SoFi

A small business can start with nothing but a great idea — but as that idea begins to coalesce into an actual operation, there are some key structural elements you’ll want to put in place. One thing you’re likely to need is a business bank account. The many advantages of a business bank account include simplifying bookkeeping and tax preparation, establishing credibility, accepting customer payments, and more.

What Is a Business Bank Account?

For convenience’s sake, it might be tempting to consider using a personal bank account vs. a business account for your new company. But convenience isn’t the whole story. It’s crucial for your new venture to have a business bank account before you start spending or accepting money.

A business bank account is used to manage financial transactions, such as receiving payments from customers, paying vendors, and paying employees. Commonly, business accounts include a business checking or savings account, a credit card account, and a merchant services account that enables you to accept credit and debit card transactions.

Key Benefits of a Business Bank Account

There are several solid reasons to open a business bank account. First, it helps you keep personal and business finances apart, which is important for legal and tax purposes. For example, separate accounts make it easier to track which expenses are business-only and thus could be possible tax write-offs.

A business bank account can also contribute to a professional image for your company. Customers pay the business directly rather than you, lending authority to your transactions.

Merchant services accounts support card transactions and offer customers purchase protection. This also helps ensure customer credit card information is safe.

What’s more, opening a business bank account along with company credit cards can help your business build credit and improve its access to future loans. Lenders will look for a strong credit history, including a track record of paying bills on time, when determining your creditworthiness.

Recommended: Startup Business Loans

Legal and Tax Benefits of a Business Checking Account

A business bank account can help you streamline your finances. You can easily view your account balances, income, recent payments, and perhaps the details of your business line of credit or other loans.

Keeping personal transactions clearly separate from business transactions will be useful later, when you’re preparing your business tax return. Personal expenses generally aren’t deductible as business expenses. Improper business deductions on your tax return might lead the IRS to charge you penalties and interest. In the worst case, IRS suspicions of fraud could turn into criminal charges.

A business bank account can also be a tool for shielding business owners’ personal assets. LLCs and corporations legally separate the business from the owner, so that in case of loss or legal damages, creditors can go after company assets only. Having a business bank account makes it clear which money belongs to the company.

Financial Management Advantages of a Business Bank Account

Many business bank accounts come with features that can help make financial management easier. For instance, as noted earlier, they may be linked to business credit cards that can help you make purchases and grow your business.

Other business checking account benefits might include invoicing tools and accounting software. You may have the ability to upload receipts and categorize spending. And you may be able to work with a dedicated account manager at your bank who provides a single point of contact, supporting your needs and advocating for you as necessary. (This relationship could also come in handy if or when you go shopping for a small business loan.)

Recommended: Equipment Financing

Types of Business Accounts

Common types of business bank accounts include:

•   Checking accounts: A deposit account that allows easy access to your money; critical for making and receiving payments. A business checking account allows for writing checks and the use of debit cards.

•   Savings accounts: A deposit account that typically earns interest, allowing you to set aside money for future goals or for an emergency fund.

•   Merchant accounts: A specialized account that allows you to accept credit and debit card payments. The account acts as an intermediary that holds funds from customer transactions before depositing them into your main account. (Many businesses use payment processors in lieu of merchant accounts. The processing system would send your payment to your business account.)

•   Credit accounts: Credit card and business lines of credit are forms of revolving credit. Credit cards allow you to borrow up to a certain limit. Ideally you’d pay back what you owe each month, but if not, you can carry a balance month to month. If you do carry a balance, you will owe interest on the debt. Similarly, lines of credit allow you to borrow up to a given limit. You’ll owe interest on the amount you borrow, and when you repay the debt, the money is available for you to borrow again.

How to Choose the Right Business Bank Account

Rates, fees, and features will vary from bank to bank. Shop around to find business account packages with the lowest fees and the right benefits for your situation. Some aspects to look at include interest rates on checking and savings accounts, as well as interest rates on credit cards and lines of credit. Take a look at transaction fees, early termination fees, and minimum account balance fees.

A merchant account may be an important feature, especially if you choose not to use a separate payment processor. When considering a merchant account, look closely at the per-transaction fee (the amount charged for processing every credit card swipe) and the monthly fee.

The Takeaway

Opening a business bank account is a crucial move for small businesses. Separating business banking from personal banking typically helps with financial management, simplifies tax preparation, and makes it easier for companies to build credit. For certain business structures, having separate business accounts can also help shield personal assets from legal damages.

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

FAQ

Do I need a business bank account as a sole proprietor?

As a sole proprietor you are not legally required to have a business bank account. You could use a personal account for business purposes, but it’s not necessarily a good idea. Having a separate business account will help you sort out business and personal expenses and income, making it easier to produce financial statements and tax returns.

Can I use my personal bank account for business expenses?

Legally, you can use a personal bank account for your business only if you are a sole proprietor or a single-owner LLC. Otherwise, you must have a business bank account. Generally it is to your advantage to have at least one business account for any company you run, regardless of structure.

Does opening a business account help build business credit?

Opening a business account can help your company build credit, as it clearly indicates that your business is separate from you as an individual. Any loans or lines of credit for the enterprise can run through your business account. Paying those bills on time while minimizing debt should improve the company’s credit score, and a high credit score can help you access loans at lower rates.

What documents are required to open a business bank account?

To open a business bank account, you’ll need to have an employer identification number, or EIN, from the federal government (sole proprietors can simply use a Social Security number). You’ll be expected to produce ownership agreements and documents related to your business formation. You may also be required to show a business license.

Can I have multiple business bank accounts?

There’s no limit to the number of business accounts that you can have. Managing multiple accounts can be complex, but there may be tradeoffs that make it worthwhile. For example, you may be able to track certain kinds of transactions better by setting up designated accounts, such as separate accounts for payroll and incoming client payments.

Photo credit: iStock/Djordje Krstic

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.

