SoFi

When choosing a business structure, you may wonder whether you should form a limited liability company (LLC) or a sole proprietorship. Each has its benefits and drawbacks, with the key differences being how they are set up and how your personal assets are implicated.

Your specific business needs will determine which works best for you. Learn the details here.

Key Differences Between a Sole Proprietorship and LLC

The most significant differences between a sole proprietorship and an LLC structure come down to the requirements for setting up the kind of business and how your personal assets are treated in each structure.

Basically, you don’t have to do anything to set your business up as a sole proprietorship. However, if you want to form an LLC, you must file paperwork, pay a fee, and wait for your state’s Secretary of State to approve your business as an LLC.

As for your personal assets, with a sole proprietorship, they may be claimed to pay business debt. But if you have an LLC, you and the business are considered separate entities so your personal assets are separate.

What Is a Sole Proprietorship?

When you start a business, you can elect a specific business structure, meaning that you formally register it with your state’s Secretary of State and pay a fee. If you don’t do that, your business is automatically considered a sole proprietorship (or a partnership if you have partners).

In a sole proprietorship, you and the business are considered one entity. You file only your personal taxes, and you claim both business income and expenses on them.

Definition and Basic Characteristics of Sole Proprietorships

A sole proprietorship is a business owned and operated by a single individual. It’s the simplest business structure, with no legal separation between the owner and business.

Basic characteristics of a sole proprietorship include:

•  Single ownership: Owned and operated by one individual, with no separate business entity.

•  Unlimited liability: The owner is personally responsible for all debts and liabilities of the business.

•  Direct taxation: Business income and expenses are reported on the owner’s personal tax return (Schedule C).

•  Simple setup: Minimal paperwork and low startup costs, with few legal requirements.

•  Full control: The owner has complete decision-making authority over the business operations.

•  No business continuity: The business dissolves if the owner exits, retires, or passes away.

Advantages of a Sole Proprietorship

When it comes to the benefits of a sole proprietorship vs an LLC, the biggest advantage is the ease of creation. Your business is a sole proprietorship simply by default.

Taxes are also simple, since you file only your personal income taxes and don’t have to file taxes separately for the business.

There are no fees required to be a sole proprietor, either.

Recommended: Small Business Loans for Sole Proprietors

Disadvantages of a Sole Proprietorship

There are, however, some drawbacks to sole proprietorship to consider.

First, because there is no delineation between you and your business, your personal assets could potentially be seized should the business have debts or legal fees that it can’t cover. That could jeopardize not only your business, but also your personal life if, for example, your home or vehicle is taken to cover business debts.

You may have difficulty if you try to get a small business loan through a bank or attract an investor when you are a sole proprietor. You could also struggle to sell your business if you haven’t elected a business structure like an LLC or corporation. Because the LLC is separate from its owner, it may be more appealing to lenders, investors, and potential buyers due to the limited risk.

If you have a sole proprietorship but don’t want to do business under your own name, you’ll usually have to file your DBA (Doing Business As) name. Let’s say your name is Jane Doe but you want your company to be called Dr. Knowhow’s Resume Writing Service. That’s fine, but it will generally require extra paperwork to file that DBA name. The filing fee can cost between $5 and $150, depending on your state.

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

What Is an LLC?

LLC stands for limited liability company. To use this business structure, you must elect and apply for it. If a company is an LLC, it’s separate from the business owner (or owners, if there are multiple owners), meaning that the owner or owners aren’t held personally responsible for the business’ liabilities.

Here, a look at the pros and cons of LLCs.

Advantages of an LLC

When it comes to an LLC, your personal assets can’t be taken to cover business debts. You have, as the name indicates, limited liability.

In contrast to another business structure, the corporation, the LLC requires less paperwork to set up and maintain, since a corporation requires annual meetings and annual reports.

LLCs can choose how they’re taxed. They can take advantage of what’s referred to as pass-through taxation, in which the business doesn’t file and pay its own taxes. Instead, its income and expenses are passed through to the owners’ personal tax returns. This equates to the LLC being taxed like a sole proprietor, and may mean it can be referred to as a “disregarded entity.”

Alternately, an LLC can also be taxed like a corporation at a lower corporate rate for the first $75,000.

Another benefit is that an LLC has no limit on the number of members (or shareholders) it can have. An S corporation, by way of comparison, is limited to no more than 100 shareholders.

And finally, you may find it easier to qualify for financing or to sell your business if it’s an LLC.

Disadvantages of an LLC

So what are the drawbacks of an LLC? First off, to start a limited liability company, you have to apply with your state’s Secretary of State department, which may require a fee and take time for the paperwork to be processed. You may also have to pay an annual or biannual fee to keep your LLC in good standing. As of 2024, those fees (in states that require them) range from $9 in New York to $800 in California.

Additionally, you may have to pay unemployment insurance for yourself and any partners, although you wouldn’t have to do so for a sole proprietorship. Costs for unemployment insurance vary by state.

Recommended: How to Calculate Cash Flow

How to File an LLC

To file an LLC, start by reviewing the requirements set out by your state’s Secretary of State. Each state has a slightly different process. Some let you apply online, while others may require you to mail in your application.

You will likely be required to file articles of organization, which is a document outlining information about your business and its members. You may also be required to file other forms as well as pay a filing fee, which may range from $35 to $500. Some states may require you to have certain business licenses or permits to qualify as an LLC, too.

Working With a Registered Agent

If you think the process of setting up an LLC yourself sounds overwhelming, you have another option. You can employ the services of a registered agent. This is an individual or company who can set up your business structure on your behalf, as well as ensure that you keep up with annual fees and paperwork deadlines. Registered agents charge a fee for their services.

