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Given how different businesses can be, it may be surprising to learn that they tend to share a predictable life cycle. Most companies will follow through five stages. Read on to find out what they are, how to recognize them, and how your business can make the most of each one.

What Is a Business Life Cycle?

Every business, regardless of its size, generally goes through five stages that make up its life cycle. Those business life cycle stages are development, startup, growth, maturity, and renewal or decline. Each stage comes with its own unique challenges and opportunities, and each is considered a healthy part of the business cycle.

By learning about each of the growth stages, you can identify where your small business currently is in its cycle and develop an appropriate business growth strategy. The following sections outline the five key stages of the business life cycle and the steps you can take to increase your odds of success as your business progresses.

1. Development

The first stage of small business growth actually begins before you start your business, while you’re coming up with business ideas and selecting one to focus on. In the development phase, you’ll be identifying an unmet need in a specific market and doing the research necessary to get your business off on the right foot.

How to Support a Business in This Phase

At this point, it’s all about laying the groundwork. You’ll want to create a detailed business plan that identifies exactly who your business will serve, the products or services your business will provide, the marketing tools and strategies you’ll use to make people aware of your company, your budget for the first year, and how you’ll fund your business.

If you don’t feel confident as a business owner yet, it may be beneficial to take business courses or workshops to ensure you’re ready to launch.

You may also want to consider whether you’re going to hire help. Having part-time, full-time, or even freelance employees will add to your startup costs but can help you get your business up and running faster.

When to Go to the Next Phase

Once you have a plan in place for your business and know where you’ll find the funds you need to launch, it’s time to move to the next phase.

How to Get to the Next Phase

This may be the time to quit your regular job so that you can fully focus on your new endeavor. Alternatively, you might decide to continue working at least part time while your business launches. You can always wait to quit until you’re making enough to replace your full-time salary.

Once you have a name and structure for your business, you may want to apply for a business checking account and business credit card. These can give you access to cash but also help you build up a credit history for your business, which might help you obtain funding later on.

As you gear up, if your business requires machinery or other fixed assets, you might want to look into equipment financing, which can be easier to get than other kinds of financing, since the equipment acts as collateral.

If your business is seasonal, you might consider applying for a business line of credit so that you can bridge slow periods. Unlike a small business loan, with a line of credit, you would be able to draw funds when you need them up to a set limit, and pay back only what you borrow (with interest).

2. Startup

Though often considered the riskiest stage of business growth, the startup phase can also be one of the most exciting. This is when you put your idea out into the world and start selling.

During the startup stage, there’s a lot to be done: You’ll generally need a website, office space, and employees, as well as a product or service to sell.

How to Support a Business in This Phase

Ideally the budgeting and finance work you did in the development phase ensures that you have enough capital to cover your startup costs. If you find yourself coming up short, you may want to weigh the pros and cons of a startup business loan. Some lenders charge high interest to loan to startups, so determine whether that’s a good tradeoff for getting the capital you need.

This is also a period of trying things out. You can test your product and target market, as well as different marketing channels. If something doesn’t work, you can tweak it and try again.

You may also want to spend time hiring people who can help your company grow. Identify the skills each role needs and then carefully choose the best candidate.

Recommended: Steps to Writing a Business Plan

When to Go to the Next Phase

Since this is one of the early stages of business growth, you may be in the startup phase for a while. You’ll know it’s time to move on when your business starts to settle and your profits become steady.

How to Get to the Next Phase

Once you’re no longer struggling financially and can confidently project sales for the future, it’s time to get ready to grow your business.

3. Growth

After you’ve been in business for a few years, your market share and customer base are now experiencing rapid growth. This presents you with a variety of opportunities to expand your business. These could include adding another location to the mix, hiring more staff, or expanding your product line.

How to Support a Business in This Phase

It’s important to keep an eye on the future while also maintaining day-to-day operations. You’ll want to set short- and long-term goals that make the most sense for your business and use your resources effectively. You’ll also need to make sure you have enough working capital to both meet your current financial obligations and also invest in new opportunities as they present themselves.

When to Go to the Next Phase

Once you’ve achieved your short- and long-term goals for growing your business, or when you feel you’ve grown as much as the market will allow, you may be ready to enter the next stage of small business growth with your established, successful company.

How to Get to the Next Phase

When your focus pulls back from aggressively growing your business, it’s time to move into the maturity phase.

Recommended: What Is Organic Growth in Business?

4. Maturity

One of the later stages of business growth is maturity. This happens when your business is stable and profits are steady. You can rely on revenues growing moderately year to year, and you can confidently make business decisions.

How to Support a Business in This Phase

In this phase, you’ll want to keep on doing what works. At the same time, you want to be careful not to succumb to the biggest risk of the maturity phase — becoming stagnant.

Even when your business is mature, you don’t necessarily want it to sit still. It can be wise to continue looking for opportunities to expand your customer base or develop new products or services that tap a new market.

When to Go to the Next Phase

For some business owners, the maturity stage may bring thoughts of selling the business, merging, or buying another company. When you’re regularly questioning “what’s next for my business?” you may be ready to enter the next phase.

How to Get to the Next Phase

Something has changed in your business, whether it’s that you’ve lost the desire to continue it or the fact that your product may be less relevant (think of camera film in a digital world). It may be time to consider the best next steps for your business.

Recommended: Inorganic Growth Explained

5. Renewal or Decline

Now is the time for the hard questions: Do you need to close down your business? Is it time to sell? Should you consider a merger or acquisition? Can you come up with innovative ideas that will inject new life into your business?

How to Support a Business in This Phase

The answer lies with your personal and professional goals. If you feel ready to retire and focus on other areas of your life, you may decide to sell the business or close it down. If you’re not ready to step away from the business, on the other hand, you might decide to invest money in developing or acquiring new products or connecting with a different target market.

Signs of Renewal vs. Signs of Decline

To understand whether it may make more sense to renew your business or step away, consider the following signs.

Strategies for Avoiding Decline

While decline can be a natural part of the business life cycle, if you want to avoid it, there are business growth strategies that may help. Here are a few:

•  Staying current on market trends. Being sure you are on top of how your product and your audience are evolving can help you understand how your business and marketing may need to change in order to stay relevant.

•  Being flexible. Understanding and marketing to new needs for your product may help you find new markets and continue to expand.

•  Embracing change. To avoid decline, a business will have to not only recognize the need to adapt to new circumstances, but willingly take on the need to change on an ongoing basis.

Pros and Cons of the 5 Stages of Growth as a Model

Each stage of growth involves both advantages and challenges. Here’s a rundown of both for each stage.

External Factors That Can Accelerate or Hinder Growth

Naturally, there are factors outside your control that can affect your business’s growth. These may include elements such as:

•  The state of the economy. If unemployment and prices are high, your market may be smaller, especially for discretionary goods.

