sales performance and projections, as opposed to credit score and business history. Potential lenders typically review your company’s transactions and other data to determine your ability to repay the loan. Each lender differs in how much it weighs business and personal credit scores.

Recommended: 5 Crowdfunding Sites to Help Fund Your Business

The Takeaway

If your company has a good revenue history, a cash flow loan could be an option when your business needs help covering operating expenses. As you weigh the pros and cons, you can search for small business loan offers to see what is available.

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

FAQ

What are the different kinds of cash flow loans?

Cash flow loans may include term loans, lines of credit, merchant cash advances, and invoice factoring. Each one has its own pros and cons, as well as its distinct requirements based on how your business brings in income.

In what situations is a cash flow loan the best option?

A cash flow loan is ideal for businesses that don’t qualify for traditional bank or SBA loans. But interest rates and fees for cash flow loans are typically higher, and this type of financing doesn’t always help build your business credit history. It’s important to explore all of your options and feel comfortable about your company’s ability to repay the loan.

Who qualifies for a cash flow loan?

Compared to a startup, a company with a history of revenue is better positioned to get approved for a cash flow loan for small businesses. A history of revenue can demonstrate your ability to repay the loan based on future sales.

Can I get a cash flow loan with bad credit?

Credit history is weighed less heavily than your revenue data when you’re applying for a cash flow loan. That doesn’t mean your business and personal credit scores aren’t reviewed at all, but it does mean you could potentially get approved even with bad credit.

How fast can I get approved for a cash flow loan?

Although processing time varies by lender, some online sources offer approval within hours. It’s possible for approved borrowers to get the funds within a day or two.

Photo credit: iStock/AsiaVision

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

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

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

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

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.

SOSMB-Q325-038

Using a car for business purposes can come with significant expenses, but the good news is that many of these costs are tax-deductible. Whether you’re a freelancer, small business owner, or part of a larger company, understanding what you can deduct can help you save money and optimize your financial planning.

Keep reading to learn key car-related expenses that qualify for deductions, the methods for calculating them, and the importance of maintaining accurate records to ensure compliance with IRS regulations.

Why Might You Use a Personal Car for Business?

If you are using your personal car for business purposes such as buying supplies, visiting clients, job site visits, business errands, or attending trade shows, your personal car meets the definition of a business vehicle. (On the other hand, if you need a specialized vehicle like a tow truck or a semi for your work, your personal car most likely won’t do the job.)

Using your personal car for business can save you the cost of having to buy another vehicle. You don’t have to worry about where to keep it, since it already “lives” at your house. And on top of all that, there are some tax benefits.

Can You Deduct Car Expenses When Using a Car for Business?

If you’re using a car for business purposes, some of the expenses you incur are tax deductible. The trick is knowing which expenses are considered qualified expenses for your business.

Because you can only deduct expenses related to the operation of the vehicle for business use and not personal, it can get a little tricky. That’s why there are two ways you can deduct expenses.

The first is by using the standard mileage rate set by the IRS. Keep track of the miles you drive for your business and multiply that times this year’s rate to get your tax deduction.

The other option is to keep track of all expenses you incur with the car and then use the number of miles driven for business versus total miles driven for the year to get the deductible portion.

Deductible Expenses

So what are the tax deductions you can write off if you’re using your own car for business use?

Things like car maintenance and repairs, oil changes, gas, tires, licenses, registration, and depreciation are all deductible expenses. You can also deduct parking fees and tolls, even if you use the standard mileage rate.

Nondeductible Expenses

The expenses incurred while using the vehicle for personal errands or trips aren’t deductible. So if you take a road trip for fun, you can’t write off the gas for the trip.

Also, you can’t deduct your miles from home to work, as that’s considered a personal expense.

To summarize, you can only write off expenses for the time you’re using the car for business.

Recommended: How Do You Categorize Expenses for a Small Business?

Other Considerations

If you’re using your car for business, there are a few other things to consider.

Depreciation

Over time, cars depreciate in value. You might have bought a car for $20,000 a decade ago, but only be able to sell it for $5,000 today. The IRS allows you to depreciate a car used for business. However, note that you must be using your car for business at least 50% of the time to qualify for depreciation.

The two methods for calculating depreciation are the straight line method and the declining balance method. Talk to your accountant to determine which is a better option for your tax situation.

Recordkeeping

The IRS can get pretty strict about checking financial records if any discrepancies or red flags pop up. The best thing you can do to prevent an audit (or make one go smoothly) is to keep accurate records.

Make sure to record all miles you travel for business. There are apps that will track this on your phone. You’ll need to note the starting mileage at the beginning of a new year in case you need to compare business miles to total miles driven.

Also, keep receipts from car maintenance visits, tire purchases, gas, and registration, and enter them into your accounting system under the appropriate category.

Employees Driving Company Cars

Another consideration is if your employees use their own cars for company activities, such as driving from one client to another or running errands for the company. Keep in mind you may be liable for them and their cars during business hours, depending on laws in your state.

Employees may be able to claim deductions for the miles they drive their own cars for business, and many employers reimburse employees for those costs, often on a per-mile basis.

Just like when you use your personal car for business expenses, employees can only claim deductions for the portion of the miles driven that are for business, so they’ll need to record those miles.

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Qualifying for the Standard Mileage Deduction

If you’d rather use the standard mileage deduction (it may be simpler than keeping track of all your business-related vehicle expenses), you must meet certain criteria, according to the IRS.