Key Comparison Factors

When comparing sole proprietorships and LLCs, key factors include:

•  Liability protection: LLCs offer limited liability, safeguarding personal assets, whereas sole proprietors are fully liable for business debts.

•  Tax implications: Tax implications differ as both allow pass-through taxation, but LLCs can opt for S-corp or C-corp taxation, adding flexibility.

•  Setup and maintenance costs: These are higher for LLCs due to state fees and annual reports, unlike the minimal costs for sole proprietorships.

•  Operational flexibility: Operational flexibility is greater for sole proprietors, who have full control, while LLCs require more formal structures.

•  Credibility: LLCs often appear more professional, appealing to clients and investors.

How to Choose a Business Structure for Your Company

When it comes to choosing a business structure for your company, consider how much effort you’re willing to put into setting up your business structure and the fees you’re willing to pay. An LLC does require some effort to prepare, and it may require an annual fee and/or paperwork to be filed.

You may also want to factor in how likely it is that your business might ever be sued. If you run a writing business out of your home, that risk might be minimal. But if you have a fitness training business, you might incur more risk of being sued, if, for example, a customer is injured during training.

Finally, think about how likely you are to want to get investors or a type of business loan. An LLC will likely be more appealing to potential investors or lenders than a sole proprietorship. And it may also be easier to sell an LLC.

Recommended: The Basics on How Umbrella Insurance Works

The Takeaway

When you’re looking at a sole proprietorship vs an LLC, the most important thing is to carefully consider which will provide the biggest benefit to your business. How you file and pay taxes, whether you separate your personal assets from the business’s assets, and whether you’re willing to go through the process and paperwork of setting up and maintaining a legal business structure should weigh into your decision.

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 an LLC be a sole proprietorship?

No, an LLC cannot be a sole proprietorship. While a single-member LLC allows one person to own the business, it is legally distinct, providing liability protection not offered by a sole proprietorship. A sole proprietorship is an unincorporated business without separate legal status from its owner.

What are the tax filing differences between sole proprietorships and LLCs?

A sole proprietorship reports taxes on the owner’s personal tax return via Schedule C of Form 1040. A single-member LLC does the same, but multi-member LLCs must file Form 1065 as a partnership or elect corporate taxation. LLCs offer flexibility to choose between pass-through or corporate tax structures.

Can I change my business structure later?

Yes, you can change your business structure later. Many businesses start as sole proprietorships or partnerships and later transition to LLCs or corporations as they grow. Changing structures involves registering with the state, updating licenses, and notifying the IRS, often for tax benefits, liability protection, or funding opportunities.

Photo Credit: iStock/SolStock

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

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

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

SOSMB-Q424-059

Taking out a business loan or line of credit is one way to get the working capital you need to launch or grow your business. But there’s also another option to consider: a small business grant.

Awarded by government agencies, foundations, and corporations, small business grants provide funding to new and existing businesses of all types, and do not have to be repaid. Some grants even come with added benefits like business coaching and mentorships.

Because grants are essentially free money, however, they can be difficult to get. Here’s what you need to know about small business grants.

What Is a Small Business Grant?

A small business grant is a lump sum of money awarded to a business or business owner that, unlike a small business loan, does not have to be paid back. Business grants are offered by federal, state, and local governments, as well as foundations, nonprofit organizations, and corporations.

Some grants are targeted to businesses in specific industries or that are developing certain types of products. Other grants are designed for businesses located in underserved communities or owned by women, minorities, or veterans. In some cases, a grant will come with stipulations about how the money has to be used by the business; in others, there are no restrictions.

Recommended: 7 Differences Between Business Grants and Loans

Why Consider Small Business Grants?

Grants provide a way to get funding without taking on debt. They also offer funding opportunities for startups that might not qualify for a loan. In fact, some grants are available for entrepreneurs who may have nothing more than a great idea for a business.

You’ll want to keep in mind, however, that grants attract a large number of applicants and often come with fairly strict qualification requirements. Plus, the application process can be rigorous. You typically need to supply a lot of information and financial details about your business, plus explain how you plan to spend the grant money.

Where to Find Government Small Business Grants

There are so many different kinds of government business grants available — at the local, state, and federal level — that trying to find the right fit for your business can feel overwhelming. Fortunately, there are some helpful resources and databases that can help streamline your search.

The U.S. Small Business Administration (SBA) and other federal agencies list their government grants for small business on Grants.gov . There, you can search based on criteria like eligibility, categories, and funding agency.

America’s Small Business Development Center, an SBA partner, is a nationwide network of Small Business Development Centers (SBDCs) located throughout the U.S. New and existing businesses can seek free business consulting and low-cost training. SBDC consultants can also help you find a grant for your business.

State Grants for Small Businesses

In addition to federal small business grants, state grants are available for businesses, too. Each state offers unique grant opportunities tailored to specific industries, needs, and demographics, supporting economic growth and innovation locally.

Here’s a comprehensive list of state grants for small businesses:

•  New York Small Business Grants

•  California Small Business Grants

•  Indiana Small Business Grants

•  North Carolina Small Business Grants

•  Michigan Small Business Grants

•  Florida Small Business Grants

•  Illinois Small Business Grants

•  Texas Small Business Grants

•  Arizona Small Business Grants

•  New Jersey Small Business Grants

•  Wisconsin Small Business Grants

•  Maryland Small Business Grants

•  Ohio Small Business Grants

•  Colorado Small Business Grants

6 Private Company Business Grants

Certain private companies offer small business grants. Below is a sampling of what’s available.

1. Visa Everywhere Initiative (VEI)

The Visa Everywhere Initiative (VEI) offers funding to tech-focused startups around the globe. To apply, you need to show how one of your products or services involves Visa products in a creative way. The top award is $100,000, but smaller amounts are also available.