•  The competition. If you’re the only company serving a niche market, it could be easier to grow than if you’re trying to break into a crowded or monopoly-dominated field.

•  Technology. Advances in tech can affect whether people still need your project and how effectively you’re able to produce it.

•  Legal/regulatory factors. If, for instance, the rules for your industry change or your tax burden rises, your company’s growth can be affected.

Identifying Which Stage Your Business Is In

Throughout the life of your business, you will likely be in one of these stages of business growth. Identifying which one your business is currently in can help you assess and solve current challenges, as well as strategize for how you will move to the next business stage.

The Takeaway

While every business is unique, all of them tend to experience common problems and opportunities that arise at similar stages of business development. Knowing where your company is in the business cycle can help you assess and solve current challenges, develop growth strategies, and plan for the future.

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 you have to go through all five stages of business growth?

Generally, every business will go through each of the five stages of business growth, though how long a business spends in each may vary.

What are the different stages of business growth?

The five stages of business growth are: development, startup, growth, maturity, and renewal or decline.

Is starting up a stage of business growth?

Yes. Starting up is the second phase of business growth. It occurs after you’ve developed your business idea and before you’ve reached the growth stage.

Can a business move backward in the stages of growth?

Yes, it’s possible that as your company develops, it may at some point move backward to an earlier phase of business growth. There are many reasons why this can happen — a shift in your market demographic, for instance or a conscious decision to return to growth after reaching maturity. The important thing is to recognize and remain responsive to the shifting needs of your business.

How long does each stage of business growth typically last?

The duration of the stages of business development vary so much from business to business that it’s impossible to generalize. This can be due to both external and internal factors. For instance, while many companies may want maturity to be their longest phase, others may go back and forth between growth and maturity in an effort to maximize profits.

Photo credit: iStock/LaylaBird

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.

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.
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-Q425-101

Looking to start your own business? You’re not alone. Some 71% of Gen Z and millennials dream of being their own boss, according to a 2024 JustWorks/Harris Poll survey.

While launching your own business allows you plenty of professional freedom, the costs of setting up a business can be expensive. As you’re creating your business plan, one question you’ll likely face early on is, how much does it cost to start a business?

The average small business owner spends around $40,000 in their first full year. But that amount can vary significantly based on a number of factors, including the size, type, and location of the business.

Let’s take a closer look at the startup costs of different types of businesses and common ways to cover the expenses.

Typical Small Business Startup Costs

The adage is true: You have to spend money to make money. And unfortunately, some of the biggest business costs can come during the startup phase, when you are defining your business goals, finding a location, purchasing domain names, and generally investing in the infrastructure of your new company.

In order to make sure your business is on firm financial footing, you’ll need more than just a business checking account and a small business credit card. What’s important is to estimate your small business startup costs in advance so that you have a good understanding of what you’ll need and why. Here are some common ones to keep in mind:

Payroll

Many small businesses start out as a company of one. But if you’re planning on having employees, salary will likely be one of the biggest costs you’ll face. After all, offering an attractive pay and benefits package can help you recruit and retain top talent.

In addition to wages, you may also want to budget for other payroll costs, such as overtime, vacation pay, bonuses, commissions, and benefits.

Office Space

No matter what your business is, you’ll need somewhere to work. Are you leasing a storefront, or will you buy a membership to a coworking space or startup incubator? Even if you’re planning to work from home, you’ll want to consider whether your new business will increase your internet bills.

And don’t forget about the supplies you’ll need to do the work. Depending on your business, this could include computers, phones, chairs and desks, paper supplies, or filing cabinets.

Recommended: Best Cities to Start a Business in the U.S.

Inventory

How much it costs to start a company varies a lot, and one major factor in that variance is inventory. If you’re starting a business that sells products, you’ll need to have some inventory ready to go. Calculating stock as part of your startup costs helps ensure that you can buy your product in advance so that you’re ready to serve customers from day one.

Licenses, Permits, and Insurance

Some businesses, especially storefronts and restaurants, require more legal legwork than others.

For example, if you’re starting a native-plants landscaping business, will you need a permit? If you’re opening a new bar, will you have to get a liquor license? Licenses and permits vary by city and state, but most require an application fee.

Likewise, your new business may need one or more insurance policies to protect you in case of future litigation, so be sure to factor in the cost of monthly premiums.

And don’t forget about the costs associated with registering your business. Whether you plan to set up shop as a corporation, limited liability corporation or other business entity, you’ll often need to pay a nominal fee. The amount will depend on the state where you operate.

And if you plan on enlisting the help of a lawyer, accountant, or tax professional to get your business up and running, add those potential costs to your budget as well.

Advertising

Getting the word out about your new business is one of the most important things you can do to ensure that your business starts off strong. Whether you want to advertise on social media or rent a billboard, your startup costs should reflect money you plan to put toward taking out ads for your business.

Technology and Software

No matter what kind of business you have, technology is likely to play a key role. If you’re creating a product, you’ll probably need equipment to make it, but also software to track inventory, payment processing tools, and possibly workforce management and payroll programs. Internet startups are reliant on the e-commerce software they’re using to sell their products and services. And retail and restaurants generally need payment processing tools, as well as software to manage scheduling and payroll, among other things.

As you’re planning, consider what tech you’ll need to manage your operation. A realistic budget will include costs for setting up and maintaining your technology systems.

If there’s a major piece of tech or manufacturing equipment you need to run your business, you may be able to use equipment financing. This kind of funding can be easier for new companies to get since the equipment itself acts as collateral for the loan.

Professional Services

As mentioned earlier, from time to time, you may need specialized professional help for various tasks associated with your business. In many of these cases, you may want to hire someone with expertise on a project basis rather than as a full-time employee.

For example, you may want to use an accountant for bookkeeping and tax preparation; a lawyer when you need to initiate or approve a contract; or an IT expert to help with maintaining computer systems and cybersecurity. Depending on your company’s growth, you may even need to hire a human resources specialist to help you with hiring.

As you look at your business plan, think about what kinds of professional services you might need at various points in your company’s progress and add those costs to your budget.

Utilities and Operational Costs

Whether your business is in your home or in a dedicated building, you’ll need to consider the additional costs of supporting your office and operations. These may include utilities such as electricity, water and sewer charges, gas, heat, trash pickup, and internet access. If you’re working solo from home, you may not be spending much extra on these, but if you’re starting up a restaurant, for instance, these costs could be significant.

Unexpected Expenses and Emergency Funds

While you can’t expect the unexpected, you can prepare. Generally, it can be a good idea for small businesses to have between three and six months worth of their expenses set aside. That way, they’ll be able to cover costs if they hit a lull or experience equipment breakdowns. You may also find this fund helpful if, for instance, you need to replace a major piece of equipment, like a delivery truck.