You can’t operate five or more cars at the same time (like if you have a fleet of delivery vans). You can’t have claimed a depreciation deduction for the car using any method other than straight-line, and you can’t have claimed the special depreciation allowance on the car.

To employ the standard mileage rate deduction, you must use it in the first year you have the vehicle for your business. After that, you can use the standard mileage rate or actual expenses for deduction.

Recommended: 9 Tips for Buying a Used Car

Current Standard Mileage Deduction Rate

If you use your car for business, charity, medical or moving purposes, you may be able to take a deduction based on the mileage used for that purpose, according to the IRS.

The standard mileage rates for 2025 are:

•  Self-employed and business: 70 cents/mile

•  Charities: 14 cents/mile

•  Medical: 21 cents/mile

•  Moving (military only): 21 cents/mile

Standard Mileage Deduction vs Actual Expenses

The IRS offers two ways of calculating the cost of using your vehicle in your business: the actual expenses or the standard mileage rate method. You can’t do both.

If you want to go the actual expenses route, track what you spend on your car, including lease payments, depreciation, repairs, oil, gas, new tires, and maintenance. For example, if 40% of your driving is for business, multiply your expenses by 40% to get your write-off.

According to the IRS, “You can generally figure the amount of your deductible car expense by using one of two methods: the standard mileage rate method or the actual expense method. If you qualify to use both methods, you may want to figure your deduction both ways before choosing a method to see which one gives you a larger deduction.”

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Where Do You Deduct Business Vehicle Expenses?

Now that you’re on top of recording business-related vehicle expenses, where do you actually get your deduction for using a car for business purposes? If you work with an accountant, she’ll handle it. You’ll just need to provide your receipts for vehicle expenses if you’re claiming actual expenses, as well as your total and business-related mileage.

If you file your own taxes, you’ll record this information on your Schedule C (Form 1040). Line 9 allows you to input expenses for cars and trucks. Section IV of the form will ask you questions about your business use of the car, including:

•  When you first used the vehicle for business purposes

•  How many of the total miles were business-related

•  Whether the vehicle was available for personal use during off-duty hours

•  Whether you or your spouse have another vehicle available for personal use

•  Whether you have evidence to support your deduction

What Expenses Can You Deduct if You Borrow a Vehicle for Your Business?

Driving any car for business — including a borrowed car — entitles you to deduct expenses like maintenance and gas, though you cannot deduct depreciation because you don’t own the vehicle.

Can You Deduct the Purchase of a Vehicle for Your Business?

It sounds appealing to write off the cost of the car on your taxes. But there are some strict rules about this, and whether you’re buying a vehicle for a small business or a large one, you need to learn the ins and outs.

Section 179 Deductions

The IRS Tax Code Section 179 permits businesses to write off qualifying vehicles as business tax deductions.

The total section 179 deduction and depreciation you can deduct for a passenger automobile, including a truck or van, you use in your business in 2025 is $31,300 if the special depreciation allowance applies, or 40% of that if the special depreciation allowance does not apply.

Section 179 Requirements

Any business that purchases, finances, or leases business equipment in 2025 (spending less than $3,130,000) should qualify for the 179 deduction. Qualifying purchases include tangible goods, off-the-shelf software, and business vehicles.

To qualify for the deduction, you must purchase and place your new vehicle into service between January 1, 2025 and December 31, 2025.

Pros and Cons of a Business Buying a Vehicle

If you’re considering using a personal car for business, it’s important to consider the benefits and drawbacks.

Pros of Using Your Own Car for Business

Having one car for two purposes saves money. If you use a car for work and then after work for personal errands, and don’t need more than that, why pay for two separate vehicles?

Also, using your own car for business purposes gives you tax deductions you can take advantage of. They’re a huge perk of using a car for business and pleasure, and can reduce what you pay in taxes.

Another benefit is that your company can cover some of the costs of maintaining and repairing your vehicle. This means less out-of-pocket expense for you personally.

Cons for Using Your Own Car for Business

On the other hand, using any vehicle is an added expense for your business. If funds are tight, this may not be an expense you can afford, especially if you’re helping to cover large repair costs or registration fees.

You’ll also have the headache of tracking miles for business. It’s easy to forget to turn on your tracking app or check the odometer, and then you’ll miss out on those mileage deduction opportunities.

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Ways to Fund the Purchase of a Personal Car for Business

If you’re considering buying a car that you’ll use for business and wonder if you should purchase it through your company, the first question to ask yourself is: Will the vehicle be used only for business? If you plan to use it for personal activities as well, it’s better to buy it yourself than through your business.

Even if you buy the car yourself, you can still deduct those business-related expenses or claim your standard mileage rate.

If you don’t have the cash to pay for a car in your personal checking account, you may qualify for a car loan.

A Word on Refinancing a Car Loan

If you’re looking to save money on your car loan, you may want to consider an auto loan refinance. A refinance could help you lower your interest rate or reduce your monthly payment.

Interest rates rise and fall, so you may be paying far more than you need to on an old loan. If you’ve built your credit since you first took out the loan, you may also qualify for a lower rate. Use an auto loan refinance calculator to find out where you stand.

Before moving forward with car loan refinancing, consider the total cost to refinance a car. You may have to pay an early termination or transaction fee with the old lender, as well as registration or title transfer fees when the loan is approved. If the fees are less than what you’ll save, by all means, consider refinancing.