2. FedEx Small Business Grant Contest

The FedEx Small Business Grant Contest is designed to help startups grow and scale their companies. Each year, it awards a $50,000 grand prize and nine additional $20,000 grants. To apply, you need to have been in business for at least six months and have no more than 99 employees.

3. NASE Growth Grant

The National Association of the Self-Employed offers a $4,000 grant to qualifying NASE members to help take their businesses to the next level. Grants can be used for marketing, advertising, hiring employees, expanding facilities, and other business needs.

4. Fast Break for Small Business

Fast Break for Small Business is a grant offered by LegalZoom, along with the NBA, WNBA, and NBA G League, that focuses on helping businesses in underserved communities. The grant provides $10,000 and up to $500 in LegalZoom products and services. Applications are open twice a year.

5. Venmo Small Business Grant

The Venmo Small Business Grant awards 10 small businesses with $20,000, free promotion on the Venmo and PayPal web and social media sites, and professional consulting services. To qualify, you must have less than $50,000 in annual sales and no more than 10 employees.

6. Lenovo Evolve Small Grant

Lenovo’s Evolve Small Initiative is a program that provides funding, mentorship resources, and community support to small businesses located throughout the U.S. and Canada. Each year, the focus and funding amounts of the grant vary.

3 Grants to Start a Business

While many grants are aimed at established businesses, others are designed to provide free money (and sometimes support) to start a small business.

1. The Small Business Innovation Research (SBIR)

The The Small Business Innovation Research (SBIR) and its sister program, the Small Business Technology Transfer (STTR), support small businesses with big ideas in technological innovation. The programs not only provide funding to qualifying small businesses, but also partner those small businesses with federal research organizations to help develop those ideas into commercialization.

2. The Halstead Grant

The Halstead Grant is specific to a particular type of business entrepreneur — emerging silver jewelry artists. The grant includes $7,500 in funding plus $1,000 in merchandise to start a small business.

3. Challenge.gov

If you’ve got a great solution to an existing problem, you could submit your idea to Challenge.gov. This site is a hub for all prize competitions and challenges across the federal government and leverages crowdsourcing to come up with ideas that turn into businesses.

4 Business Grants for Women Business Owners

Some grants are only open to women who run businesses. Below is a selection of available grants.

1. Cartier Women’s Initiative

The Cartier Women’s Initiative seeks women who are making a difference in the business world. In addition to grants of either $30,000, $60,000, or $100,000, winners also receive business and financial coaching.

2. Amber Grant

WomensNet offers several Amber Grants throughout the year, giving away at least $30,000 every month, including “Startup Grants” and “Business Category Grants,” as well as two “$25,000 Year End Grants.”

3. Tory Burch Foundation Fellows Program

This Fellows Program provides 50 eligible women running early-stage businesses with a one-year fellowship that includes workshops, coaching sessions, network-building, and financial resources.

4. The SoGal Black Founder Startup Grant

The SoGal Foundation, along with Winky Lux, bluemercury, and other sponsors, offers several $10,000 and $5,000 startup grants to Black women or nonbinary entrepreneurs. Grant winners also receive fundraising assistance and access to the SoGal Ventures team. Applications are rolling.

Recommended: 30 Small Business Grants and Grant Databases for Women

3 Grants for Minority Business Owners

Here’s a look at just some of the available awards for minority business owners.

1. Galaxy of Stars Grant

Galaxy of Stars, an online network for minority- and women-owned businesses, offers a grant of $2,250 to eligible applicants to start or grow a business.

2. The Coalition to Back Black Businesses

The Coalition to Back Black Businesses offers $25,000 grants to 14 Black business grantees who’ve been selected by a panel of judges. It also awards mentorships and resources to other qualifying small businesses.

3. National Black MBA Association Scale-Up Pitch Challenge

If you have an idea for a Black-owned startup that is scalable, you might want to consider The Scale Up Pitch Challenge. Sponsored by the National Black MBA Association, the competition aims to give eligible startups a chance to connect with venture capitalists and other early-stage investors. Three finalists also receive cash awards (up to $50,000).

How Do You Qualify for a Small Business Grant?

While each grant program will have different requirements for applicants, many share certain criteria.

If the grant is U.S.-based, applicants may be required to be U.S. citizens. If the grant is state-based, applicants may be required to be citizens of that state or doing business there.

Additional requirements for certain grants may include:

•  You may only qualify if you have been in business for a certain period of time.

•  You may need to operate a for-profit company (or, in some cases, the opposite: a nonprofit).

•  You may need to have a business in a particular industry.

The key is reading all of the qualification requirements carefully before applying. This allows you to make sure you meet the criteria before investing too much time in the application process.

The process of applying for a small business grant can be time consuming. You’ll want to write your business plan (if you haven’t already) or refine it. The plan should clearly explain your business and what sets it apart from other competitors, plus detail what you would do with the grant money. Small business grant applications may also require financial data and other relevant information for your business, so having that information organized and prepared can help streamline the process.

Pros and Cons of Small Business Grants

Like any type of small business funding, grants come with both benefits and drawbacks. Here’s a look at how they stack up.

Pros

•  You don’t need to repay the money. Unlike small business loans, grants do not have to be repaid, so they’re essentially free money.

•  Information is widely available. No matter what type of business grant you’re looking for, a lot of information about grants is available online.

•  Provides credibility. In addition to the funds, a grant can provide more visibility to your business and validate your business idea. It can also make it easier to receive other grants in the future, since you’re already a proven candidate.

Cons

•  Time-consuming. Just finding the right grant to apply for can require extensive research. And once you do find one, completing the application and making a convincing proposal can take time and effort — and may not result in any returns.

•  Hard to get. Small business grants are appealing, so you’re not the only business looking for one. Grants typically receive a large number of applicants, but only a few are chosen.