Coming up with this reserve may be daunting, but you can build it up over time. Having a business line of credit may also help access funds you can draw on when you have an emergency.

Differences in Startup Costs Based on Industry

The actual cost of starting a small business can vary by business and industry. Here’s what you might be looking at if you want to start one of these common types of small businesses.

Online Business Startup Costs

As with brick-and-mortar stores, the cost of doing business online varies depending on the type of business you have. But in general, you’ll need to budget for things like:

•  Web hosting service and domain name

•  Web design and optimization

•  E-commerce software

•  Payment processing

•  Content creation and social media

If you’re selling products, you’ll need to invest in inventory and shipping. If you’re providing services, you may need to hire employees. All of these costs can be significant.

However, one benefit of starting your small business online is that you may be able to keep other costs low. For example, if you can conduct business from home, you may not need to rent office space, which can be a major savings. If you’re able to do the work without purchasing inventory or hiring employees, the startup costs can be even lower.

Average startup cost: $2,000 to $20,000 or more (depending on your business)

Storefront Startup Costs

If your business idea requires a physical space, your startup costs might range from $50,000 to $1 million, depending on how large a store you’re planning and what the stock will be. A medium-sized clothing store or boutique, for instance, might cost between $50,000 and $150,000.

Although $150,000 might seem like a daunting number, remember that many smaller, independently owned stores began with a much smaller budget.

Average medium-sized retail startup cost: $80,000-$150,000

Restaurant Startup Costs

If you’re planning to start earning money by selling your grandma’s famous bánh mì, you could be looking at startup costs of anywhere from $30,000 to $100,000 for a used food truck or cart to up to $2 million to buy a franchise restaurant. Typically, costs for small restaurants, including coffee shops, fall somewhere in the $275,000 to $425,000 range.

Average startup cost: $375,000

Recommended: 15 Types of Business Loans to Consider

How to Finance Your Startup Business

Many people who want to start a business are overwhelmed by the initial costs, but there are several ways to fund your passion project.

Friends and Family

Perhaps one of the most common ways to raise money for your small business is to ask friends and family to invest in you.

Friends and family loans can be ideal for financing a new small business because you can negotiate low-interest rates, set up flexible pay-back schedules, and avoid bank fees. Of course, borrowing money from friends and family can quickly become complicated by family drama, so make sure to agree on conditions before taking out a loan from a relative.

Outside Investors

When we’re discussing startup companies, we frequently hear about so-called “angel investors” sweeping in to fully fund new businesses. But there are other practical ways to fund your small business with outside investors.

Some small businesses use crowdfunding platforms to find investors who each contribute a small amount, and others use startup funding networks to find investors looking to fund their specific type of business.

Outside investors will want to know that your business is likely to succeed, so you’ll need a solid business plan to land outside funders.

Personal Savings and Investments

Most people end up covering some of their small business startup costs out of their own personal savings. Self-funding your new business venture can be the most convenient option. After all, if you’re your own funder, you don’t have to worry about family drama or picky investors. And putting your own money on the line can be an extra motivation to make sure that your business is set up to succeed.

Of course, it can seem overwhelming to save up enough money to fund your small business. Luckily, there are simple strategies to effectively manage your money.

Business Loans

If you’re looking to purchase equipment, buy inventory, or pay for other business expenses, a business loan might make sense for you.

There are various types of small business loans available, each with different rates and repayment terms.

Note that in some cases, lenders may be reluctant to give loans to a brand-new business because they want to see at least a year of revenue. You might need to put up some type of collateral to qualify for funding. Or it may sometimes be easier to qualify for startup business loans, which are designed specifically for younger companies.

When you’re considering a loan, a small business loan calculator can be useful to help you estimate what your monthly costs might be, as well as the full costs over the life of the loan.

You may be able to get a Small Business Administration (SBA) loan. SBA loans are partially backed by the government and often come with more advantageous terms than other loans, though they may require more paperwork upfront.

Using an SBA loan calculator can help you understand what the monthly costs of an SBA loan would be.

Recommended: Business Term Loans: Everything You Need to Know

Personal Loans

A personal loan can be used for just about any purpose, which can make it attractive for entrepreneurs who want to turn their passion project into a reality. These loans are usually unsecured, which means they’re not backed by collateral, such as a home, car, or bank account balance.

Personal loan amounts vary. However, some lenders offer personal loans for as much as $100,000. Most personal loans have shorter repayment terms, though the length of a loan can vary from a few months to several years.

While there’s a great deal of latitude in terms of how you use the funds, you might need to get your lender’s approval first if you intend on using the money directly for your business.

Recommended: How to Get a Small Business Loan in 6 Steps

The Takeaway

Going into business for yourself can be personally and professionally fulfilling. But it can also be expensive, especially if you’re starting from scratch. Estimating your startup costs early on can help ensure you’re on solid financial ground from the get-go. Labor, office space, and equipment are among the biggest expenses facing many entrepreneurs, but there are also smaller fees and charges you’ll likely need to consider.

Fortunately, small business owners have no shortage of options when it comes to covering startup costs. Dipping into personal savings and asking friends and family to invest are popular choices. Taking out a business loan or personal loan is another way to help finance a new business. The money can be used for a variety of purposes, and that flexibility can be especially useful when you’re just starting out.

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 average startup costs for a small business?

Startup costs can vary significantly based on factors like the company’s type, industry, and location, but on average, a typical small business owner spends around $40,000 in the first year.

Can I start a business with no money?

It is possible to start a business without money, though it depends on the kind of business you have in mind. Some service-based businesses, such as pet care or being a virtual personal assistant, often don’t require money to start, and you may also not need funds to start selling hand-crafted goods. Dropshipping could be another option.

What business has the lowest startup cost?

Some of the businesses with the lowest startup costs are service-based companies that rely on skills you already have. For example, tutoring or freelance editing businesses can be relatively inexpensive to set up.

How long does it take for a business to become profitable?

You may see online that startups on average take as long as three to five years to become profitable. Bear in mind, however, that the amount of time it takes a business to achieve profitability can vary enormously, and low-overhead companies may be able to reduce that time.

What are the hidden costs of starting a business?

Costs that entrepreneurs may forget to take into account when they’re starting up a business can include utilities, office supplies, WiFi, and printing and mail charges.

Photo credit: iStock/Wavebreakmedia

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

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

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

SOSMB-Q425-102

If you own a farm, ranch, or agricultural business, you may need additional capital to upgrade equipment, manage seasonal cash flow, or purchase land. Those just entering the farming industry may also require significant upfront funding to get their operation established and running smoothly.