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

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-Q425-008

If you’re considering taking out a business loan, you’ll want to make sure your company looks like a safe bet in the eyes of a lender. One of the metrics they may review is your debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio.

Debt-to-EBITA is a financial metric that looks at how much of the income your business is generating is available to pay down debt before covering interest, taxes, depreciation, and amortization expenses.

Read on to learn how this ratio is calculated and how to know if your company’s debt-to-EBITDA ratio is healthy.

What Is Debt-to-EBITDA?

Simply put, debt-to-EBITDA measures the ability of your company to pay off its debts. It compares the business’s actual cash earnings to its financial obligations, including debt and other liabilities.

A high debt-to-EBITDA ratio might result in a lower business credit score, whereas a lower ratio could positively impact your credit profile, making it easier to qualify for financing at favorable rates and terms.

What Is EBITDA?

EBITDA stands for earnings before interest, tax, depreciation, and amortization. It is a measurement of a company’s profitability before those expenses are taken out.

While not accepted by GAAP (generally accepted accounting principles), EBITDA is often used by analysts and investors to compare the profitability of two companies in the same industry.

The reason for this is that EBITDA removes expenses that can vary depending on a company’s capital structure (and how much it spends on interest on debt), historical investments (which affect its depreciation and amortization expenses), and tax burden (which can vary from state to state).

You can calculate EBITDA by looking at your income statement and adding interest, tax, depreciation, and amortization back to net income.

EBITDA = Net Income + Interest + Taxes + Amortization + Depreciation

Recommended: What Is EBITDAR?

What Is Debt?

Debt is anything your company owes another company or individual and includes both short-term and long-term debt obligations. You can find these numbers in a company’s quarterly and annual financial statements.

Exactly what obligations are included in total debt for the debt-to-EBITDA ratio, however, is somewhat open to interpretation. Often, it’s defined as all interest-bearing liabilities, such as small business loans.

If you want to take on more debt, lenders may look at financial metrics like your debt-to-income ratio, debt-to-equity ratio, and debt-to-EBITDA ratio. All of these can help a lender understand the likelihood of your company being able to repay a new loan with the given amount of debt you currently have.

Formula for Calculating Debt-to-EBITDA

Calculating the debt-to-EBITDA ratio is done by dividing the sum of a company’s short-term debts and long-term debts by its EBITDA. The main goal of this ratio is to reflect the amount of cash available at the company to pay back its debts. (If you look at just the long-term debt, the result is called a funded debt-to-EBITDA ratio.)

Debt-to-EBITDA Ratio Formula

To calculate the debt-to-EBITDA ratio, you would use this formula:

Debt-to-EBITDA Ratio = Total Debt / EBITDA

What the Debt-to-EBITDA Ratio Tells You

The debt/EBITDA ratio compares a company’s total liabilities to the actual cash it is bringing in. The goal of this financial ratio is to show how capable the business is of paying its debt and other liabilities.

Generally, the lower your debt-to-EBITDA ratio, the more money your company has available to cover its financial obligations when they come due. A higher debt-to-EBITDA ratio, on the other hand, suggests that the business is heavily leveraged and might run into trouble paying its debts.

What’s considered a good debt-to-EBITDA ratio will vary by industry. Generally speaking, however, a ratio of 4 or 5 is considered to be high. This may be a red flag to potential investors or lenders that your business is overleveraged and could potentially default on its debts.

Recommended: What Is EBITDA Margin?

Why the Debt-to-EBITDA Ratio Matters to Lenders

Your company’s debt/EBITDA ratio can be an important factor to lenders when they are considering extending a loan to you. This metric is significant to potential lenders for several reasons.

Assessing Credit Risk

Before offering a loan to a potential borrower, lenders typically want to know that the borrower will be able to repay the loan. To gauge that ability, they may look at a variety of factors, including the owner’s credit history, the company’s credit score, and others. One of the key metrics is the company’s debt-to-EBITDA ratio since it shows how the company’s debt compares to its earnings, suggesting how much cash it may have available to repay new debt.

Evaluating a Company’s Financial Health

A company’s debt-to-EBITDA ratio also suggests how well the company is doing financially. That’s because it indicates whether the business is able to pay its debts with the income it’s making. Lenders may consider this metric in order to gauge a company’s financial health, based on the metric and the standard in its industry.

Recommended: What Is Debt Factoring?

Uses of Debt-to-EBITDA

So when would you actually use your debt-to EBITDA ratio? If you’re looking to borrow money for your business, it can be smart to calculate your debt-to-EBITDA ratio before you start the business loan application so you know where you stand.

If you borrow money from a bank, there may be a requirement to meet a certain debt-to-EBITDA ratio in your loan agreement. If you can’t maintain that ratio, you may risk the loan being called.

If you are considering bringing on investors, they may also want to look at your debt-to-EBITDA ratio. Investors will often use this ratio to gauge the approximate amount of time it will take a company to pay off all of its debts with its available cash.

Recommended: How to Read Financial Statements

How Different Industries Use the Debt-to-EBITDA Ratio

What is considered an acceptable debt-to-EBITDA ratio varies from industry to industry. For example, for utilities and telecoms, which have relatively predictable cash flow, a higher debt-to-EBITDA ratio may be considered acceptable. For technology and software companies, which can often grow quickly without incurring extensive debt, good debt-to-EBITDA ratios may be on the lower end. It’s important to understand what the expectation is in your industry when you want to apply for a loan so that you’ll understand how your company will be evaluated.

Recommended: What Is EBIDA?

Pros and Cons of Using the Debt-to-EBITDA Ratio

There are both benefits and drawbacks to using debt-to-EBITDA ratio to assess the financial health of a business. Here’s how they stack up.

Pros

Debt-to-EBITDA is simple to calculate. Debt can be found on the balance sheet and EBITDA can be calculated from the income statement. As a result, this ratio can be a quick way to get a snapshot of a company’s financial health and liquidity.