•  Grant money may have strings attached. Some grants come with restrictions about how you can spend the money, and others may require you to spell out your plans for the money in your application. Once you get your award, you typically need to stick with that plan.

Recommended: Guide to Grant Writing for Small Businesses

Alternatives to Small Business Grants

If you don’t qualify for any small business grants (or don’t feel it’s worth the time and effort to apply), you’re not necessarily out of funding options. Here are some other ways you may be able to get the capital you need to launch or grow your business.

Small Business Loans

There are many types of loans for small businesses. For example, the SBA helps businesses by backing up loans made by partner lenders. While banks typically have strict criteria (such as at least two years of business history and a minimum amount of revenue) for business loans, online business lenders tend to have more flexible requirements. Just keep in mind that rates from online lenders are generally higher than those from traditional banks.

Angel Investors

Angel investors are high-net-worth individuals who invest in early-stage startups in exchange for equity in the company. Since they invest using their own money, they aren’t beholden to banks or other institutions. This allows them to invest more freely. Typically, when an angel investor funds your company, you also get access to their expertise and industry contacts, which could help you grow your business.

Merchant Cash Advances

If you do business using credit card transactions, you may be able to get a merchant cash advance (MCA) fairly easily. With an MCA, you get a cash advance in exchange for a fixed percentage of future credit card receipts. Typically, the MCA provider automatically deducts a daily (or weekly) percentage of your debit and credit card sales until the advance, plus fees, is repaid in full. While an MCA can be a quick source of cash, this is one of the most expensive types of small business financing.

Recommended: First-Time Business Loans

The Takeaway

No matter where you are on your business journey, there may be a grant or loan available to help you take it to the next level. While grants provide money that does not need to be repaid, small business loans do need to be repaid, with interest.

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

Which business grants are considered taxable?

Generally, the money you receive from any type of business grant is taxable and should be reported on your federal tax return. Depending on what state you live in, you may also need to report a business grant award on your state return.

How do you get small business grants?

Small business grants are offered by the government (at the federal, state, and local level), foundations, and corporations. You might start your search with the government database Grants.gov., as well as simply searching “Business [industry] grant.”

Who can get small business grants?

Grants are available for all types of businesses, but you may have a better chance of finding one if your company serves an underrepresented or rural community, is in the tech sector, or is owned by a woman, minority, or veteran.

Photo credit: iStock/mapodile

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

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

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

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-Q424-015

If you feel like your company’s growth has stagnated, it may be time to look at inorganic growth strategies. Inorganic growth involves expanding through mergers and acquisitions rather than increasing your company’s current activities. It’s generally considered faster than organic growth but requires a larger upfront investment and comes with some risk.

Read on for a closer look at inorganic growth, including its pros and cons, how it compares to organic growth, and strategies for achieving (and funding) inorganic growth.

What Is Inorganic Growth?

Inorganic business growth is growth that is created using resources outside of the company. It typically involves mergers and acquisitions, joint ventures, or adding locations. This is in contrast to organic growth, which occurs through harnessing a company’s existing resources.

While organic growth tends to be slow and gradual, inorganic growth enables a company to expand rapidly by entering a new market that may be related to or different from its original business line. Inorganic growth typically involves a more dramatic shift in how a business operates. It also requires a larger upfront investment than organic growth. Owners will often use small business loans to fund inorganic growth.

Example of Inorganic Growth

An example of inorganic business growth is Facebook’s acquisition of Instagram in 2012. Rather than building a similar platform from scratch, Facebook purchased Instagram for $1 billion to expand its presence in the social media and photo-sharing space.

This acquisition allowed Facebook to tap into Instagram’s growing user base and capitalize on its unique features. The move provided immediate access to Instagram’s established brand and audience, fueling Facebook’s growth in new demographics.

This strategic inorganic growth decision helped Facebook maintain its dominance in the social media industry while reducing competition and diversifying its service offerings.

Recommended: IPO vs Acquisition: Advantages and Disadvantages

What Is Balanced Growth?

Balanced business growth refers to the strategy of achieving a steady and sustainable expansion by integrating both organic and inorganic methods. It involves growing through internal efforts, like improving sales, launching new products, and enhancing operational efficiency, while also leveraging external growth opportunities, such as mergers, acquisitions, or partnerships.

The goal is to balance short-term gains from inorganic growth with the long-term stability of organic development. This approach helps businesses minimize risks, maintain operational control, and ensure that growth is sustainable, scalable, and aligned with the company’s strategic objectives over time.

Inorganic Growth vs Organic Growth

Both inorganic and organic growth serve the same purpose — taking your business to the next level. But each takes a very different path to get there.

Inorganic growth involves using resources outside of the company, such as engaging in mergers and acquisitions. Organic growth, on the other hand, uses inside opportunities — such as cost-cutting measures, internal research and development, and operational improvements — to spur growth.

Another key difference is that inorganic growth typically requires a large initial investment, whereas organic growth generally involves gradually investing in marketing, human resources, and operations over time. As a result, inorganic growth usually requires taking out a business loan, whereas organic growth may or may not require financing.

Inorganic vs. organic growth also comes down to speed. Inorganic growth generally leads to a much faster increase in revenues and profits than organic growth.

Pros and Cons of Inorganic Growth

To help you decide if an inorganic growth strategy is the right fit for you, here’s a look at some of the benefits and drawbacks of inorganic growth.

Pros

Unlike organic growth, which can take time, inorganic growth results in rapid expansion, since the company you are acquiring or partnering with already has established systems, customers, and revenues.

Growing through mergers and acquisitions also gives your business access to valuable resources and assets, such as technology, intellectual property, equipment, and staff. In addition, it can expand your market share and reduce competition. Becoming a larger company can also make it easier to access capital through business loans when you need it.