Fortunately, there are a number of business loans available to farmers and agricultural entrepreneurs, including federal farm loan programs, farm loan programs offered by commercial lenders, short-term loans, and business lines of credit.

The best business loan option will depend on the size of your business, your credit profile, your collateral, how much capital you need, and how long your farm has been in operation.

Here’s what you need to know about small business agriculture loans.

What Is a Farm Loan?

A farm or agricultural small business loan is intended to help someone maintain, expand, or start a farming business. Farm loans can provide the capital needed at the start-up phase of an agricultural business, as well as help established farmers manage cash flow during off seasons, purchase heavy equipment, fund construction or irrigation, hire workers, or expand their operations.

Farm loans come in the form of short- and long-term installment loans, lines of credit for incremental purchases, equipment financing, and more. Many different entities provide business farm loans, including government programs for agriculture businesses, as well as banks, nonprofits, and online lenders.

How Do Agricultural Loans Work?

Just as there are different types of small business loans, there are many types of farm loans, and each one operates a little differently.

What Can Farm Loans Be Used For?

Government-backed farm loans can typically be used to start, buy, run, or expand a farm. These loans are similar to traditional term loans. You receive a lump sum (the principal) up front and then are given a period of time — anywhere from two to 40 years — to pay it back, with interest, during which you would make predetermined, fixed monthly payments.

Commercial farm business loans operate much like other business loans, though they typically come with higher down payment requirements, shorter payback periods, and higher interest rates. Commercial lenders also offer farmers business lines of credit, equipment loans, and invoice factoring.

Does It Differ From Business Loans for Other Industries?

The United States Department of Agriculture’s Farm Services Agency (FSA) has several farm loan programs designed to fit the needs of new and established farming and agriculture businesses.

Some commercial lenders also market loans specifically to farmers and agricultural businesses. However, these so-called “farm loans” work in a similar way to traditional business loans. Standard small business loans, offered by banks and other business lenders, are also often available to farmers.

Types of Loans for Agricultural Businesses

Below are some small business agriculture loans options you may want to consider.

USDA Farm Loans

The USDA Farm Service Agency (FSA) has several farm loan programs that can provide needed capital to farms, ranches, and agriculture businesses.

Operating Loans

The FSA’s Direct Farm Operating Loan program provides loans up to $400,000 for starting or operating a farm or ranch. The funds can be used for a range of purposes, including purchasing livestock, buying farm equipment, paying operating expenses, improving/repairing buildings, and developing land. Down payments can be as low as 5%, and interest rates are fixed.

Microloans

Farm microloans are small, simplified loans offered by the USDA’s Farm Service Agency to help beginning, small, and niche farmers cover operating expenses, equipment purchases, or minor land improvements. They feature lower borrowing limits ($50,000 or less), streamlined applications, and more flexible requirements than traditional farm loans, making them more accessible for new agricultural businesses.

Guaranteed Farm Loans

The FSA also has Guaranteed Farm Loan programs that make it easier for farmers to receive loans through commercial lenders. Through these programs, the FSA guarantees a large portion of a business loan and, thus, makes farmers more attractive as borrowers.

Long-Term Farm Loans

Long-term business loans, available to farmers through banks and other lenders, are defined as having repayment terms that range from three to 25 years. The loan proceeds can typically be used for any business purpose, including purchasing supplies or inventory, buying livestock, or using the funds as working capital.

Farmers receive the entire loan amount at once and make fixed monthly payments based on the loan amount, term, and interest rate. Because the repayment period is long, lenders are known to have strict qualification requirements, including being in business for at least two years and having a strong credit profile.

Business Lines of Credit for Farms

A business line of credit (LOC) can be a good option if you don’t know exactly how much capital you’re going to need for your farm. A line of credit works in a similar way to a credit card: You get approved for a credit limit and then draw money on demand at any time up to the credit limit.

You are only responsible for paying interest on what you actually borrow. Many farmers and ranchers use LOCs to remedy intermittent cash flow issues or cover unexpected expenses.

Short-Term Loans for Agricultural Business

A short-term loan can be a good option if you need money quickly or have been turned down by traditional lenders. Offered by alternative and online lenders, this type of business farm loan provides a lump sum of cash that gets paid back (with interest) over a short period of time, often three to 24 months. Short-term loans are typically repaid through daily, weekly, or monthly payments.

Qualification requirements aren’t as strict as with traditional long-term loans, and you can often get access to funds within 24 hours. Because they can be funded quickly, short-term loans work well for working capital, filling seasonal revenue gaps, or covering an emergency expense.

However, these loans tend to come with higher costs than other types of financing.

Equipment Loans

Equipment loans are a common loan for agricultural businesses, as farm-related machinery is typically expensive and may exceed a farm’s typical cash flow.

Generally, the way an equipment loan works is that the vehicle or machinery you are purchasing is used to secure the loan, which means you shouldn’t have to put up any additional collateral. Another plus of equipment financing is the loan terms often mirror the actual life expectancy of the equipment itself. So, if the machinery you’re purchasing has an expected useful life of 15 years, you may be able to get a repayment period of the same length.

Recommended: A Guide to Collateral and Business Loans

SBA Loans

Small Business Administration (SBA) loans are a type of small business loan backed by the government, which means that if a borrower defaults, the SBA will cover most of the cost. Though the SBA doesn’t offer any loan products specifically targeted to agricultural or farming businesses, it does serve the industry.

Because the SBA guarantee lessens the risk to the lender, SBA loans typically offer large amounts, low rates, and long repayment terms (up to 25 years). However, these loans are tough to qualify for and require a lengthy application and underwriting process that can take several months.

Invoice Factoring

Invoice factoring is a form of financing in which you sell your unpaid invoices to a third party lender, who immediately gives you a large portion of the invoice amounts up front. The lender is then responsible for collecting on those invoices and, when they do, they give you the balance of the invoice, minus fees (called factoring fees, which are a percentage of the invoice amounts).

Because this type of financing is based on invoices, your credit score isn’t a factor. And, no collateral is required. However, invoice factoring tends to be more costly than other financing options.

Business Credit Cards

A small business credit card can be a handy financial tool to have in your back pocket. It can allow you to buy supplies, cover operating expenses, or handle an emergency without waiting to get approved for a loan.

With some research, you may be able to find business credit cards with low interest rates. Some cards even offer a 0% introductory APR (which may last as long as 18 months). This might allow you to cover an unusually high farming expense, then pay the card off before the standard interest rate kicks in.

Agricultural Real Estate Loans

Agricultural real estate loans help small farming and agricultural businesses purchase, expand, or refinance land and buildings used for farming operations. These loans are often used to buy farmland, construct barns or storage facilities, or improve existing property, and they typically offer longer repayment terms and competitive interest rates to match the long-term nature of agricultural investments.