The debt-to-EBITDA ratio is also popular with analysts because it relates the debts of a company to its business cash flow by ignoring non-cash expenses. This is important because, in the end, it’s cash, and not profits, that is needed to pay off debts.

Cons

Because EBITDA adds interest, taxes, depreciation, and amortization to net income, it may not provide an accurate measure of a firm’s actual earnings. If any of these variables is high, it could impact a company’s ability to pay debts.

In addition, debt-to-EBITDA may not be useful for comparing companies in different industries. Capital requirements vary by industry and, as a result, some companies need to carry a higher debt loan than others. For this reason, using debt-to-EBITDA to compare firms across industries may not be reliable.

Debt-To-EBITDA Ratio Example

Let’s look at an illustration of how the total debt-to-EBITDA ratio can indicate a company’s financial health (or lack thereof).

Calculation Example

Let’s say company ABC’s EBITDA is $10 million and its debts add up to $30 million. To calculate ABC’s debt-to-EBITDA ratio, you would calculate:

Debt-to-EBITDA = $30 million / $10 million

Debt-to-EBITDA = 3

A debt-to-EBITDA ratio of 3 is generally considered low and indicates that ABC has revenue to cover its debts. A lender may look at that ratio and decide ABC isn’t a risk and approve a loan.

Here’s another example: Let’s say company XYZ has an EBITDA of $10 million, but has $60 million in debt. This would be its ratio:

Debt-to-EBITDA = $60 million / $10 million

Debt-to-EBITDA = 6

Depending on the industry, a ratio of 6 may be considered high and could make it difficult for XYZ to get a good credit rating and qualify for any additional financing.

How to Interpret the Results

It’s important to be careful as you interpret your debt-to-EBITDA ratio. What is considered a healthy ratio varies considerably by industry, so it’s helpful to have a sense of the benchmark in the one in which your company operates. As discussed in the examples above, the metric will be understood by lenders in the context of what good numbers look like for other, comparable companies.

Recommended: A Guide to Ecommerce Business Loans

The Takeaway

The debt-to-EBITDA ratio reveals how much actual cash a company has available to cover its debt. It is one of many financial metrics used by lenders, analysts, and investors to gauge a company’s liquidity and financial health.

As a business owner, it can be a good idea to calculate your company’s debt-to-EBITDA ratio periodically. It can give you insights into your company’s current financial position and also help you see trends over time. If you see the ratio going down, for example, it means that you are paying down debt, the company’s earnings are going up, or both.

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 is considered a good debt-to-EBITDA?

A good debt-to-EBITDA ratio will depend on your industry. Generally, however, a ratio of three or less can indicate that your business has enough cash flow to comfortably cover its debts.

Is debt included in EBITDA?

Yes. EBITDA stands for earnings before interest, tax, depreciation, and amortization. Interest represents the interest your business is paying on its debts.

What does debt-to-EBITDA indicate?

The debt-to-EBITDA ratio indicates how much income your company has available to pay down debt before covering interest, taxes, depreciation, and amortization expenses.

How can a company improve its debt-to-EDITDA ratio?

To improve debt-to-EBITDA ratio, a company could pay down its debt, increase its earnings, or both.

What are the limitations of the debt-to-EBITDA ratio?

Debt-to-EBITDA ratio has certain limitations. If a company is paying a lot for any of the elements that EBITDA adds to net income — interest, tax, depreciation, and amortization — its ability to pay back debt may be less than the debt-to-EBITDA ratio suggests. Additionally, if you’re using debt-to-EBITDA ratio to compare companies in different industries, you won’t necessarily get a good result, since expectations of the ratio vary by industry.

Photo credit: iStock/sanjeri

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

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

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.

SOSMB-Q425-014

If you own a small business, you likely have quite a few expenses associated with operating your company. Business credit cards can offer a way to manage and even take advantage of those business expenses, while building your credit.

What Is a Business Credit Card?

Business credit cards offer a way for a company to charge for business-related expenses. Business credit cards function similar to personal credit cards, but are specifically for businesses and their unique needs. Just like there are business checking account options and personal checking account options, there are also business and personal credit cards.

How Business Credit Cards Work

Business credit cards work similarly to personal credit cards by providing businesses with a line of credit for purchases. Just as with personal credit cards, a company will put charges on the business credit card and then pay the card’s balance.

Key Features That Differentiate Them From Personal Cards

When differentiating between personal credit vs business credit cards, there are some key differences. Business credit cards usually have higher credit limits. Issuers consider both personal income and business revenue when determining credit limits for business credit cards. Personal credit cards only consider personal income when determining credit limits.

Another difference is that business credit cards primarily report to business credit bureaus, which affects your business credit score. Personal credit cards usually report to consumer credit bureaus. However, business credit cards can impact your personal credit score because your personal credit score is part of business credit card applications. Also, business credit card issuers can report negative activity to consumer credit bureaus.

One thing to keep in mind is that business credit cards have fewer consumer protections. Business credit cards aren’t required to provide some of the consumer protections that personal credit cards have to.

Pros of Business Credit Cards

There are several pros of using business credit cards. One of the main reasons why business owners use business credit cards is to keep business expenses separate from personal expenses. A business credit card is an easy way to keep track of your business expenses, especially when it comes time for taxes. Combining personal and business expenses is not advised.

If you have a business, it is important to have a good business credit history if you need to apply for a loan or other business credit. Responsible usage of business credit cards can help in building business credit history and improving your business credit score.

Many business credit cards offer the chance to earn rewards and cash back. Depending on the card, you might earn rewards or cash back for business-related purchases, like shipping, office supplies, internet, or travel. Plus, credit card rewards are not considered income, so they are not taxable. Some business credit cards also offer additional benefits like purchase protection or extended warranty on qualifying items purchased with the card.

Cons of Business Credit Cards

Although there are many benefits to having a business card, there are also downsides. Like all credit cards, business credit cards may be tempting to overspend. If your business has financial hardship and can’t pay the credit card bills, it could actually negatively affect your personal credit.