Recommended: 10 Business Growth Strategies

Cons

Inorganic growth generally requires a large upfront investment, which may involve taking on debt. If your company is currently small, getting the financing you need might require collateral, which can put personal or business assets at risk.

Acquiring a new business or adding a new location can also result in management challenges. In the case of a merger or acquisition, you may end up with multiple people in the same roles and need to consolidate. Merging with another company can also lead to friction.

While inorganic growth can result in rapid growth, success is not guaranteed. Investing in another business or location can be risky.

5 Inorganic Growth Strategies

There are several inorganic growth business strategies to consider, depending on how your business is set up and how willing you are to give up your company’s independence.

1. Acquisition

Purchasing an already-established business is one way to instantly increase your business’s revenues and profits. An acquisition allows you to take over a proven business model with customers and systems already in place rather than having to build it from scratch.

Recommended: Top Business Acquisition Loans

2. Merger

In a merger, two firms agree to become partners in a larger business. To achieve inorganic growth through a merger, you might join forces with a competitor. This takes your competition out of the marketplace and allows you to absorb its market share. It also gives you access to its technology, products, and workforce.

3. New Location

Opening a new location for your existing business leverages the hard work you’ve already put into your brand. You won’t have to develop new management or marketing strategies, other than extending what you’re already doing at your original location. If you sell products, you may be able to negotiate a lower per-unit cost if you need to increase the size of your orders from suppliers to outfit a new location.

4. Strategic Alliance

When two brands see benefits in working together but don’t want to give up their individual independence by merging, you have a strategic alliance. Perhaps Company A has the audience that the other wants to reach, while Company B has technology that Company A can leverage.

5. Joint Venture

Similar to a strategic alliance, a joint venture involves two or more companies coming together to take on a particular business activity for a limited period of time. A joint venture creates a new business entity that is separate from the participating businesses. This allows the participating businesses to grow while maintaining their independence and individual brands.

Recommended: How to Grow a Business

Funding Inorganic Growth

Here’s a look at some ways your business may be able come up with the capital it needs to fund inorganic growth.

Business Loans

There are many different types of small business loans, including business acquisition loans. If you have good credit, you may qualify for a bank loan with low interest rates and favorable terms. If your business is new or you have fair credit, you may be able to get financing for inorganic growth through an online lender. These alternative lenders often have more flexible qualification criteria than banks, and also provide faster funding. However, loan amounts may be smaller and interest rates can be higher.

Equity Fundraising

Another option for funding inorganic growth is to bring on private equity investors. These individuals (or firms) can provide capital for you to acquire, merge with, or partner with another business, in exchange for equity in the company. Keep in mind, though, that investors may want a say in strategic decisions.

Invoice Financing

If you are looking for a smaller amount of financing to help fund a joint venture or strategic alliance, you might consider invoice financing. This allows you to leverage the value of unpaid invoices to get access to cash quickly. With invoice financing, lenders advance a percentage of your unpaid invoice amount (often as much as 90%). When your customer pays the invoice, you repay the lender the advance amount, plus fees.

Because invoice financing is backed by your invoices, it can be easier to qualify for compared to other types of business loans. However, invoice financing tends to cost more than other types of financing.

The Takeaway

Inorganic growth involves buying or joining forces with other businesses or opening new locations. It contrasts with organic growth, which is growth from within the company. Both inorganic and organic growth may involve outside financing. However, inorganic growth generally requires significantly more capital than organic growth.

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 the difference between organic growth and inorganic growth?

Organic growth happens over time and involves using internal resources to increase revenues and customers. Inorganic growth, on the other hand, happens quickly and typically involves acquiring, merging with, or partnering with another company.

What is a benefit of inorganic growth?

Inorganic growth enables your business to expand rapidly, since the company you acquire or partner with typically already has established systems, customers, and revenues.

What are the methods of inorganic growth?

Inorganic growth strategies include acquisitions, mergers, opening a new location, joint ventures, and strategic alliances.

Photo credit: iStock/filadendron

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

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

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

SOSMB-Q424-014

A strong business plan can help you succeed at any stage in your company’s growth.

When you launch, a business plan helps to prioritize and manage your funds. As you continue to evolve, it gives you a roadmap to execute new opportunities. And at any point in time, a business plan could be used to apply for loans and grants or set up a crowdfunding campaign.

Find out how to write a business plan for a small business that is designed to help you achieve your company’s unique goals.

The Importance of a Business Plan

Creating a business plan allows you to map out every crucial detail in launching and managing your company. Walking through each step helps you define your business goals, financial strategies, and both legal and organizational structures.

The document helps ensure that you focus on your core areas without getting distracted by opportunities that don’t support the plan. Externally, the business planning process helps identify funding needs and serves as support for financing applications, investor pitches, and even crowdfunding for small businesses.

When deciding how to make a business plan, first identify which type is better suited for your company. There are two primary categories: a traditional business plan and a lean startup plan.

Traditional Business Plan

A traditional business plan is the more in-depth option, discussing the company’s past, present, and future. The goal of writing a business plan is to provide a roadmap for the company. As such, it often includes:

•  A discussion of the broader market to identify both upcoming challenges and opportunities the business may face.

•  Any relevant expansion plans. The business plan generally outlines where the funding will come from (such as a small business loan) and what hiring needs to be done.

•  An explanation of duties for current employees.

•  A strategy in case certain setbacks occur.

•  A five-year forecast of company financials.

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

Lean Startup Plan

For a more basic business plan, you could opt for a lean startup model. Writing a lean startup model business plan requires less detail than a traditional plan and takes a more general approach to outlining the company’s information.

A lean startup business plan typically doesn’t have enough information to satisfy a lender or investor, but it can be a useful internal tool when you’re just starting out. It also provides the flexibility to experiment with business models and other details. In other words, it gives you more room to pivot as you gain experience with managing the company.