Livestock Financing

Livestock financing helps small agricultural businesses cover the costs of purchasing, raising, and maintaining animals such as cattle, poultry, or sheep. These loans can be used for buying livestock, feed, veterinary care, fencing, and related infrastructure, allowing farmers to manage cash flow while their herds grow and generate income.

Pros and Cons of Loans for Agricultural Business

Taking out a loan for your farm or agricultural business can be a lifesaver — it can help you manage seasonal dips in revenue, purchase new equipment, hire more workers, and make changes that can boost your profits. If you’re just getting into the agricultural business, a farm loan can provide the cash you need to get you through the startup phase.

On the downside, farm loans with attractive terms and rates can be difficult to qualify for and the application process can be extensive. In addition, you will most likely need to make a down payment on any farm loan. You may also have to put up an asset as collateral or sign a personal guarantee (which would put your personal assets at risk).

Finding Farm Loans

Farm loans can be found from many lenders. The USDA’s FSA program can be a good place to start your search, since these loans offer some of the lowest interest rates and down payment requirements. You may also want to look into SBA loans, which also offer low rates and attractive terms.

Many private lenders also offer loan products that can be useful for farmers, including short-term loans, business lines of credit, and equipment financing. These loans may be easier to qualify for and faster to fund, but generally come with shorter payback terms and higher rates than FSA or SBA loans.

Local Agricultural Lenders and Credit Unions

Local agricultural lenders and credit unions are often a strong starting point when searching for farm loans, as they tend to understand regional farming conditions, seasonal cash flow, and commodity cycles. These institutions may offer personalized service, flexible terms, and loan products tailored to equipment purchases, operating expenses, or land acquisition. Building a relationship with a local lender can also make it easier to negotiate terms and access guidance as your farm business grows.

Online Lenders Specializing in Agribusiness

Online lenders that focus on agribusiness provide an alternative for farmers seeking speed, convenience, or more flexible qualification requirements. Many offer streamlined applications, faster funding, and a range of loan options for equipment, livestock, or working capital. While interest rates and fees may vary, these lenders can be especially useful for small or newer farm operations that need quick access to financing or don’t meet traditional bank requirements.

Applying for Farm Loans

The process of applying for a business loan for your farm will depend on the lender and type of loan you’re trying to get.

For all business loans, however, you will need to provide basic information about yourself and your agricultural business, such as your name, business name, address, phone number, social security number, and federal tax ID.

You will also likely need to prove that your farm is creditworthy and has the means to pay back the loan. Additional documentation to receive a farm loan may include:

•  Business and personal bank statements

•  Income statements

•  Business and personal tax returns

•  Balance sheets

•  Profit and loss statements

•  Business and personal credit scores

Approval times vary based on the loan you’re trying to get. Government farm loans may take several weeks or months, while some alternative loans are instantly approved. To make the loan process as efficient as possible, follow the application instructions to the letter, and make yourself available in case any questions come up.

Recommended: Guide to Typical Small Business Loan Requirements

Alternative Financing Options

If you don’t qualify for financing, or prefer not to take out a loan, there are some other funding options for your farming business. These include:

Farm Grants

Small business grants for farms are available from a variety of federal, state, and local agencies, as well as private organizations.

Value-Added

The USDA offers Value-Added Producer Grants, which can be used by farmers to expand marketing opportunities, create new products, and boost income.

Research and Education

Many farm grants are also available at the state level. To learn more about local grant opportunities, visit your state’s Department of Agriculture website.

Help for Agricultural Entrepreneurs

PA Farm Link, for example, connects new Pennsylvania farmers with retiring farmers. As part of the program, the retiring farmers provide financial assistance to the new farmers until they are able to get their farms up and running. This can be a helpful alternative for anyone struggling to get startup capital for their farm.

Recommended: Small Business Startup Loans

The Takeaway

Farm business loans can play a vital role in helping agricultural operations grow, adapt, and stay financially stable through changing seasons and market conditions. By understanding the different loan options available — from microloans and equipment financing to real estate and livestock loans — farmers and ranchers can choose funding that aligns with their goals and cash flow.

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 agribusiness loans?

Agribusiness loans are financing options designed to support agricultural operations, including farms, ranches, and related businesses. They can be used to purchase land, equipment, livestock, or supplies, cover operating expenses, or manage cash flow, helping agricultural businesses grow, modernize, or remain financially stable.

Can you start a farm with no money?

Yes, starting a farm with no money is possible, but difficult. You can get going through grants, microloans, partnerships, leasing land, or beginning on a very small scale. Many new farmers rely on USDA programs, community support, off-farm income, or gradual expansion to reduce upfront costs and financial risk.

Can you get an agricultural business loan with bad credit?

Yes, farmers with bad credit can often still get an agricultural business loan, especially if your other financials are strong and you have enough cash to make a downpayment.

What are typical interest rates on farm loans?

Interest rates on farm loans vary by lender, loan type, and borrower credit, but they typically range from about 4% to 8%. Government-backed loans, such as USDA or FSA loans, often offer lower rates, while private or short-term loans may have higher rates depending on risk and market conditions.

Are there startup loans for farms?

Yes, startup loans for farms are available. Options include USDA Farm Service Agency (FSA) loans, microloans, and beginning farmer programs, as well as loans from local agricultural lenders and credit unions. These loans are designed to help new farmers cover startup costs like land, equipment, and operating expenses.

Photo credit: iStock/artiemedvedev

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-Q425-040

Whether you plan to take out a loan or you’re looking for investors, one cash management concept to familiarize yourself with is cost of capital. By understanding why cost of capital matters to your business, you may be able to make your business more appealing to investors or increase your chances of getting approved for a small business loan.

Keep reading to learn more about what cost of capital is and why it matters.

What Is Cost of Capital?

The cost of capital for a small business is the rate of return it must earn to justify using funds from lenders or investors. It reflects the combined cost of debt (like loan interest) and equity (the return expected by owners or investors). It’s an important metric to know if you’re evaluating whether a new product is worthwhile or if an investor is assessing whether to invest money in your company.

Cost of capital includes how much it costs your business to access cash, whether that’s through financing or equity. In fact, a simple formula for cost of capital is:

Overall cost of capital = Cost of debt + Cost of equity

Cost of Debt vs. Cost of Equity

Both cost of debt and cost of equity contribute to your cost of capital, but it’s important to understand the difference between them. Cost of debt is the interest rate your firm pays on borrowed funds, less any tax deductions it can take on the interest. If you plan to take out a small business loan, your cost of capital (also called hurdle rate) includes the interest you will pay on that loan over time. Trade credit you have with vendors that you pay in the short term can also qualify as your cost of capital.