Small business credit cards also usually have higher interest rates than personal credit cards or business loans like startup business loans. If you pay off your credit card balance, however, then it won’t be an issue.

There are also fees associated with most business credit cards. If you forget or are unable to pay your credit card bill by the due date, you will likely be charged a late fee.

When a Business Credit Card Makes Sense

A business credit card may make sense if you want to keep your business expenses separate from your personal expenses. Also, if you are interested in building your business credit history and want to earn rewards on business expense spending, business credit cards may be a good fit for your business.

Alternatives to Business Credit Cards

If a business credit card doesn’t make sense for your situation, there are alternatives. A business line of credit or a small business loan are two popular alternatives to a business credit card.

Business Lines of Credit

A business line of credit, like a small business loan, is an alternative to a business credit card if your business needs a way to cover short-term business expenses. A business line of credit works more like a credit card than a traditional loan. With a business line of credit, you can access financing through revolving credit up to an approved limit, instead of receiving a lump sum like with a traditional loan. You then make monthly payments on what you borrow from the business line of credit, and are only charged interest on what you owe.

Small Business Loans

Small business loans are also called commercial loans. A small business loan can be used as financing for business-related activities like purchasing inventory, starting a business, funding operating costs or managing cash flow. Small business loans can be used for equipment financing or for other business expenses. There are short-term and long-term small business loans.

Tips for Choosing the Right Business Credit Card

When choosing a business credit card, you want to understand your business expenses and what categories you spend the most on. For example, if your business spends a lot of money on office supplies, you may want to choose a card that offers rewards for that category of spending. Some business credit cards offer rewards as well, so compare those to find one that will best fit your preferences. Of course, you should also make sure that you can qualify for the business credit card that you want. Most business credit cards require a good personal credit score, but some accept applicants with a fair credit score.

The Takeaway

Business credit cards can be a great way to keep track of your business expenses, build credit, and earn rewards. However, business credit cards may not be a good choice for all businesses. If you might overspend on a business credit card or don’t have good credit but still need a way to cover short-term business expenses, you could look into alternatives like business lines of credit or small business loans.

If you do decide to apply for a business credit card, be sure to do your research to choose the right one for your business’s qualifications and needs. SoFi’s marketplace can help you find the right business credit card for your business’s 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

Do business credit cards affect personal credit?

Business credit cards can impact your personal credit score because your personal credit score is part of business credit card applications. Also, business credit card issuers can report negative activity to consumer credit bureaus.

Can I get a business credit card as a sole proprietor?

Yes, a sole proprietor can get a business credit card. If you apply for a business credit card as a sole proprietor, the lender will likely use your personal credit history for qualification. This can be an option if you want to get a business credit card without a business, like if you are a freelancer.

What credit score is needed for a business credit card?

Minimum credit scores for business credit cards will vary by the lender and product. In general, you need a FICO credit score of at least 670 to qualify for a business credit card.

Are business credit card rewards taxable?

Business credit card rewards are not considered income, so they are not taxable.

How many business credit cards can a company have?

There is no formal limit to the number of business credit cards a company can have. However, issuers have different qualifying guidelines and restrictions for their own products.

Photo credit: iStock/Drazen_

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.

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.

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.

SOSMB-Q425-019

If you’re a small business owner and need funding, you’re considering many options. It may seem like you have too many choices.

One choice is how long you’ll have to repay the loan (your loan term). Factors that determine your loan term include:

•   The type of small business loan you need

•   Which kind of lender works best

•   Interest rates and fees

•   Repayment terms

•   Aspects of your business (age, credit score, revenue, etc.)

Repayment term refers to the amount of time you have to pay back the lender. Terms generally range from within a few months to 25 years. Some lenders call out the loan maturity date (the day by which your loan must be paid off) instead.

It’s helpful to understand how small business loan terms differ among lenders and loan types to make sure you’re choosing the right financing. You also want to have clarity on rates, fees, and guidelines set by the lender.

We’re breaking down business loan terms and conditions for different types of small business financing, from short-term business loans for boosting cash flow to long-term business loans aimed at helping your business grow, as well as alternatives to traditional bank loans.

What Is a Loan Repayment Term?

A loan repayment term can be a short term measured in months, an intermediate term measured in years, or a long term spanning more than two decades.

Typical business loan terms vary depending on business needs, type of financing, lender, and other conditions, as do average business loan amounts. The following sections will highlight common repayment terms and lending vocabulary to help give you an understanding of what to expect when you’re searching for the small business loan funding that’s right for you.

Recommended: Delayed Draw Term Loans

Typical Small Business Loan Terms by Loan Type

We’ve broken down several different small business financing options and included the following information:

•   Repayment term: How long you have to pay back the loan

•   Loan amount: Total amount you can borrow from a lender

•   Interest rate: Amount the lender charges for the loan, usually stated as a percentage

•   Time to funding: Amount of time it will take to receive the actual funds

•   Requirements/eligibility: Conditions that determine whether you qualify for financing

Recommended: Unsecured Business Loans

SBA 7(a) Loans

The U.S. Small Business Administration (SBA) offers a variety of loan programs, including SBA 7(a) loans as highlighted below:

•   Repayment term: Maximum of 10 years for inventory, working capital, or equipment; 25 years max for real estate loans.

•   Loan amount: $5 million is the maximum business loan amount for all 7(a) loans except SBA Small Loan, Express, and Export Express, which typically have maximums of $500,000.

•   Interest rate: Can be fixed or variable and is determined by the lender using guidelines on rate maximums from the SBA.

•   Time to funding: Varies depending on program, but turnaround time can be as short as 36 hours or take up to several weeks.