According to the Small Business Administration (SBA), elements of the lean startup plan include:

•  Partnerships: Highlight the strategic partnerships that will help your business operation. This may include suppliers or manufacturers.

•  Activities: In what ways will the company have a competitive advantage in the existing market? Things to consider here may be technology that could set you apart.

•  Resources: What resources will allow you to create value for customers? This may be staff, intellectual property.

•  Value proposition: What unique value does your company bring to the existing market?

•  Customer relations: How will consumers interact with your company? Will their experience be in-person or online?

•  Customer segments: Identify your target market. Defining and understanding who your target market is can help inform overall business and marketing strategies.

•  Cost structure: This section should explore the costs your business will face — such as labor or supplies. It can also be helpful to define whether your company will work on a cost-driven model or a value-driven model. Cost-driven models focus on lowering costs while value-driven models focus on creating premium value for customers.

•  Revenue streams: How is the company going to make money?

There are a variety of templates, examples, and online resources that can help business owners navigate how to write a lean startup business plan.

Recommended: Why Do Business Owners Reinvest Their Profits?

9 Steps to Writing a Business Plan

Here’s how to write a business plan step-by-step that can help you create a solid strategy for both the near-term and long-term. The following steps are for a traditional business plan.

Business owners may decide to pick and choose the sections that are most relevant for their goals.

1. Executive Summary

The executive summary provides a brief overview of your company as well as your goals. This section is particularly important if you’re applying for a small business loan or pitching new investors. Be direct with your funding goals, whether it’s receiving a certain loan amount or raising a specific amount of money.

Within no more than a few pages, the executive summary should outline what you’ll discuss in greater detail throughout the rest of the business plan. You may even opt to write this section last so you know exactly what you’re summarizing.

2. Business Overview and Structure

This section goes into more detail on the business, including the products or services you offer. Include information on why your company is (or will be) successful, such as a specific competitive advantage, unique expertise on your team, and intellectual property.

Also talk about your mission and vision statements to clearly communicate your goals and values. These can be updated over time as your company evolves. Finally, describe your target customer, location, and other structural details that are central to your business.

3. Market Analysis and Structure

Here’s where you show an assessment of your market. Discuss metrics and trends of the entire industry in which your company operates. This should largely discuss the competition and the demand for your product or service. Is your industry focusing major growth in one area, or price increases because of a general trend?

Also describe your various customer segments, including their general location and demographics. By the time a lender or investor finishes reading this section they should understand how your industry works and where your company fits in among the competition.

4. Management and Team

The strength of a company’s management team can be an important part of any business plan. Even if there are only a couple of co-founders at the moment, present their full bios and how each individual contributes to the company’s success. Larger businesses could include an organizational chart to illustrate the reporting structure of the team.

Another important aspect to consider when writing a business plan, regardless of a company’s size, is the legal structure and ownership of the company. You can also introduce any advisory board members who lend their expertise to the business.

Recommended: Unemployment by Cities in 2024

5. Marketing Plan

Tee up your funding request by explaining how you plan to get sales or how your current sales come in. Whether you’re selling a product or a service, go in-depth about where you connect with customers, such as in-store or online. Also outline your pricing strategy and how that stacks up to the competition.

Next, describe your advertising strategy and any results that you’ve experienced so far. Are you advertising online or through traditional media channels? For more established companies, discuss any new, upcoming campaigns. You can also mention budget plans for your sales and marketing plans.

6. Operations Plans

This section may make sense if you want to give more detail on how your company operates, especially if you have multiple divisions rather than just a few team members. It can build off of information you included in the management section. Rather than focusing on each member’s expertise, here you would discuss the different responsibilities throughout the company.

Also provide details on operating expenses and overall budgets. You don’t need to go into revenue numbers yet, but instead talk about the capital and cash flow needed to run the business on a day to day basis. You may need to update your business plan if your company pivots to a new product or service.

7. Financial Projections

Your financial section includes both a historical account of your business finances (if you’re already established), as well as a forward-looking estimate, usually projecting the next three to five years. Data should include profit and loss statements, balance sheets, and cash flow statements.

Include projections for each of these documents and get as specific as possible if you’re a new enterprise. Graphic visuals can also help your numbers pack more of a punch, especially when showing trends over a period of time.

8. Funding Request

When writing a business plan to attract investors or apply for a small business loan, you’ll want to outline your exact financing needs and what you plan to accomplish with the funds. Describe how much you’ll need to launch if you’re a startup. Existing businesses can describe expansion plans, such as salaries for new positions, research and development for a new product, or a brand new location.

For a loan application, you may give details about your preferred repayment plan. For an investor pitch, address your valuation and how much equity you’re willing to give up for a specific investment. Some small business grant applications will like to see a business plan, too.

Tie all of this information back to your projections and how much revenue growth you expect from this potential funding.

Recommended: Startup Business Loans With Bad Credit and No Collateral

9. Appendix and Supporting Documentation

The final component of creating a business plan is your supporting documentation in the appendix. This could include requested materials, like resumes or a business credit report (although lenders will frequently do their own credit check).

You may also include letters of recommendation, customer testimonials, and product pictures. Consider adding your incorporation documents and any legal contracts or licensing information that impacts your business.

Recommended: What Are the Stages of Business Growth?

Tips for Writing an Effective Business Plan

Tips for writing an effective business plan include:

•  Be clear and concise: Use simple language and avoid jargon to make the plan easy to understand.

•  Tailor to your audience: Adjust tone and detail depending on whether it’s for investors, lenders, or internal use.

•  Focus on the essentials: Include key sections like market analysis, financial projections, and business strategy without overloading with unnecessary details.