Recommended: Pros and Cons of Car Refinancing

The Takeaway

Using your car for business can lead to substantial tax savings if you understand and properly utilize the available deductions. Whether you opt for the standard mileage rate or the actual expense method, keeping detailed and organized records is essential to maximize your deductions and stay compliant with IRS regulations.

If you’re looking for other ways to save money on your vehicle, consider refinancing your auto loan. An auto loan refinance could potentially lower your interest rate or your monthly payment. Just keep in mind that if you extend your loan term, you’ll pay more in interest over the life of the loan.

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

FAQ

How can I buy a car for business use?

You can buy a car through your company if you plan to only use it for business purposes. However, if you want to also use it for personal activities, you must buy the car on your own. You can still deduct business expenses for the miles you drive for qualified business activities.

Where do you deduct business vehicle expenses?

Keep track of your car expenses and how many miles you drive in total and for business, and when you file your taxes, you’ll enter the information on your Schedule C or Form 1040. Line 9 allows you to enter car and truck expenses, and section IV asks questions about your business and personal use of the vehicle.

What expenses can you deduct if you borrow a vehicle for your business?

Whether you borrow, lease, or own a vehicle that you use for business, you can deduct expenses related to maintenance, repair, gas, tires, registration, fees, toll road fees, and parking fees.

What is the current standard mileage deduction rate?

For 2025, the standard mileage rate for self-employed and business is 70 cents a mile.

Photo credit: iStock/PeopleImages

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

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 .

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.

SOALR-Q325-082

If you’re looking at loan options for your small business, you have two main choices: fixed or variable interest rate loans. Variable-rate loans typically come with lower rates than their fixed-rate counterparts but the rate could rise over time. Fixed-rate loans keep the same rate throughout the term of the loan, which can be a benefit if market rates go up, but a drawback if rates go down.

Keep reading to learn the difference between fixed- and variable-rate small business loans, the pros and cons of each, and factors that can help you determine which could be better for your small business.

What Are Fixed Interest Rate Loans?

A fixed-rate loan comes with an interest rate that does not change throughout the life of the loan. Once the loan is processed, monthly payments are the same until the loan is paid off. This means borrowers can easily budget for a fixed-rate loan because they know exactly how much each payment is going to be. They also know how much they are going to pay for the loan overall.

The downside to a fixed-rate loan is that if the market changes and banks start loaning at lower interest rates, borrowers with fixed-rate loans won’t see any changes. On the flip side, if rates go up, fixed-rate borrowers are protected from any increases.

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Types of Fixed-Rate Business Loans

Types of small business loans that may come with fixed rates include:

•  Short-term business loans

•  Long-term business loans

•  SBA loans

•  Commercial real estate loans

•  Invoice financing

Fixed Interest Rate Loan Example

Let’s assume you borrow $50,000 to purchase an additional asset for your company. For this example, the repayment period is five years and the annual percentage rate (APR) is fixed at 7%.

Your monthly payment would be $990.06 for the life of the loan, and you would pay $9,403.60 in total interest.

Who Should Consider a Fixed Interest Rate Loan?

Business owners who prefer more predictability often choose loans with fixed rates. They like that payment amounts stay the same month to month, regardless of any changes in the federal funds rate. Especially with long-term loans, such as business acquisition loans, a fixed rate enables the borrower to plan and budget more confidently through the end of the loan’s term.

What Are Variable Interest Rate Loans?

The rate on a variable interest rate loan mirrors the market, which means a loan with this type of interest may have different monthly payments from one month to the next. However, in a stable economy, the payment amounts may not fluctuate significantly.

On the plus side, variable-rate loans usually offer lower interest rates than the fixed-rate version of the same type of loan. And, in some cases, you might be able to get an introductory rate that is guaranteed for a set number of months. In fact, for a short-term business loan, a variable interest rate can end up being a good deal for the borrower.

However, there are also some downsides to choosing a variable interest rate loan. Should market rates go up during your loan term, your rate (and monthly payments) will likely go up. If your business’s revenues are unpredictable, this can make cash management difficult.

Another challenge with a variable-rate loan is that you won’t know what the total cost of your loan will be until you’re done making payments. With a fixed interest rate, you always know exactly what you’re paying each month and the total cost of the loan.

Types of Variable-Rate Business Loans

Types of small business loans that may come with variable rates include:

•  Business lines of credit

•  Invoice financing

•  SBA loans

•  Merchant cash advances

•  Commercial real estate loans

Variable Interest Rate Loan Example

The previous fixed-rate loan example saw the borrower take out a $50,000 loan with a five-year repayment period and a 7% APR. Overall, that borrower will pay $9,403.60 in interest over the life of the loan.

If the borrower were to choose a variable interest rate loan instead, they might be offered a 6% APR, which could be a better deal if rates don’t go up (leading to just $7,998.40 in total interest). However, if the APR goes up to 8% during the loan’s term, it could end up costing more than going with a fixed rate of 7%.

When to Choose a Variable Interest Rate Loan

Risk-tolerant borrowers who want immediate cost savings are often drawn to variable-rate loans, which tend to start out charging less than fixed-rate loans. They are running a risk, betting that, even if rates go up, they’d still be able to cover rising payments.

And if rates seem to be approaching their peak, nearing a downturn, a business owner might opt for a variable-rate loan, hoping that any adjustments could eventually lower their monthly payments.