•   Eligibility: Lenders will have the final say on whether you’re approved for an SBA 7(a) loan, but at a minimum, your business must meet the following eligibility requirements set by the SBA:

◦   Is a for-profit enterprise

◦   Currently does or proposes to do business in the U.S. or its territories

◦   You have a reasonable amount of equity in the business

◦   You have exhausted all other business and personal financing options

Term Loans

A term loan is a type of financing in which the borrower receives a single lump sum of funding that they repay (plus interest) to their lender according to an agreed-upon repayment schedule. The business loan term is based on a borrower’s qualifications, loan amount, and other conditions set by the lender. Examples of common term loans are commercial real estate loans and other installment lending options.

•   Repayment term: Short term (three to 24 months), intermediate term (up to five years), or long term (up to 10 years).

•   Loan amount: Varies depending on type of lender and program, but generally starts around $50,000 and can go over $1 million.

•   Interest rate: Depends on type of lender, amount of loan, and other qualifying factors.

•   Time to funding: Varies depending on the program but can be a few days or a few weeks.

•   Eligibility: Typically determined by the lender based on loan amount, creditworthiness, and the amount of time you’ve been in business.

Bank Loans for Small Businesses

Business loan terms and rates from banks are generally seen as some of the most favorable, but also the most challenging to get. Banks typically require collateral and a strong financial history in order to qualify.

•   Repayment term: Typical business loan terms are three to 10 years.

•   Loan amount: Average business loan amount is around $500,000.

•   Interest rate: Will ultimately depend on the lender, loan type, and assessed risk of lending to the borrower.

•   Time to funding: Banks often have longer approval processes due to their stricter qualifying factors. They can be anywhere from one week to two months.

•   Eligibility: Typically determined by the lender based on loan amount, creditworthiness, and the amount of time you’ve been in business.

Recommended: Fundamentals of Business

Business Line of Credit

A business line of credit gives you access to funding up to an approved maximum amount, with interest typically charged on unpaid balances. These can be good short-term options for small business owners who want cash flow and flexibility to access funding on a revolving basis.

Business loan terms for a line of credit function differently than a traditional term loan because borrowers do not pay back in set installments, but according to how much they borrow against the line of credit.

•   Repayment term: Typically six months to five years.

•   Loan amount: Credit limit is determined by the lender but generally can be between $1,000 to $250,000.

•   Interest rate: Depends on lender and creditworthiness.

•   Time to funding: Online lenders typically approve within a few days, while traditional banks may take up to two weeks.

•   Eligibility: Banks may require a credit score over 680 and a minimum two years in business. Some lenders may have less stringent standards.

Microloans

Microloans can be great for small business startups or businesses that have struggled to get financing elsewhere. The SBA has numerous intermediary lenders participating in its microloan program.

•   Repayment term: Up to seven years for SBA microloans. Private and peer-to-peer lenders will set their own business loan terms.

•   Loan amount: Business loan amounts vary depending on lender, but are generally up to $50,000.

•   Interest rate: Depends on type of lender, loan amount, and your business’ eligibility, but rates are generally higher than other loan types.

•   Time to funding: Online lenders may approve within 24 hours, while lenders with stricter application requirements may take days or weeks.

•   Eligibility: Traditional lenders will base funding on creditworthiness, collateral, and business history. Alternative lenders may have fewer or different qualifications and take your business’ cause into consideration.

Invoice Factoring or Financing

With invoice factoring, you sell your invoices to a factoring company that is then responsible for collecting payment from your customers. With invoice financing, you use unpaid invoices as collateral to receive cash from a lender. Both can be short-term financing options for small, B2B businesses that regularly use invoices or have irregular billing cycles.

•  Repayment term: Typically, 30 to 90 days to reflect the terms set for customers paying the invoice.

•  Loan amount: Typically a percentage — up to 90% upfront, depending on the lender — of the amount of each invoice.

•  Interest rate: On top of potential processing fees, the factoring fee is generally 1.00% to 5.00% of the total amount of each invoice and generally charged each month until the customer pays their invoice.

•  Time to funding: Typically, between 24 hours and a few days.

•  Eligibility: Must be a business that invoices customers, which usually means a B2B organization. Lenders may also consider your creditworthiness and your customers’ ability to pay the invoices.

Equipment Financing

A type of small business loan for the specific purchase of necessary business equipment, these are typically intermediate-term loans that are paid off within a few years. With business equipment financing, you can secure loans for necessary equipment and machinery without tapping into valuable cash reserves.

•  Repayment term: Often business loan terms are linked to the expected lifespan of the equipment; could be a few months or many years.

•  Loan amount: Can be up to 100% of equipment cost

•  Interest rate: Typically ranges between 5.00% and 30.00% or more

•  Time to funding: Online lenders may approve within 24 hours, while banks may take up to a few weeks.

•  Eligibility: Lenders will typically look at creditworthiness, business history, and monthly or yearly revenue. Banks may want to see at least two years of business history to qualify. Because the equipment acts as collateral, these types of loans may be easier to qualify for than other financing.

Inventory Financing

This is an asset-based term loan or line of credit that a business receives in order to purchase more inventory and maintain cash flow. The inventory itself acts as collateral for the loan or line of credit.

•  Repayment term: Typically around one year, depending on the inventory, or possibly longer for revolving inventory lines of credit.

•  Loan amount: A percentage of your inventory, generally 20% to 65%

•  Interest rate: Depending on the lender type, could be anywhere from 8.00% to 99.00%

•  Time to funding: Between one business day and several weeks depending on the lender

•  Eligibility: Be in business for at least six months to one year, meet inventory minimum set by the lender, and be willing to have inventory audited if the lender requires it

Merchant Cash Advance

A merchant cash advance allows small businesses (“merchants”) to get a cash advance in return for a portion of their future credit/debit card sales or receivables, plus a factor rate or fee.

•  Repayment term: Typically, three to 18 months but depends on the lending company and your sales.

•  Loan amount: Business advance amounts usually up to $500,000.

•  Interest rate: Factor rate typically between 1.1 to 1.5, multiplied by the cash advance amount (E.g.: $5,000 cash advance × 1.3 factor rate = $6,500 owed to the merchant lending company).