Assuming that interest is the rate your company pays on its current debts and tax represents the marginal tax rate, the formula for cost of debt is:

Cost of debt = (Interest expense / Total debt) x (1 – Tax)

As for cost of equity, if your company has investors, your cost of capital includes the cost of the equity they hold. For example, if you receive venture capital in exchange for 25% equity, that 25% contributes to your cost of capital.

If your company is public and sells stock to raise capital, your cost of capital includes the cost of that debt as well as the cost of equity.

How to Calculate Cost of Capital

To calculate the cost of capital, combine the costs of borrowing money (debt) and raising money from investors (equity).

First, figure out the interest rate on loans after taxes. Then, estimate the return investors expect for funding your business. Weigh these costs based on how much of your total funding comes from each source (debt and equity). This gives you the weighted average cost of capital (WACC), which tells you the minimum return your business needs to make projects worthwhile.

Weighted Average Cost of Capital (WACC)

Cost of capital is a general term that refers to the minimum return a company needs to justify an investment. The weighted average cost of capital (WACC), on the other hand, is the most commonly used method to measure the overall cost of capital, combining the costs of debt and equity financing weighted by their proportions in a company’s capital structure.

Example of a Cost of Capital Calculation

To see how this works in action, let’s take an example.

The formula for the overall cost of capital is:

Overall Cost of Capital = Cost of Debt + Cost of Capital

Let’s consider Company ABC. Imagine that it has a capital structure with 60% equity and 40% debt. To arrive at the company’s WACC, we’ll need to weigh the components accordingly.

If the after-tax cost of debt is 4% and equity investors expect an 8% return, the WACC calculation will look like this:

(.40 x 4%) + (.60 x 8%) = 1.6% + 4.8% = 6.4%

Company ABC calculates its weighted average cost of capital (WACC) at 6.4%.

Why Is It Important to Know the Cost of Capital?

Knowing the cost of capital is essential for making informed financial decisions. It acts as a benchmark for evaluating investment opportunities, helping investors gauge whether projects are likely to yield returns exceeding this threshold to create value. It also guides businesses in choosing between financing options, such as debt and equity, by comparing associated costs.

Understanding the cost of capital helps a company optimize its capital structure, reduce financing risks, and enhance profitability.

Impact on Business Valuation and Investment Decisions

Simply put, investors look at cost of capital to estimate what kind of return they might be likely to get for a potential investment. A high WACC often presents a riskier proposition and a less appealing prospect.

The metric is also used in business valuation. Discounted cash flow (DCF) analysis is a common method of valuation, and it bases its estimate of a company’s present day value on the sum of projected future cash flows. WACC is used as the discount rate – to discount these back to the present, allowing for risk and the time value of money. A higher WACC could result in a lower valuation.

Role in Strategic Financial Planning

Cost of capital is important for a company to understand in the context of its investors. But the concept can also be useful when the business is thinking about a new venture, as it can use the hurdle rate to determine how much the project will need to generate in order to pay for the funds needed to start it.

Understanding cost of capital can also help a business optimize its capital structure by finding a mix of debt and equity that will keep its WACC low.

7 Things to Know About Small Business Cost of Capital

Cost of capital matters when it comes to running your business or expanding it. If you want to take on a new project, for example, calculating the cost of capital will help to determine whether the project is worth it.

But that’s not all. Here are seven things to know about small business cost of capital.

Recommended: What are Term Loans?

1. It Matters to Investors

When investors are selecting a business to put their money in, they typically want a good return. The business’s cost of capital tells them the level of risk they would be taking on to attain that return. A high cost of capital signals more risk; a lower one indicates less risk.

An investor typically wants to see a rate of return that is, at a bare minimum, equal to his or her investment. But ideally, the rate of return exceeds that initial investment. Having details on your cost of capital can go a long way toward helping a potential investor decide whether or not to invest.

2. There Are Actually Two Costs to Consider

When you look at costs, there are two you’ll want to consider, depending on how your business gets capital. Cost of equity and cost of debt both factor into your cost of capital.

Let’s look at the cost of equity first. When you work with investors, you’ll have a valuation of what your company is currently worth, and you’ll work to agree with your investors on what percentage of the company they’ll own. Down the road, if your company is doing well and gets valued higher, those investors can cash out their equity and get a rate of return higher than their initial investments. The difference between what they invested originally and what they take out is your cost of equity.

Next is the cost of debt. When you take out a loan or line of credit, you pay interest and/or fees on that financing. The sum of the interest and fees is your cost of debt. Ideally, the cost of debt should prove worthwhile in the long run because the money you borrow can help you grow your business and thus make more money.

3. Weighted Average Cost of Capital May Be Relevant

In the event that your company has both debt and equity, you may need to consider what’s called your weighted average cost of capital (WACC). This calculates an average of both your cost of debt and your cost of equity together, weighted proportionally.

The distribution of debt and equity makes up your company’s capital structure, and every type of debt and equity your business has must be considered to calculate your WACC, including both common and preferred stock, loans, bonds, and other financing. The formula can look intimidating, but basically it is a way to evaluate your cost of capital, taking into account exactly how much of it is equity-based and how much of it is debt-based.

Ultimately, the higher your weighted average cost of capital, the lower your business valuation and the greater the risk to potential investors.

4. WACC Relates to Your Discount Rate

When you look at your weighted average cost of capital in relation to a particular project, you’ll probably want to consider your discount rate. This refers to the current value of future cash flows (net present value). Simply put, it’s a tool to help figure out whether anticipated future returns justify the amount of money you’d need to put into a project.

Let’s say you’re thinking about spending $1 million to expand operations in Europe. How much might that investment net you five years from now? Ideally, it should be more than your initial $1 million investment.

Similarly, an investor thinking about investing in your business will likely consider the discount rate. It provides the potential investor with insight into the risk level, as well as the opportunity cost of your business. It also accounts for the time value of money (TVM).

Here’s a simplified example. You have $100 and want to invest it in a savings account that offers 5% interest per year. At the end of the year, you would have $105. Because your ending balance is more than what you started with, you might consider that a worthwhile investment. Of course, when you’re investing in a business, your returns won’t necessarily be so clearcut.

Weighted average cost of capital is a type of discount rate, and it’s the one investors will likely be keen to examine when they consider investing in your business. An investor may have a specific discount rate in mind that must be reached to move forward with an investment.

5. Cost of Capital Can Help You Evaluate Financing Options

Having an understanding of your business cash flow and the cost of the investment opportunities your company offers is essential, both for you and for any investors.