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3 Factors to Consider When Choosing the Best Loan for Your Business

When choosing whether to go with a fixed or variable small business loan, there are a number of things to keep in mind.

1. How Comfortable You Are With Risk

As a small business owner, you’ll want to first consider risk — and how much you’re willing to take. Many businesses want predictable monthly expenses and are willing to miss out on “historic lows” because they don’t like the idea of being vulnerable to market fluctuations.

Because of this, business owners will often choose a loan with a fixed rate.

2. Your Monthly Budget

If your business’s budget is tight, a fixed-rate loan may be a good option, since you’ll know exactly what to expect each month. If, on the other hand, you have some breathing room in your monthly budget, you might want to take advantage of the lower rates that often come with variable-rate loans, knowing that you’ll still be able to cover your payments should they go up in the future.

3. The Type of Loan

Certain types of small business loans, such as term loans, come with fixed rates. Other loan types, such as business lines of credit, have variable rates. If you are set on a specific type of loan, you may not have a choice in whether or not you receive a fixed or a variable interest rate.

Recommended: What Is a Balloon Payment?

The Takeaway

Both fixed- and variable-rate small business loans have advantages and disadvantages. Knowing your budget, financial goals, and risk comfort level will help guide you when it comes to choosing the right loan for your needs.

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

FAQ

Is it faster to get a fixed- or variable-rate business loan?

The type of interest rate you receive has no impact on how long it will take to get a small business loan. Some small business lenders, such as online lenders, may be able to fund your loan within 24 hours of approval. Other lenders, such as traditional banks, may take one to two weeks to fund your loan. The type of loan you’re applying for also has an effect on funding time. SBA loans, for example, generally take much longer to fund than short-term business loans.

Which is easier to get between variable- and fixed-rate small business loans?

Whether you apply for a fixed- or variable-rate small business loan, lenders will look at your credit score, your business income, and the length of time you’ve been in business. The type of interest rate you receive does not make it any easier or harder to obtain the loan.

Are fixed or variable small business loans typically cheaper?

Variable interest rate business loans typically start out at a lower interest rate than fixed-rate loans. If you are able to pay the loan off quickly, or if the market rate doesn’t go up during your loan term, a variable-rate loan may save you money. However, the rate on a variable-rate loan can also increase over time, making it more expensive in the long run.

Do small business loans have a fixed interest rate?

A small business loan may have a fixed or variable interest rate. With a fixed-rate loan, the interest rate and monthly payment won’t change over the life of the loan, making it easier to budget for repayment. Lump-sum term business loans typically have fixed rates.

A variable-rate loan may carry a lower initial rate than a fixed-rate loan, but that rate can rise (or fall) over time since it’s tied to a benchmark rate that fluctuates with the market. A business line of credit may come with a variable interest rate.

How do you tell if a loan is fixed or variable?

You can find out if your small business loan has a fixed or variable rate by looking at your loan contract and repayment terms.

Photo credit: iStock/Talaj

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

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

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

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

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.
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.

SOSMB-Q325-040

When it comes time to finance your small business or its growth, many options are available — everything from a business line of credit to a small business loan.

Many small businesses turn to SBA loans in such scenarios. These bank loans are backed by the U.S. Small Business Administration (SBA). With an SBA loan, borrowers can work toward their goals, whether that’s getting a startup off the ground or expanding an established small business.

Let’s take a closer look at what an SBA loan is and how it works.

What Is an SBA Loan?

An SBA loan is a type of small business financing that is partially guaranteed by the U.S. Small Business Administration and offered by approved lenders such as banks, micro-lending institutions, and private lending companies. The SBA itself does not lend money directly but helps reduce risk to lending partners. With these types of loans, small business owners usually enjoy competitive rates and SBA loan terms, counseling, and education opportunities.

To apply for an SBA loan, you’ll need to find an SBA-approved lender. Lenders will differ depending on what SBA loan is desired. The lender will then assess your eligibility according to SBA requirements. If approved, you’ll receive a loan, and a percentage of the amount will be guaranteed by the SBA. This means that if you default on the loan, the SBA guarantees repayment to the lender, making SBA loans relatively low-risk — and appealing — for lenders and borrowers alike.

SBA loan eligibility requirements vary depending on the lender and the type of loan program. A few things lenders consider when assessing a potential borrower are:

•  How does the business receive income?

•  What is the character of its ownership?

•  Where does the business operate?

•  Does the business meet size standards?

•  Has the business received funds from another financial lender?

Additionally, lenders will look at a potential borrower’s creditworthiness. They assess personal credit and business credit (if established) to ensure that the potential borrower can responsibly repay the loan.

It may be possible for those with less-than-optimal credit to qualify for startup funding with certain SBA loan programs and lenders. Outside the SBA program, “bad credit” business loans are offered by many lenders. These typically carry higher interest rates because there is higher risk involved.

How Do SBA Loans Work?

SBA Loan Terms

Specific business loan terms under the SBA will depend on the lender and eligibility, but they generally fall between five and 25 years.

•  Working capital: 10 years

•  Equipment: 10 years (as long as it does not exceed the life of the equipment)

•  Inventory: 10 years

•  Real estate: 25 years

Certain SBA loans have special terms that may not follow the above criteria. They include:

•  504 loans: Loan terms can be 10, 20, or 25 years.

•  Microloans: Maximum maturity is seven years.