•  Time to funding: Can be as little as 24 hours.

•  Eligibility: Lenders typically look at financing documents like monthly sales and bank statements to determine if the business will be able to make the amount advanced back.

Recommended: Working Capital Line of Credit

Interest Rates and Fees Explained

When it comes to repaying your loan, line of credit, or other type of funding, the term has a significant impact on what your payments will be and how many of them you’ll need to make. But the length of time you have to pay back your financing isn’t the only factor to consider as you evaluate its expense. Here are some other important considerations.

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Fixed vs. Variable Interest Rates

Most financing will charge you some kind of interest: It’s the cost of taking out the loan or line of credit. The lower your interest rate, the more affordable your loan is likely to be. However, it’s also worth assessing the difference between fixed and variable interest rates to make sure you’re comfortable with your choice.

A fixed interest rate will not change for the life of your loan. If it starts at 10.50% it will remain 10.50% through your last payment. This means you’ll know exactly what you’ll need to repay every month, allowing you to budget effectively far in advance.

Some loans — and many lines of credit — come with a variable rate. Loans with these rates may start out lower than comparable fixed-rate loans, but at a set point, they will change according to an industry benchmark. If prevailing interest rates drop, this could mean that you’d pay less, but if they rise, your bills will increase, too. While a variable rate can be advantageous, it also adds an element of uncertainty to your budget and makes it more difficult to forecast your costs.

Origination Fees and Other Charges

Whenever you’re considering applying for financing, fees are a concern, as they can add significant expense to borrowing. Basically, an origination fee pays the lender for the work of handling your application — reviewing your paperwork, verifying your eligibility, checking your credit score, and so on.

Generally speaking, any form of business financing may involve an origination fee, which can be a flat-fee charge of a percentage of the amount you’re borrowing. Banks typically charge between 0.50% and 1.00%, while online lenders may charge from 1.00% to 9.00%. Potentially, you may also face other closing costs, as well. SBA 7(a) loans don’t charge origination fees, but do require an upfront guarantee fee.

Depending on the financing you choose, you may also need to take into account appraisal fees (if you are offering up collateral for your lender to review)h. Once you’ve secured your funding, there may be annual fees, draw fees (for lines of credit), late payment fees, collection fees (if you default), and more. Be sure to go over the fine print about fees as you discuss potential financing options with your financial advisor.

APR vs. Interest Rate

One way to get a quick sense of how expensive fees on your business financing will be is to compare the interest rate to the annual percentage rate (APR), which is the yearly charge for borrowing money plus fees charged by your lender. Also expressed as a percentage, the APR provides a more comprehensive gauge of the cost of your particular loan on a yearly basis.

Recommended: Debt-to-Income Ratio

Loan Maturity Date

The loan maturity date is generally the due date for making the final required payment on your small business loan. The loan maturity date typically aligns with the term length.

A $50,000 SBA microloan with a six-year term, for example, would typically feature 72 scheduled monthly payments. The date when the 72nd and final required loan payment is due is the loan maturity date.

Here are some of the maximum maturity term lengths on SBA loan products:

•  SBA 7(a) loans can have a maturity term of up to 25 years for financing real estate

•  SBA 504 loans can have a 10-year maturity term for equipment financing

•  SBA microloans can have a maturity term of no more than seven years

What Is a Prepayment Penalty?

A prepayment penalty is a fee that some lenders may charge if you pay off a loan prior to the loan maturity date. The terms and conditions of your small business loan should disclose the financing costs, including any fees and penalties. Paying off a small business loan early can minimize your interest costs and may be right for you if there’s no prepayment penalty.

Recommended: Stated Income Business Loans

How Repayment Frequency Impacts Your Cash Flow

Depending on your lender and your financing, you may have some options as to how often you make payments. While many loans require monthly payments, some financing can be repaid on a weekly or biweekly basis, on the one hand, or a quarterly schedule on the other.

Repayment frequency may be instrumental in impeding or improving business cash flow. The payment frequency that will work best for you will likely depend not only on the type of financing you choose, but also on the nature of your business and its income.

Frequent payments are typically smaller. This means that they may be easier to pull together and leave more cash available for other purposes. However their frequency can make managing them more demanding and could be a problem if your company tends to receive income at longer intervals. Quarterly repayments, which are likely to be much larger, require more discipline to plan for and gather, which can make it feel like they’re restricting cash flow, assuming that you’re budgeting well in advance.

Which Business Loan Terms Are Right for You?

When deciding which business loan term is right for your business, it may help to assess what your immediate needs are and how much debt you can safely take on. To get started, try answering the following questions:

•  What is the total cost of the funding you need, including interest rates and fees?

•  What are your revenue projections for the business loan terms you’re considering?

•  What items are the most essential to purchase for your business? Are there items that can wait?

•  What are your regular business expenses, and how do you plan to cover them?

•  How much working capital do you currently have to work with?

•  Do you have collateral you can offer to lenders?

•  Has cash flow been healthy or restricted? Would financing help or hurt it?

Recommended: SBA 504 vs. 7a

How to Compare Loan Options Effectively

It’s always a good idea to shop around for loans. As you size up your different offers, here are some elements you should consider:

•  Type of financing and how well it meets your needs

•  Maximum amount available

•  Length of loan term

•  Repayment schedule and whether it aligns with your business

•  Interest rate (or factoring fee)

•  APY (and/or fees associated with the financing)

•  Timeframe for funding

Understanding how your options stack up in these areas should help simplify your choice so that you can find the best financing for your business.

💡 Recommended: Small Business Loans in Virginia

The Takeaway

The terms of business loans can be short, intermediate, or long in duration. A short term may suffice if you need fast funding for working capital. You might prefer a longer term if you need commercial real estate financing.

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 common terms for a business loan?