•  Use data and research: Back up claims with facts, market data, and financial evidence to build credibility.

•  Set realistic goals: Present achievable, measurable milestones for business growth and profitability.

•  Highlight your unique value: Clearly explain what differentiates your business from competitors.

•  Be flexible: Show an understanding of potential risks and outline contingency plans.

•  Revise and update: Regularly review the plan as your business evolves to ensure it remains relevant.

Common Mistakes to Avoid in Business Plan Writing

When writing a business plan, common mistakes to avoid include:

•  Being overly optimistic with financial projections, which can make the plan seem unrealistic.

•  Failing to research the market thoroughly, which can lead to inaccurate assumptions about customer demand and competition.

•  Lack of clarity or organization, which makes the plan hard to follow, diminishing its impact.

•  Ignoring potential risks or challenges, which makes the plan appear incomplete.

•  Using vague language instead of specific, actionable details may reduce the credibility and effectiveness of the plan.

The Takeaway

Understanding how to write a business plan can help business owners be better prepared for both requesting funding, like a small business loan, and actually running your business.

Writing a business plan requires quite a bit of research to make sure you can clearly communicate about your company and your industry as a whole. You may not need to follow all of these business plan steps, especially if you’re a new company, but you can still provide a well-informed analysis of your market, your company’s competitive advantage, and your future plans.

As your business grows and evolves, it can be helpful to regularly update your business plan in the appropriate areas. This could give you the agility to jump on opportunities as they arise when you already have a well-prepared plan that only needs minor changes. Writing a business plan is a particularly wise investment of your time regardless of your company’s current stage.

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

How long should a business plan be?

A business plan should typically be between 15 to 25 pages, depending on the complexity and stage of the business. It needs to be detailed enough to cover all key aspects — such as market analysis, financial projections, and operational plans — while remaining concise and focused to engage investors or stakeholders.

Do I need a business plan if I’m not seeking funding?

Yes, even if you’re not seeking funding, a business plan is essential. It helps you define your goals, develop strategies, and identify potential challenges. A business plan serves as a roadmap for growth, guiding decision-making, resource allocation, and helping to track progress as your business evolves.

How often should I update my business plan?

You should update your business plan annually or whenever significant changes occur, such as market shifts, new competition, or business expansion. Regular updates help ensure your plan remains relevant and aligns with your current goals.

What’s the difference between a business plan and a pitch deck?

A business plan is a detailed document outlining a company’s goals, strategies, financials, and operations, typically 15-25 pages long. A pitch deck, on the other hand, is a concise, visual presentation (usually 10-15 slides) designed to quickly engage investors or stakeholders by highlighting key aspects of the business.

Photo credit: iStock/milanvirijevic

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

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

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

SOSMB-Q424-011

A trade credit is a business-to-business (B2B) transaction where one business is able to procure goods or services from the other without immediately paying for them. It’s called a trade credit because when a seller allows a buyer to pay for goods or services at a later date, they are extending credit to the buyer.

Trade credit can be a great tool for a small business that can free up cash flow and grow a company’s assets. However, there are some drawbacks, including a short financing window and potentially high interest if you need to extend that window.

Here’s what every small business needs to know about trade credit.

How Does Trade Credit Work?

Trade credit is a formal name for a common agreement between two companies where one company is able to purchase goods from the other without paying any cash until an agreed upon date. You can think of trade credit the same way as 0% financing, but with shorter terms. Sometimes trade credit is also referred to as vendor financing.

Sellers that grant their customers trade credit generally give them anywhere between 30 and 120 days to pay for the goods or services they received on credit. The range, however, can be higher or lower depending on the industry and individual seller.

Often, the seller will offer the buyer a discount if they settle their account earlier than the balance due date. If they do offer a discount, the terms of the trade credit sale are usually written in specific format. For example, if the seller offers a 5% discount if the invoice is paid within 20 days, but is willing to give the buyer a maximum of 45 days to pay the invoice, that agreement would be written as:

5/20, net 45.

If the buyer is unable to pay their invoice within the set time period (which is 45 days in the above example), the vendor will typically charge interest. If that happens, trade credit is no longer an interest-free form of financing.

Recommended: 15 Types of Business Loans to Consider

Common Terms

Common terms used in trade credit include:

•  Net terms: This specifies the number of days the buyer has to pay the invoice, such as “Net 30” or “Net 60,” meaning payment is due within 30 or 60 days.

•  Discount terms: Offers a discount for early payment, like “2/10, Net 30,” meaning a 2% discount is available if paid within 10 days.

•  Credit limit: The maximum amount a supplier allows a buyer to purchase on credit at one time.

•  Invoice: A detailed bill issued by the supplier outlining goods or services provided and the payment due.

•  Grace period: The extra time allowed beyond the due date to settle the account without incurring penalties.

Types of Trade Credit

The three main types of trade credit include:

1.   Open Account: The most common form, where the supplier delivers goods or services and the buyer agrees to pay by a specified date, usually 30 to 120 days later.

2.   Promissory Note: A formal written agreement where the buyer promises to pay the supplier by a certain date, often used when open accounts are not available.

3.   Trade Acceptance: The buyer signs a formal agreement accepting the supplier’s terms and acknowledging their obligation to pay at a future date. Trade acceptance is sometimes used for larger or international transactions.

Who Uses Trade Credit?

Business trade credit is very common in the B2B ecosystem. Businesses that use trade credit include:

Pros and Cons of Trade Credit

Pros and Cons of Trade Credit for Buyers

Pros of trade credit for buyers include:

•  Frees up cash: Because payment is not due until later, trade credits improve the cash flow of businesses, enabling them to sell goods they acquired without having to pay for those goods until a future date. It can be a good option for companies expanding into a new market or that have seasonal peaks and dips.