•  All CAPLine loans except the Builders CAPLine: Maximum maturity is 10 years.

•  Builders CAPLine loans: Maximum maturity is five years.

•  International Trade loans: Maximum maturity is 25 years.

•  Export Working Capital loans: Maximum maturity is typically 1 year, but can be up to 3.

Finally, the SBA offers longer maximum repayment periods on disaster loans:

•  Economic Injury Disaster Loan (EIDL): Maximum maturity is 30 years.

•  Business Physical Disaster Loan: Maximum maturity is 30 years.

•  Military Reservists Economic Injury Loan: Maximum maturity is 30 years.

SBA Loan Amounts

SBA financing programs offer a variety of loan amounts for small business owners. The exact approved amount for each borrower depends on the lender and eligibility. You can get an estimate of the amount your business may qualify for by using a SBA loan calculator. Below are the maximum loan amounts for different types of SBA loan programs:

•  Standard 7(a): $5 million.

•  7(a) Small loan: $350,000.

•  SBA Express: $500,000.

•  Export Express: $500,000.

•  Export Working Capital: $5 million.

•  International Trade: $5 million.

•  504 loan: Generally $5 million (qualified energy-efficient or manufacturing projects may receive as many as three loans, each up to $5.5 million)

•  Microloan: $50,000.

•  CAPLine loan: $5 million.

•  All disaster loans: $2 million.

SBA Interest Rates

Ultimately, interest rates on SBA loans are negotiated between the borrower and lender. The SBA provides some guidelines and rules around interest rates, which vary depending on the type of loan:

•   All 7(a) loans: Interest rates vary depending on the type of loan and what the daily peg rate is. As of September 2025, the maximum rate for fixed-interest loans of less than $25,000 is 15.5%. The top interest rate for loans of more than $250,000 is 12.5%. These figures are based on a prime rate of 7.5%.

•   504 loan: Interest rates are below-market and fixed for the life of the loan. In September 2025, rates ranged from 6.25% to 8.25%.

•   Microloan: Interest rates are typically between 8% and 13%.

•   Disaster loans: Interest rates are determined by law and each type of disaster loan has its own criteria:

◦   Economic Injury Disaster Loan (EIDL): Maximum interest rate for businesses is 4%.

◦   Business Physical Disaster Loan: Maximum interest rate is 4% if you aren’t able to obtain credit elsewhere; otherwise, 8% maximum.

◦   Military Reservists Economic Injury Disaster Loan (MREIDL): Interest rate is 4%.

Common Types of SBA Loans

There are multiple SBA financing options for small businesses. Faced with these choices, you’re likely to wonder how all the SBA loans work and which will be better for the type of business you have. The most common types of SBA loans include 7(a) loan programs, 504 loan programs, microloans, and SBA disaster loans.

SBA 7(a) Loans

If you own a small business and need manageable financing, SBA 7(a) loans for small business generally offer more favorable terms and rates than credit cards or business lines of credit. There are standard and small versions of this loan, allowing for flexibility based on your specific funding requirements.

Loan purpose: Can be used for working capital, purchasing equipment or inventory, refinancing existing debt, buying real estate, or funding business expansion.

Max loan amount: $5 million.

Repayment terms: Depends on the purpose of the loan. For working capital, for example, the term can be up to 10 years, while for real estate, it can be up to 25 years (including extensions).

SBA 504 Loans

SBA 504 loans are for small businesses looking to make significant investments in their infrastructure. They have favorable terms and conditions to support long-term business growth.

Loan purpose: Purchasing fixed assets like real estate, buildings, and machinery. They can also be used to construct, renovate, or improve facilities.

Max loan amount: $5 million ($5.5 million for certain energy-efficient or manufacturing projects).

Repayment terms: Range from 10 to 25 years, which helps keep monthly payments manageable.

Recommended: Leasing vs Purchasing Equipment for Businesses

SBA Express Loans

SBA Express loans are ideal for small businesses that need quick access to capital. Their simplified application process makes them practical for addressing immediate financial needs.

Loan purpose: Provide small businesses with quick and flexible access to capital to meet various business needs.

Max loan amount: $500,000.

Repayment terms: Range from seven to 25 years depending on the loan’s purpose.

SBA Microloans

SBA microloans are small, short-term loans to help small businesses start up and expand.

Loan purpose: Can be used for working capital, inventory or supplies, furniture or fixtures, and machinery or equipment. They cannot be used to pay existing debts or to purchase real estate.

Max loan amount: $50,000.

Repayment terms: Maximum repayment period is seven years, with terms varying based on the loan amount, the planned use of funds, and the needs of the small business borrower.

SBA Disaster Loans

SBA disaster loans are low-interest loans meant to help businesses, homeowners, renters, and nonprofit organizations recover from declared disasters. These loans can be used to repair or replace property, cover operating expenses, and minimize property risks ahead of future disasters.

Loan purpose: Help repair or replace damaged property, cover operating expenses, and prevent future disaster risks.

Max loan amount: $2 million for businesses, $500,000 for homeowners to repair real estate, and $100,000 to replace personal property.

Repayment terms: Up to 30 years, with generally low interest rates. For loans over $50,000, collateral is required to the extent possible.

SBA CAPLines

SBA CAPLines are designed to help small businesses meet their short-term and cyclical working capital needs.

Loan purpose: Provide small businesses with short-term and cyclical working capital, financing for accounts receivable and inventory, and funding for contract-specific needs.