A business loan can have a short term, intermediate term, or long term repayment schedule depending on its purpose. Microloans, for example, generally have terms of up to six or seven years. SBA 7(a) loan terms can go up to 25 years for financing real estate and up to 10 years for working capital purposes.

What is a typical SBA loan term?

Here are some typical term lengths for SBA loan products:

•  Up to 25 years for SBA 7(a) loans used for real estate financing

•  Up to 10 years for SBA 7(a) loans used for working capital purposes

•  25 years for SBA 504 loans used for real estate financing

•  10 years for SBA 504 loans used for equipment financing

•  No more than seven years for SBA microloans

How long can a business loan term be?

SBA 7(a) and 504 loan terms can go up to 25 years for financing real estate. These are generally the longest terms you can get for an SBA loan product.

What are the three types of term loans?

A business loan can have a short term, intermediate term, or long term repayment schedule depending on its purpose. An SBA 7(a) loan for real estate financing typically comes with a long term of up to 25 years. Microloans usually have short terms of up to 36 months, but SBA microloan lenders can offer intermediate terms of up to seven years.

What is the difference between a loan term and a loan amortization schedule?

While your loan term and your amortization schedule are related, they’re not the same. A loan term is the entire period of time you have to fully pay back a loan — principal and interest. An amortization schedule is the plan for how each of the payments you make will be applied toward principal and interest. When you start paying back the loan, most of your money will go toward interest, and as you reach the end of your loan term, more of your payment will be applied toward principal.

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Small Business Loans
*Reference to “same day funding” or “funding within 24 hours” describes a general capability of many lenders you can reach through SoFi’s marketplace. Funding or funding timing is not guaranteed. Your experience with any lender will vary based on requirements of the lender and the loan you apply for. To determine the timing of funds availability, you must inquire directly with any lender. In addition, your access to any funds from a loan may be dependent on your bank's ability to clear a transfer and make funds available.

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

SOSMB-Q425-018

“Cost of goods sold” (COGS) refers to the cost of producing the goods sold by a company. Calculating COGS involves knowing the amounts you spend to create your products, which helps in determining whether your business is making a profit. Cost of goods sold is sometimes referred to as “cost of sales.”

What Is Cost of Goods Sold (COGS)?

Cost of goods sold comprises the outlay for materials and labor that are directly used to create the product. COGS does not include indirect expenses, such as sales or distribution costs.

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Components of COGS

Knowing how to find the cost of goods sold enables you to manage your business better as you zero in on the relevant line items. The expenses included in COGS are those directly associated with the production or acquisition of a company’s merchandise.

Some COGS-related expenses are direct raw materials, direct labor costs, manufacturing overhead, and direct costs of production. COGS does not include general and administrative expenses, marketing, utilities, equipment purchases, salaries of management-level employees, insurance premiums, or certain other business liabilities.

Raw Materials

The price of raw materials, such as basic manufacturing supplies or substances, is a major factor to include when you are finding out your cost of goods sold. The calculation might also include materials for packaging, such as boxes for shipping orders. Businesses that sell goods might have high materials costs, while businesses that sell services would likely spend much less or nothing on materials.

Labor Costs

Cost of goods sold also includes labor costs, including direct labor for creating or assembling products. Administrative costs or salaries of management-level employees are not part of finding the cost of goods sold.

Manufacturing Overhead

Another set of costs to add into the COGS is the manufacturing overhead. As with raw materials, the cost of manufacturing overhead (also known as factory overhead) will be higher for companies that fabricate or assemble products than for companies that provide services. Note that, if you’re financing business equipment, expenses related to the loan are not part of COGS.

Freight and Shipping Costs

Freight and shipping costs can be tricky when you’re calculating COGS. Depending on what’s being shipped and to whom, these costs may be considered different types of expenses.

Inbound shipping costs are typically included in COGS. Examples could include raw materials needed for manufacture or inventory purchased from a vendor. The same concept applies to transporting bulk cargo as freight.

Outbound shipping costs, though, generally aren’t part of COGS. Such shipments typically involve customers (for instance, when you’re sending purchased items to an online shopper). The shipping fee would be considered a separate operating expense.

Packaging Costs

As you learn to find the cost of goods sold, another expense you’ll have to categorize is the purchase of packaging materials. The IRS has rules to ensure that expenses are taxed correctly; it says that “containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold.” One example might be a jar that holds salsa. The jar’s cost would generally be included in the salsa maker’s COGS.

On the other hand, the cost of items that aren’t integral is not part of COGS. Such items might include outer cardboard boxes for shipping, protective materials such as packing peanuts, or cardboard displays for marketing. The IRS regards these outlays as “shipping or selling expenses.”

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How To Calculate COGS

Calculating COGS can be useful as part of a break-even analysis, and you can reassess the figures monthly or quarterly to track the company’s progress. The following formula shows how to calculate the cost of goods sold.

COGS Formula and Example Calculation

The COGS formula is:

Cost of goods sold = (beginning inventory cost + inventory costs) − ending inventory

The components are:

•   Beginning inventory: the cost of the goods in the company’s inventory at the beginning of a given time period. This is not the same thing as inventory costs.

•   Inventory costs: additional costs incurred in purchasing or creating more inventory during the time period.

•   Ending inventory: the cost of the inventory that the company has left at the end of the time period.

There are several ways to determine inventory cost. The inventory cost accounting method that your business chooses will affect its COGS calculation; each business may use a different method. The four common inventory costing methods are weighted average, LIFO, FIFO, and special identification.

•   Weighted average: This is one of the simplest methods, where the outlay for the entire period determines the inventory cost. The date that a given unit of inventory was purchased or produced doesn’t matter in the weighted average method.

•   LIFO: This acronym stands for last in, first out. In this method, the newest inventory is sold first.

•   FIFO: The opposite of LIFO, this stands for first in, first out. In this method, the oldest inventory is sold first.

•   Special identification: With this system, each unique unit is tracked and has its own cost. Each unit may be labeled with a serial number.