From your perspective, understanding the cost of capital, particularly the cost of debt, can help you decide whether taking out financing is worthwhile. If what you pay in interest or fees outweighs what you could see in increased revenues, it’s not worth it. On the other hand, if paying, for example, 5.00% interest on a loan could help you realize a 15% growth in revenue, the cost of debt may be justified.

This information is also valuable to investors. The equity you receive from an investor should be used to deliver the expected rate of return. (That will also be beneficial to you, since you are also an equity owner in your company.) If you aren’t able to deliver the expected rate of return, any shareholders you have will likely sell their shares of your company’s stock, which will devalue your company.

That’s why it’s important to have a plan for how you’ll spend the investment capital you receive.

6. You May Be Able to Control Your Cost of Debt

There are many small business financing tools to choose from, and each comes with a different cost of debt. If you take out a loan, you may pay 6.00% annually. If you use a business credit card, your interest might be 16.99% on what you borrow.

Carefully consider your financing options and your ability to repay the loan. The faster you repay it, the less you’ll pay in interest or fees.

The bottom line is that financing can be helpful, but be mindful of how much you pay for it over time. Keeping down the unnecessary cost of debt can help you keep your cost of capital lower.

7. It’s Not an Exact Science

As you’ve seen, determining weighted average cost of capital can look complex and technical. But in fact, there’s no guarantee that an investor will receive a given discount rate for his or her equity. Many factors contribute to the return your business may see, including market conditions, how many competitors are in your industry, how your business is run, and more.

Calculating cost of capital is a way to provide an educated guess on what sort of return an investment might bring, but it’s definitely not set in stone.

The Takeaway

With a solid understanding of what cost of capital means, you can make smarter financial decisions. You can determine what type of loan or financing to take out and how to attract potential investors to help you grow your business.

The more appealing your company looks, the more likely investors will be to give you capital in exchange for equity. Staying on top of your cost of capital can help you show your business in a positive light.

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 an example of cost of capital?

An example of cost of capital is a company with 60% equity and 40% debt. If equity investors expect an 8% return and the after-tax cost of debt is 4%, the company calculates its weighted average cost of capital (WACC) at 6.4%, and that metric can be used to guide investment decisions and evaluate profitability.

What does cost of equity mean?

Cost of equity is the return investors expect for owning a company’s stock. It represents the compensation shareholders require for the risk of investing in the business and is used in valuation and capital budgeting to assess whether an investment or project is worthwhile.

How can I calculate the cost of capital?

To calculate the cost of capital, combine the costs of debt and equity financing using the weighted average cost of capital (WACC) formula. Adjust the cost of debt for tax benefits, and calculate the cost of equity using a model like the Capital Asset Pricing Model (CAPM). Weigh both costs by their proportions in the capital structure.

Why is cost of capital important for small businesses?

Looking at what its cost of capital is can be valuable for a small business for several reasons. Cost of capital can serve as a benchmark for the company as it evaluates its capital structure and contemplates taking on future debt or offering more equity. It’s also important to the business because potential investors can be more likely to consider this metric before deciding whether or not to invest in the company.

What factors influence a company’s cost of capital?

A company’s cost of capital is influenced by interest rates, market conditions, business risk, capital structure (debt vs. equity), creditworthiness, industry stability, tax rates, and investor expectations. Factors like company size, growth prospects, and economic conditions can also affect how much return lenders and investors require.

Photo credit: iStock/pixdeluxe

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.

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-Q425-045

Starting a new business requires a good idea, customers who want your product or service, and money to get you off the ground. A personal loan to start a business can be one option for funding your business, especially if you don’t yet qualify for a small business loan.

Let’s walk through the difference between personal loans and business loans, the advantages and disadvantages of using a personal loan for business, and some alternative options to explore.

What Is a Personal Business Loan?

Personal loans for business are offered by some banks, credit unions, and online lenders. While many loans will specify what you can spend the money on — a mortgage must be used to buy a house, for example — the sum you receive from a personal loan can be used in several ways. That said, it’s important to confirm with your lender whether its personal loans can be used for business expenses, as some lenders do not allow this.

Your personal loan interest rate is based on various financial factors, including your financial history, income, and credit score. Generally, the higher a person’s credit score, the more likely they are to receive a personal loan with favorable terms and interest rates. Applicants with lower credit scores may have more difficulty qualifying for low interest rates. Lenders tend to see them as at greater risk of defaulting on their payments. To offset that risk, they might charge a higher interest rate.

Personal Business Loans vs Small Business Loans

Borrowing money to pay for business expenses is a decision that takes some consideration. There are different reasons you might want or need a business loan, many lenders to choose from, and different lending options to compare. Some things to think about if choosing between a personal loan for business or a small business loan include:

Recommended: Business Loan vs. Personal Loan: Which Is Right for You?

Benefits of a Personal Loan for Business

Taking out personal loans for business purposes can offer several advantages over other financing options.

Ease of Qualification

If your business is brand new, it can be tricky to get a startup business loan and may be easier to qualify for a personal loan. Banks offer personal business loans based on your personal income and credit score.

By contrast, you’ll be asked for a lot of information during the business loan application process, including your personal and business credit score, annual business revenue and monthly profits, and your length of time in business. The longer your business has existed, the more likely you are to have a record of revenue and profit — and the more likely you are to qualify.

Faster Funding

The length of time it takes to get approved for a personal loan and receive funding will vary by lender. Online lenders are typically faster than traditional banks and credit unions. You are likely to receive funding within seven business days.

By contrast, the process for a business loan can be much slower. For example, it can take 30 to 90 days to receive funding from a Small Business Administration (SBA) loan.

Potential for Low Interest Rates

If you have strong credit, personal loans can have lower annual percentage rates (APRs) than other financing products — such as credit cards. While it can be useful to have a business credit card, you’ll pay a relatively high rate if you carry a balance from month to month.

Small business credit cards may also have penalties and fees that personal loans may not have. These often include penalty APRs that go into effect if you make a late payment, over-limit fees if you spend more than your credit limit, annual fees, and more.

Flexibility and Versatility

Personal loans have few restrictions on how you’re allowed to use the money you borrow. You can use them for anything from debt consolidation to home repairs to a veterinary bill.

Disadvantages of a Personal Loan for Business

Despite the potential advantages of using a personal loan to help you start your business, there are drawbacks.

Some Lenders Don’t Allow Personal Loans for Business

Some lenders place restrictions on how personal loans can be used. It’s wise to be transparent about your intention to use the personal loan for business expenses and confirm if the lender permits it.

In some cases, it may not be. However, it’s far better to be honest about how you plan to use a loan than risk breaching the loan agreement. If you end up using a loan in a prohibited way, your lender could force you to immediately repay the full amount of the loan with interest.