Max loan amount: $5 million.

Repayment terms: Up to 10 years, with specific terms depending on the type of CAPLine and the borrower’s needs.

SBA Export Working Capital Loans

SBA Export Working Capital loans are designed to help small businesses obtain the necessary working capital to support export sales.

Loan purpose: Provide working capital to small businesses to support export transactions — including financing for production, inventory, and accounts receivable — and cover standby letters of credit used as bid or performance bonds.

Max loan amount: $5 million.

Repayment terms: Typically 12 months or less, but can be renewed annually. Also, any individual owning 20% or more of the business must provide a personal guarantee.

International Trade Loans

SBA International Trade loans help small businesses engaged in international trade or those adversely affected by competition from imports.

Loan purpose: Provide financing to small businesses for expanding export activities, developing new export markets, or improving operations in response to import competition. This includes funding for working capital, equipment purchases, and real estate acquisition.

Max loan amount: $5 million.

Repayment terms: Up to 25 years for real estate, up to 10 years for equipment, and up to seven years for lines of credit.

Pros and Cons of SBA Loans

As with any business term loan, SBA loans have advantages and disadvantages. As they’re designed specifically for small businesses, they offer attractive rates and terms. Yet they can be more difficult to qualify for, especially if your business is fairly new.

Advantages of SBA Loans

•  Competitive rates: Interest rates may be lower than other types of small business loans.

•  Low fees: Minimal associated costs and charges.

•  Longer terms: Extended repayment periods make managing cash flow easier.

•  Large loan amounts: Access significant funding to support business growth.

•  Flexible use of funds: Support a variety of business needs.

•  Support available: Access resources and guidance from the SBA.

•  Lower down payments: Reduce the initial capital required to secure the loan.

Disadvantages of SBA Loans

•  Hard to qualify: Strict eligibility criteria can make approval challenging.

•  Slow to fund: Approval and funding process can be lengthy.

•  May require collateral: Assets are often needed to secure the loan.

•  Requires extensive documentation: Application process requires a significant amount of paperwork.

•  Personal guarantee: Borrowers must personally back the loan.

•  Prepayment penalties: Fees may apply for paying off the loan early.

SBA Loan Requirements

To get an SBA loan for a small business, companies must meet specific criteria and provide comprehensive documentation to show their creditworthiness and ability to repay the loan. The requirements are:

•  Business size: The business must meet the SBA’s size standards, which vary by industry and are typically defined by the number of employees or average annual receipts. The SBA generally considers a small business to be independently owned and operated and not dominant in its field.

•  For-profit business: The business must be a for-profit entity. Nonprofit organizations are generally not eligible for SBA loans.

•  Location: The business must be physically located and operate in the United States or its territories.

•  Owner’s equity investment: The business owners must have invested their own time or money into the business. This demonstrates the owners’ commitment and reduces the risk for lenders.

•  Good credit history: Both the business and its owners must have a good credit history. Lenders typically look for a strong personal credit score and a business credit profile.

•  Ability to repay: The business must demonstrate the ability to repay the loan. This is usually assessed through financial statements, cash flow projections, and other documentation that shows the business’s profitability and financial stability.

•  Collateral: While not always required for smaller loans, collateral is often required for larger SBA loans. This can include business assets, personal assets, or real estate.

•  No delinquent debt to the U.S. government: The business must not have any delinquent debt obligations to the U.S. government, such as unpaid taxes or federal loans in default.

Recommended: Guide to Business Tax Refunds

Tips for Improving Your Chances of Approval

Following these tips may help strengthen your SBA loan application.

1.   Approach banks you already work with. The SBA recommends seeking out a financial institution with which you already do business. That lender already has a clear picture of your financial history as well as insights into your character.

2.   Bolster your business plan. Lenders will likely want to see a clear description of your company and your plan for moving forward. Review your business plan to make sure it contains a solid overview along with detailed plans for management, financial affairs, marketing, and operations.

3.   Check your credit score. There’s no SBA loan credit score minimum, but lenders may have their own individual standards. They’ll likely evaluate both your personal and business credit scores, so you’ll want to make sure those reports are accurate. Request a free copy of all three personal credit reports (from Equifax, Experian, and TransUnion) and business credit scores (from Experian, Equifax, and Dun & Bradstreet) to double-check.

4.   Discuss changes in cash flow. Cash flow can reveal to lenders whether your business can handle a new loan payment on top of current operating expenses. Your application will likely need to present historical cash flow data as well as a 12-month projection to demonstrate the company.

5.   Consider using collateral. For SBA loans up to a certain amount (often $50,000), collateral isn’t required for approval. Even so, it may improve your chances, especially if your credit and cash flow aren’t ideal. Borrowers can secure an SBA loan using both personal and business assets. But there is some risk involved: You could lose that property in the event of default.

How to Apply for an SBA Loan

There are some application differences between conventional loans vs. SBA loans. Use this checklist to get a successful start on applying for your SBA loan.

1. Check Your Eligibility

SBA loans for small businesses require applicants to meet several requirements. They must adhere to the SBA’s size standards, which vary by industry. Only for-profit entities are eligible, and the business must operate within the United States or its territories. In addition, owners need to demonstrate their commitment by investing their own time or money into the business.

Further, both the business and its owners must have a good credit history. Their ability to repay the loan must be evident through financial statements and projections. While collateral is often required for larger loans, it may not be necessary for smaller ones.