An example of calculating COGS would be as follows:

•   Business XYZ started the month with stock that had a cost of $10,500 (the beginning inventory).

•   During the month, the business spent $3,000 for the purchase of materials to make new products (the inventory cost).

•   At the end of the month, XYZ had $4,100 worth of goods in stock (ending inventory).

To calculate the cost of goods sold for the month, the formula would be:

Periodic vs. Perpetual Inventory Method

How you keep track of inventory has an effect on how precisely you’ll be able to calculate your COGS at any given time. There are two main methods of evaluating inventory.

•   Periodic inventory method: This approach involves taking inventory at the beginning and end of a given period (such as a month or a quarter) and then finding the average COGS for the units sold during that period. The calculations above represent this method. Monthly or quarterly storage fees may also be included in inventory costs, depending on accounting rules.

•   Perpetual inventory method: This higher-tech mode tracks individual items in real time, so there’s no need to wait till the end of a month or quarter to assess your COGS. Using special identification such as bar codes, a business can tag each item, linking it to its cost of production, date of production, date of sale, storage details, and other relevant information. Data from sales, returns, and restocks goes to an accounting system that can calculate the COGS automatically.

If the expense of purchasing or warehousing inventory drains your capital, inventory financing or some other asset-based lending may be worth exploring. These lenders generally accept inventory as collateral and provide ready cash for the business while it’s waiting for that inventory to sell. The lender will need to have confidence in your financial reporting, including your COGS assessment, to evaluate its risk fairly.

Why COGS Matters for Your Business

Cost of goods sold is recorded as a business expense on income statements, and may be used by investors or managers to estimate a company’s bottom line. A lower COGS means higher net profits (with all other things being equal).

Also, the details of your COGS analysis are likely to be relevant to lenders if you apply for a small business loan.

Manufacturers, retailers, and other companies with high COGS may need a business line of credit to finance the purchase of raw materials or finished goods to meet demand.

In cases where costs are suddenly much higher than usual — due to an unusually large order, for instance — there are lenders who will advance the needed funds through purchase order financing. The purchase order could serve as collateral for a loan, but lenders will want to know about your customer’s credit history as well as yours.

As for service companies, they may not have any COGS at all. Service-only companies don’t have goods to sell. They also do not have inventories. Examples of service-only companies include law offices, real estate appraisers, business consultants, and accounting firms.

How COGS Affects Financial Statements

COGS helps determine two crucial business metrics shown on financial statements: gross profit and gross margin.

•  Gross profit is revenue minus COGS.

•  Gross margin is gross profit divided by revenue.

If COGS is under control, profit estimates and other projections (like those shown on a budgeted income statement, for example) are likely to be more reliable.

Ways To Reduce COGS

Companies can reduce their COGS through purchasing cheaper raw materials or increasing efficiency in the production process to lower costs.

COGS can also be manipulated, either intentionally or mistakenly. Some ways might include overstating discounts, overstating returns to suppliers, overvaluing inventory on hand, allocating to inventory higher manufacturing overhead costs than those incurred, altering the amount of inventory in stock at the end of an accounting period, or failing to write off obsolete inventory. COGS will then be underreported, leading to a falsely high gross profit margin and an inflated net income.

Common COGS Calculation Mistakes

Many people use “cost of sales” and “costs of goods sold” interchangeably. But the calculations aren’t necessarily the same.

•  Cost of goods sold involves the direct costs associated with producing goods — or acquiring inventory that has been sold — during a specific time period. Examples include raw materials and pay for factory workers.

•  Cost of sales includes the direct costs of goods sold plus any other costs related to generating revenue — generally a wider range of expenses than COGS.

COGS is used for manufacturing and cost of sales is more appropriate for companies that provide services.

A related mistake in calculating COGS is factoring in costs that should not be included. Some examples: general and administrative expenses, marketing, utilities, equipment purchases, rent or mortgage payments, salaries of management-level employees, or insurance premiums. An accountant will help you categorize your expenses in order to get the most accurate data.

COGS vs Cost of Revenue

Another term for “cost of sales,” mentioned above, is “cost of revenue.” Like COGS, the cost of revenue is the amount a business spends to produce a service or item for sale. But “cost of revenue” is more suited to service providers such as attorneys or consultants. The cost of revenue may also include expenses such as marketing and distribution.

COGS vs Operating Expenses

Operating expenses generally don’t overlap with costs of goods sold, because operating expenses aren’t directly linked to production of goods or services. They’re recorded separately on the income statement. Examples would include bills such as rent, utilities, office supplies, and legal fees.

The Takeaway

Cost of goods sold represents the sum of a business’s direct costs for producing the merchandise it sells. The monthly or quarterly calculation includes any direct costs that a company incurs for manufacturing, purchasing, or selling products. It’s worth tracking and analyzing this information, as lowering COGS can boost net profits.

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 is included in the cost of goods sold?

Costs of goods sold includes the direct outlays of a business for expenses closely associated with the production of the goods it sells. COGS includes things like direct labor, direct materials, direct costs of production, and manufacturing overhead.

How does COGS impact business profitability?

COGS affects a company’s profits as COGS is subtracted from revenue to show gross profit. If COGS increases, the business will have less profit. As a result, businesses try to keep their COGS low.

Is COGS the same as expenses?

COGS includes the costs and expenses that are directly related to the production of goods. However, COGS does not include all expenses. Indirect expenses, such as sales force costs, are not included in COGS.

Can service-based businesses calculate COGS?

Service-based businesses usually cannot calculate COGS. Companies that offer only services don’t have goods to sell, and they don’t have inventories. Examples of service-only companies include law offices, real estate appraisers, business consultants, and accounting firms. Instead of COGS, these businesses can calculate “cost of sales.”

How do I reduce my cost of goods sold?

Companies can reduce their COGS through cheaper raw materials or more efficient production.

Photo credit: iStock/svetikd

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-Q425-015