•  Possible discount: Depending on the trade credit agreement, if the buyer pays the invoice within a certain amount of time, they may receive a discount on the goods or services they purchase.

•  0% interest: The cost of capital can be a burden on some small businesses. If the buyer can settle the invoice within the agreed upon time frame, there is no interest charged on this type of financing.

Cons of buyers using trade credit include:

•  Short payment period: The length of the trade credit payment term varies, but they are often 120 days or less, which is shorter than most types of small business loans. For a growing small business, this may not be enough time. Companies that need a longer repayment period may want to look into other types of debt instruments.

•  It’s easy to over-commit: With discounts and wholesale prices, it can be tempting to buy too much of a particular good. Not only does this create excess inventory, but it also creates a bigger debt obligation.

•  Possible penalties for late payments: Depending on the trade credit agreement, there may be negative consequences for late payments, such as interest or a fine. In addition, the company might report your late payment to the credit bureaus, which could damage your business’s credit score.

Recommended: Getting a Cash Flow Loan for Your Small Business

Pros and Cons of Trade Credit for Sellers

Pros of using trade credit for sellers include:

•  Beat out competitors: Companies offering trade credit may be able to gain an advantage over industry peers that don’t offer trade credit. Because it can be difficult for some small businesses to get a bank loan, they may seek out suppliers offering trade credit.

•  Develop a strong relationship with clients: Offering trade credit increases customer satisfaction, which can lead to customer loyalty and repeat business.

•  Increase sales: Trade credits are still sales even if payment is delayed. Trade credit can also encourage customers to purchase in higher volumes, since there is no cost to the financing. Therefore, a trade credit can provide the opportunity for growth and expansion.

Cons of trade credit for sellers include:

•  Delayed revenue: If your business has plenty of cash, this may not be an issue. However, if budgets are tight, delayed revenue could make it difficult to cover your operating costs.

•  Risk of buyer default: Sometimes customers are unable to pay their debts. Depending on the trade credit agreement, there may be little to nothing the seller can do other than sell the debt to a collection agency at a fraction of the cost of the goods provided.

•  Less profit with early payment discounts: If the seller offers a discount for early payment, they will earn less on the sale than they otherwise would.

Recommended: Understanding Business Liabilities

Trade Credit Accounting

Trade credit needs to be accounted for by both buyers and sellers. The process, however, will vary depending on the company’s accounting method — specifically, whether they use accrual vs cash accounting.

With accrual accounting (which is used by all public companies), revenue and expenses are recorded at the moment of transaction, not when money actually changes hands. With cash accounting, on the other hand, a business records transactions at the time of making payments.

A seller who offers trade credits and uses accrual accounting can face some complexities if the buyer ends up paying early and getting a discount or defaulting (and never paying). In this case, the amount received doesn’t match their account receivables and the difference becomes an account receivable write-off, or liability that must get expensed.

Trade Credit Instruments

Typically, the only formal document used for trade credit agreements is the invoice, which is sent with the goods, and that the customer signs as evidence that the goods have been received. If the seller doubts the buyer’s ability to pay in the allotted time, there are credit instruments they can use to guarantee payment.

Promissory Note

A promissory note, or IOU, is a legal document where the borrower agrees to pay the lender a certain amount by a set date. While it’s usually used for repaying borrowed money, it can also be used to pay for goods or services.

Commercial Draft

One hitch with a promissory note is that it is typically signed after delivery of the goods. If a seller wants to get a credit commitment from a buyer before the goods are delivered, they may want to use a commercial draft.

A commercial draft typically specifies what amount needs to be paid by what date. It is then sent to the buyer’s bank along with the shipping invoices. The bank then asks the buyer to sign the draft before turning over the invoices. After that, the goods are shipped to the buyer.

Banker’s Acceptance

In some cases, a seller might go even further than a commercial draft and require that the bank pay for the goods and then collect the money from the customer. If the bank agrees to do this, they must put it in writing — which is called a banker’s acceptance. It means that the banker accepts responsibility for payment.

Trade Credit Trends

Trade credit is widely used worldwide. In fact, the World Trade Organization estimates that 80% to 90% of all world trade relies on trade credit in some capacity. It’s so widespread that it’s given rise to a type of financing called accounts receivable financing (also known as invoice financing).

With invoice financing, a company that offers trade credit can get a loan based on their outstanding invoices, effectively enabling them to get paid early. When they receive payments from their customers, they give that money (plus a fee) to the financing company.

Recommended: Understanding Business Liabilities

The Takeaway

Trade credit in business is very common and occurs when one company purchases goods or services from another company but doesn’t pay until a later date.

Essentially an interest-free loan, trade credit can be particularly rewarding for young businesses or seasonal businesses that may find themselves occasionally strapped for cash. A key drawback of trade credit, however, is that the buyer is generally expected to pay the invoice relatively quickly, sometimes within a month or two. For many small businesses, that may not be enough time, and they might be better served by getting a small business loan.

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 trade credit?

Let’s say a restaurant offers kobe beef on its menu and gets its beef from a food supplier in Japan. The supplier offers them a 5/30, net 60 trade. This means that the restaurant has 60 days to pay for a shipment of beef. If they pay the invoice within 30 days, however, they will receive a 5% discount on the purchase price.

Are there any benefits to trade credit?

Yes, benefits of trade credit include interest-free financing for buyers, improves cash flow for buyers, increases sales volumes for sellers, and it builds strong relationships and customer loyalty for sellers.

When do businesses typically use trade credit?

Businesses use trade credit either when they do not have the capital on hand to make a purchase or they need to temporarily free up cash for other expenses. Trade credit is also a good option for young businesses that may not qualify for other forms of business financing.

Photo credit: iStock/Hiraman

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

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

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

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

SOSMB-Q424-007