Lastly, the business must not have any delinquent debt obligations to the U.S. government.

2. Choose a Lender

When selecting a lender for your SBA loan, it’s important to understand the difference between standard and preferred lenders. Standard lenders must submit the entire loan application and supporting documents to the SBA for approval, which can result in a longer approval process.

Preferred lenders, on the other hand, are part of the SBA’s Preferred Lender Program (PLP) and have the authority to approve loans on behalf of the SBA, typically leading to a faster approval process.

Some questions to ask prospective lenders:

•  What types of SBA loans do you offer?

•  Are you a standard or preferred SBA lender?

•  How long does your loan approval process typically take?

•  What are the interest rates and fees associated with your SBA loans?

•  What documentation will I need to provide for the loan application?

•  How do you handle ongoing support and communication after the loan is approved?

3. Gather Documents

Once you’re ready to apply, you’ll generally need to gather the following documents (the exact documentation you need might vary by the loan program and lender):

•  Business financial statements: Profit and loss statements, balance sheets, and cash flow statements for the last three years.

•  Personal financial statements: Financial statements of all owners with a 20% or greater ownership stake.

•  Business plan: A detailed business plan that includes market analysis, business model, and financial projections.

•  Personal and business tax returns: Tax returns for the last three years.

•  Loan application history: Information on any previous loan applications.

•  Résumé of principals: Background and experience of key business owners and managers.

•  Business license and certificates: Proof of business ownership and any necessary permits.

•  Lease agreements: If applicable, a copy of your business’s lease agreement.

•  Collateral documentation: Description of collateral being used to secure the loan, including appraisals if available.

•  Articles of incorporation or organization: Legal documents that establish the business entity.

4. Submit Your Application and Wait for Approval

The time it takes for an SBA loan application to be reviewed can vary. For standard lenders, the review process may take several weeks to a few months due to the need for SBA approval. Preferred lenders can often process and approve loans more quickly, sometimes within a few weeks, due to their delegated authority.

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What to Do If You’re Denied an SBA Loan

If at first you don’t succeed with an SBA loan, you still have options. You can try again after 90 days, and in the meantime, possibly cast a wider net as well.

Review the Denial Reasons

There are many reasons why an SBA loan application could be denied, and a lender who says no will typically provide an explanation. An applicant may run afoul of SBA’s eligibility requirements, or perhaps there was a mistake on the application. If the problem with your application can be solved, you may be able to do so by working with a mentor, a hired professional, or your would-be lender. After a 90-day waiting period, you can reapply.

Consider Alternative Funding Sources

You may decide to look at other options beyond SBA loans. Alternative funding sources include online lenders, business credit cards, business lines of credit, grants, crowdfunding, personal loans, and merchant cash advances, among others. See if the terms, conditions, and available amounts on offer align with your business needs.

The Takeaway

The SBA guarantees many types of small business loans with competitive rates and terms. Business owners can use the money for working capital, equipment, real estate, inventory, and other expenses. The demands of a lengthy application process and strict eligibility criteria are balanced out by lower interest rates and longer repayment periods. If a loan is denied, applicants can review the reasons, make improvements, and try again.

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

FAQ

What credit score is needed for an SBA loan?

A credit score of 680 or higher is typically required to qualify for an SBA loan, so maintaining good credit is crucial. Online lenders, though, may accept lower credit scores.

How long does it take to get approved for an SBA loan?

Once you’ve submitted your application and all necessary documents, the review process may take several weeks to a few months, pending SBA approval. If you’re working with one of the SBA’s preferred lenders, approval may come sooner, possibly even within a few weeks.

Can you apply for multiple SBA loans?

Yes, you can apply and be approved for multiple SBA 7(a) or 504 loans. But the total amount of SBA-backed financing you can receive is generally capped at $5 million.

What is an SBA loan used for?

Approved uses of SBA loans include:

•  Deploying working capital

•  Building or rehabbing real estate

•  Purchasing and installing inventory and equipment

•  Refinancing current debt

What happens if you default on an SBA loan?

Your lender will try to collect on the debt. After notifying you of your default status, the lender can seize and sell your collateral. Thanks to the SBA loan’s personal guarantee provisions, you may also face the loss and liquidation of personal assets.

If there’s additional unpaid debt, the SBA will give you 60 days to pay up. The SBA then transfers your account to the U.S. Treasury Department, which may garnish your wages and tax refunds or, potentially, file a lawsuit against you.

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

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

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

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

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.
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.

SOSMB-Q325-032

Taking the risk of starting a business makes it possible to reap big rewards if the business succeeds. To assess your prospects when starting a small business, it helps to know what percent of businesses fail in your industry — and, in particular, what percentage of small businesses fail.

What Is the Business Failure Rate?

According to the latest data from the U.S. Bureau of Labor Statistics (BLS), about one out of five new businesses fail in the first year of operation. Almost half (48.4%) fail within the first five years. The rate of failure changes as businesses get older.

There are several ways to define and measure business failures.

Defining Business Failure

A “business failure” typically occurs when a company is consistently unprofitable, runs out of business capital, cannot pay its creditors or suppliers, and ceases to operate. But sorting out what percent of businesses truly fail can be tricky, as some closures aren’t thought of as failures. At times a business is unable to continue after an unforeseeable event, such as a natural disaster or the loss of its primary customer. And a sole proprietorship can shut its doors for any reason the owner chooses.