Lower Loan Amount Limits

Personal loans generally offer borrowing limits as low as $1,000. They can go as high as $100,000 for larger personal loans. For small businesses, this might be plenty. But if you own a larger business that needs more money, you might benefit more from a loan specifically designed to meet business financial needs. Small business loans generally have lower interest than personal loans.

Shorter Repayment Terms

Lending periods for personal loans vary. Typically, you can find loans with term lengths of 12 months to five years. Compared to some small business loans, this is a relatively short period. Consider that for SBA loans, maximum terms can be as much as 25 years for real estate, 10 years for equipment, and 10 years for working capital or inventory.

Potential to Affect Personal Credit Score and Assets

If you take out a personal loan and can’t make monthly payments, you are putting your personal credit at risk. Missed payments may harm your credit score, which can make it more difficult for you to access funding in the future.

Recommended: What Is Considered a Bad Credit Score?

Fewer Tax Deduction Opportunities

Generally, the interest you pay on a personal loan is not tax deductible, unlike the interest paid on business loans. However, there’s an exception if you use the proceeds of a personal loan for business purposes.

However, this can get a bit tricky, as you may only deduct interest on the portion of the loan used for business expenses. So if you use any of that money to remodel the primary bathroom in your home, for example, interest on that portion can’t be deducted.

How to Get a Personal Loan for Business

Securing a personal loan for business purposes involves several key steps. The process looks like this:

1.    Assess your finances: Begin by looking at your personal credit score, income, and overall financial health. This will give you insight into the likelihood of qualifying for a personal loan and the interest rates you might get.

2.    Choose a lender: Look for banks, credit unions, and online lenders that offer personal loans suitable for business purposes. Make sure they allow you to use personal loan funds for business expenses. Compare interest rates, loan terms, and fees to find the best lender for your needs.

3.    Prepare your documents: Gather documents like proof of income, tax returns, identification, and any business-related information required for your application.

4.    Submit your application: Complete the loan application process with your chosen lender. Be honest about your intention to use the loan for business expenses. This transparency helps avoid potential issues in the future.

5.    Review loan terms: Once your application is approved, carefully review the loan terms, including the interest rate, repayment schedule, and any associated fees. If everything looks good to you, accept the loan terms to move forward with the funding process.

What to Consider Before Applying for a Personal Loan for Business

When analyzing the benefits and risks of this approach, consider these factors.

•   Your personal creditworthiness: Using a personal loan for business mixes your individual finances with the company’s risk. Think about the effects this move might have on your personal credit score and future loans.

•   Your business revenues: You’ll want to be sure your business will bring in enough money to cover your monthly personal loan payments. Run the numbers to be sure that paying the costs for this loan won’t force you to skimp on other needed business expenditures.

•   The loan’s true cost: Beyond the loan’s interest rate, lenders may charge fees for loan origination, late payments, loan processing, or account maintenance.

•   Timing: Funding for a personal loan may be processed faster than for a business loan. That’s an advantage over SBA loans, which can take up to three months to come through, possibly costing you a current opportunity.

•   Usage restrictions: Some personal loan agreements forbid using funds for business, so double check that your prospective lender permits it.

•   Repayment details: If you do get the green light, you may want to have on hand a solid business plan (showing revenue model and expenses, for example) to show how the loan will be repaid.

There are funding alternatives that could cost you less or give you added flexibility. Those are detailed in the next section.

Alternatives to Personal Business Loans

Personal loans might not be ideal for everyone and aren’t the only funding option for your small business. It may be worth considering small business loans or other types of business loans as alternatives.

Small Business Loans

Small business loans are offered through online lenders, banks, and credit unions. There are various options available, each designed for specific purposes. For example, a working capital loan is designed to help you finance the day-to-day operations of your business. Equipment financing can help you replace aging technology and buy new tools and machinery.

SBA loans are guaranteed by the Small Business Administration, whose aim is to help small businesses start and grow. If you aren’t able to make your payments, the SBA will step in and cover up to 85% of the default loss. By reducing risk in this way, the organization helps businesses get easier access to capital.

Shopping around for the best small business loan rates is a good way to compare lenders and find the one that works best for your unique financial needs.

Business Lines of Credit

A business line of credit is revolving credit, similar to a credit card. You have a set credit limit and only pay interest on the amount you’re currently borrowing, making it a more economical option than a term loan for some business owners. As you repay the funds, they are available to borrow again.

Another advantage to a line of credit over a term loan is the ability to use a check to pay vendors who do not accept credit cards.

Business Credit Cards

Business credit cards can be useful for separating personal and business expenses. They also usually have higher credit limits than personal credit cards, which gives you more flexibility to make larger business purchases. Plus, they may offer rewards, perks, and bonuses. It’s important to keep in mind, however, that credit cards tend to have higher interest rates than other types of business financing.

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

Merchant Cash Advance

A merchant cash advance (MCA) is an alternative form of financing for businesses that get revenue through credit card sales. With an MCA, a business can borrow a lump sum of money and repay the lender with a percentage of future credit card transactions. The repayment amount is larger than the advance, since the lender charges a fee. In some cases, MCA fees can significantly exceed interest rates on other types of business loans.

The Takeaway

Can you use a personal loan to start a business? Perhaps. Taking out a personal loan may be one way to fund your small business needs. However, some lenders do not allow a personal loan to be used for business purposes. It’s a good idea to explore alternatives, such as a small business loan or line of credit.

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

Can a personal loan be used for business?

Yes, you can use personal loans for business if the lender allows it. It’s important to check with the lender to ensure there are no restrictions on using the loan for business expenses.

Can I write off a personal loan if used for my business?

You can typically write off the interest on a personal loan used for business purposes, but only the portion directly related to business expenses. Personal loan principal repayments are not tax-deductible.

Does the SBA offer personal loans?

No, the Small Business Administration (SBA) does not offer personal loans. The SBA provides various loan programs designed specifically to support small businesses, such as SBA 7(a) loans and SBA 504 loans.

What are the risks of using a personal loan for business purposes?

Funding your business with a personal loan can present a number of risks. The overall risk is that such a loan puts your individual creditworthiness on the line, as personal loans always require a personal guarantee. This means:

•   Any missed payments could hurt your individual credit history.

•   Even if you pay on time, you’d miss the opportunity to build your business credit score.

•   Defaulting on a personal loan could cause lenders to take legal action, meaning you’d probably have to pay for a lawyer to represent you.

•   Negative consequences from a lawsuit could include a lien on your home or garnishment of your wages.

Can startups qualify for a personal loan for business?

Generally, the answer is no. Many lenders disallow the business use of a personal loan, for one thing. For another, lenders ordinarily approve or deny loans based on the borrower’s ability to manage repayments — and given the high rate of startup failure (roughly 20% in the first year), both personal and business loans to new entrepreneurs are often seen as too risky.

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