Overall Statistics on Business Failure Rates

Business failure isn’t confined to brand-new entrepreneurs who are starting a small business. It can also happen to well-established businesses that have been around for decades or even centuries. So it may be useful to consider the percentage of businesses that fail by industry as well as by lifespan.

Recommended: Many Small Business Owners Reporting Sleepless Nights

Failure Rates by Industry

The industry that a business operates in can be a major factor in its likelihood of survival. When an entire industry faces rough economic conditions, companies in that field may go out of business due to factors beyond their control.

BLS figures for various industries’ one-, five-, and 10-year survival rates illustrate this. Agency data shows that, of businesses established in 2013, those in agriculture, forestry, fishing, and hunting had the best survival rates. Across those four sectors, 87.5% of businesses were still operational after one year, 66.2% after five years, and 50.5% after a decade.

By contrast, companies in mining, quarrying, and oil and gas extraction survived their first year at a rate of 79.4%. But after five years, the survival rate plummeted to 40.2%. Ten years in, a mere 24.5% of firms were still in business — the lowest 10-year survival rate of all 20 industries identified.

Factors Contributing to Business Failure

There are many reasons that businesses fail. Some failures are due to multiple contributing factors. Here are some of the key reasons.

•   Lack of market need. The classic example of changing markets is the death of buggy whip manufacturers after the automobile made horse-and-carriage use obsolete. While industries rarely decline so dramatically, there’s always the possibility that the market for certain goods and services will nosedive. Businesses in that industry would end up going broke unless they choose a new business model.

•   Cash flow issues. At other times, a business can almost be a victim of its own success. A company may enjoy high demand for its goods or services but lack access to the capital it needs to meet that demand. Being unable to meet expenses due to cash flow problems is one reason that some businesses fail. That’s why it’s important to have a reliable source of small business financing for help in bridging that gap.

•   Poor management. For businesses in the same sector, the quality of executive management can make the difference between one company’s success and another’s failure. Poor management can be one reason for subpar employee retention, shortsighted strategic decisions, or funding problems that can’t be fixed with just an emergency business loan.

•   Competition. Some industries are highly competitive and have relatively narrow profit margins. If a new company tries to break into one of these industries without having any strategic advantage, it may fall victim to its competitors. Some rivals might deliberately try to undercut the new business and force it to exit the market.

Recommended: The Six Reasons Small Businesses Fail

Business Survival Rates Over Time

When looking at how many businesses fail across all industries, the overall closure rates tell a sobering story. Approximately 20% of all startups fail in their first year; within five years, the rate is roughly 50%. By the 10-year mark, almost two-thirds (65.1%) of startups have failed.

How to Interpret Business Failure Statistics

Failure is a tough word, because nobody likes to fail. That’s why it’s important to know the odds. If your company operates successfully and profitably for 10 years before going out of business, you need not consider that a failure. After all, a mere 34.9% of businesses endure longer than a decade. The longer your business survives and thrives, the more the risk of starting it will have paid off — even if the business eventually ceases operations.

Strategies to Avoid Becoming a Statistic

To keep your company afloat, it helps to plan and prepare. Among the steps to take before starting your business: studying the market, estimating your expenses, and creating a sound business plan. Adopting an appropriate invoicing schedule is crucial. You’ll want to understand what net 30 is and how it helps both you and your customers.

Another way to help your business survive is through proper financial management. You need to carefully track your revenue and expenses to stay on a path to profitability and sustainability. You should also understand the taxes you’ll have to pay. For example, employers must file and pay quarterly federal tax returns using IRS Form 941, which tracks income taxes, Social Security tax, and Medicare tax withheld from employee’s paychecks.

Recommended: Same-Day Business Loans

The Takeaway

Making your small business successful and profitable is a serious challenge. Seeing the statistics on business failure can be sobering, but the facts shouldn’t discourage you from creating a strong business plan and carefully executing it. Know the failure rate of businesses in your industry and how various factors can affect the fate of your company. This will enable you to take measures that will give your business every chance of succeeding.

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

FAQ

What percentage of businesses fail in the first year?

Statistics from BLS show that since 1995, roughly 20% to 25% of all businesses fail in their first year.

How does the failure rate differ for small businesses vs. large corporations?

Among all businesses, about 50% will fail within five years.

Are certain locations associated with higher business failure rates?

Business failure rates do vary by state. As of 2023, Washington state had the highest one-year failure rate at just over 40%, with California’s being the lowest at 18.5%. Regionally, the percentage of businesses that fail within a year was highest in the BLS’s Mountain West (25.6%), West North Central (24.4%), and South Atlantic (23.9%) divisions.

What is considered a “good” survival rate for businesses?

People may have their own definition of “good,” but the data are clear. Approximately half of all businesses fail within five years, so any business that lasts longer than that is beating the average.

How do economic downturns impact business failure rates?

When economic downturns cause layoffs and consumer uncertainty, fewer sales can lead to more layoffs, further depressing demand. Loan delinquencies, defaults, and bankruptcies increase, while lenders tighten credit access to stem their losses. Small businesses in particular may lack the financial resources to weather a downturn in demand. Data from the New York Fed shows that during the 2007-2009 financial crisis, small business losses accounted for 40% of the overall employment decline.

Photo credit: iStock/SIphotography

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

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

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

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

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.
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.

SOSMB-Q325-035