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

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

•   The type of small business loan you need

•   Which kind of lender works best

•   Interest rates and fees

•   Repayment terms

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

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

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

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

What Is a Loan Repayment Term?

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

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

Recommended: Delayed Draw Term Loans

Typical Small Business Loan Terms by Loan Type

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

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

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

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

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

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

Recommended: Unsecured Business Loans

SBA 7(a) Loans

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

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

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

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

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

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

◦   Is a for-profit enterprise

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

◦   You have a reasonable amount of equity in the business

◦   You have exhausted all other business and personal financing options

Term Loans

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

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

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

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

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

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

Bank Loans for Small Businesses

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

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

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

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

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

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

Recommended: Fundamentals of Business

Business Line of Credit

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

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

•   Repayment term: Typically six months to five years.

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

•   Interest rate: Depends on lender and creditworthiness.

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

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

Microloans

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

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

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

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

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

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

Invoice Factoring or Financing

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

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

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

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

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

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

Equipment Financing

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

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

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

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

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

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

Inventory Financing

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

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

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

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

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

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

Merchant Cash Advance

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

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

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

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

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

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

Recommended: Working Capital Line of Credit

Interest Rates and Fees Explained

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

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Fixed vs. Variable Interest Rates

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

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

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

Origination Fees and Other Charges

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

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

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

APR vs. Interest Rate

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

Recommended: Debt-to-Income Ratio

Loan Maturity Date

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

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

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

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

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

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

What Is a Prepayment Penalty?

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

Recommended: Stated Income Business Loans

How Repayment Frequency Impacts Your Cash Flow

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

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

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

Which Business Loan Terms Are Right for You?

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

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

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

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

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

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

•  Do you have collateral you can offer to lenders?

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

Recommended: SBA 504 vs. 7a

How to Compare Loan Options Effectively

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

•  Type of financing and how well it meets your needs

•  Maximum amount available

•  Length of loan term

•  Repayment schedule and whether it aligns with your business

•  Interest rate (or factoring fee)

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

•  Timeframe for funding

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

The Takeaway

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

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

FAQ

What are common terms for a business loan?

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

What is a typical SBA loan term?

Here are some typical term lengths for SBA loan products:

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

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

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

•  10 years for SBA 504 loans used for equipment financing

•  No more than seven years for SBA microloans

How long can a business loan term be?

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

What are the three types of term loans?

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

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

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

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SOSMB-Q425-018

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

What Is Cost of Goods Sold (COGS)?

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

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Components of COGS

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

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

Raw Materials

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

Labor Costs

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

Manufacturing Overhead

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

Freight and Shipping Costs

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

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

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

Packaging Costs

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

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

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How To Calculate COGS

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

COGS Formula and Example Calculation

The COGS formula is:

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

The components are:

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

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

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

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

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

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

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

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

An example of calculating COGS would be as follows:

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

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

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

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

Periodic vs. Perpetual Inventory Method

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

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

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

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

Why COGS Matters for Your Business

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

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

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

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

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

How COGS Affects Financial Statements

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

•  Gross profit is revenue minus COGS.

•  Gross margin is gross profit divided by revenue.

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

Ways To Reduce COGS

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

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

Common COGS Calculation Mistakes

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

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

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

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

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

COGS vs Cost of Revenue

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

COGS vs Operating Expenses

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

The Takeaway

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

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

FAQ

What is included in the cost of goods sold?

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

How does COGS impact business profitability?

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

Is COGS the same as expenses?

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

Can service-based businesses calculate COGS?

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

How do I reduce my cost of goods sold?

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

Photo credit: iStock/svetikd

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

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

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

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSMB-Q425-015

Owning a small business can mean keeping a lot of plates spinning, including making sure the cash is flowing during fluctuations in income and sales. You might need to buy more materials, pay additional workers, improve your physical location, and deal with other expenses.

When those moments arise, you may need a little outside help to cover costs, and a short-term business loan can be helpful. Here, you’ll learn more about these loans, their pros and cons, and whether they might be right for you.

What Is a Short-Term Small Business Loan?

A short-term small business loan is a loan that is designed to help small businesses maintain cash flow and cover small expenses. Because they are meant to be paid off on a shorter timeline (usually within three to 24 months) than long-term loans, they tend to have higher interest rates and can be secured very quickly. Basically, they can get you cash fast.


💡 Quick Tip: Need help covering the cost of a wedding, honeymoon, or new baby? A SoFi personal loan can help you fund major life events — without the high interest rates of credit cards.

What Can You Use a Short-Term Business Loan for?

There are several common uses for short-term loans. A popular one is to cover project start-up costs. If your business is launching a new product or service, a short-term loan can help you avoid disrupting your business’s cash flow.

They can also help bridge cash flow gaps related to uneven sales or seasonal effects, cover emergency repairs, and purchase discounted inventory that you’re confident will sell fast and at a profit.

A short-term loan can also help small businesses take advantage of unexpected growth opportunities by giving them the capital they need to keep production running in a short time period.

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What Are the Drawbacks of Short-Term Business Loans?

In addition to high interest rates, short-term loans often require frequent repayments. Instead of the customary monthly payments that come with a lot of loans, short-term business loans often require weekly, and in some cases daily, repayments. While these payments tend to be small, they can be difficult to manage, particularly if your business has uneven sales or a lower cash-flow.

There’s also a risk of accumulating debt when using short-term business loans. Because they can be so easy to get (note: there are still eligibility requirements for these types of loans), using them could potentially lead to a business owner relying on this type of small business debt financing.

This could lead to a debt trap where someone would continue rolling over their short-term debt instead of paying it off on the predetermined repayment timeline. Ultimately, rolling over the debt means the business owner would accrue significant interest if they weren’t able to pay the short-term business loan within the initial term.

Recommended: Typical Small Business Loan Fees

What Alternative Financing Options Are Available?

There are a number of alternative financing options when you need cash for your company.

•   A business credit card is another way to cover small expenses that you plan to pay back quickly. On the flip side, business credit cards can come with high interest rates. And credit card debt is considered “revolving,” which involves borrowing against a credit limit, as opposed to paying off your debt on a defined term.

•   Short-term lines of credit can help you manage day-to-day cash flow, too. Lines of credit can help provide flexibility for business owners. You can borrow up to a set amount of money but are only required to pay interest on the actual amount of money that you borrow.

You can then borrow and repay the funds on a payment schedule similar to how a credit card works. Similar to credit cards, this is considered a “revolving debt.” Short-term lines of credit may come with maintenance fees. And the interest rate could go up if you fail to pay on time.

There are many financing options available to help pay for your business expenses. Short-term business loans can help you get the cash you need for your business quickly, and pay it off on the predetermined schedule, or add additional payments as your cash flow picks back up again.

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About SoFi Personal Loans

While you cannot use a personal loan for business expenses, there may be times in your life that a personal loan is appropriate; say, if you want to consolidate your credit card debt (which could free up funds for your small business). In those situations, see what SoFi offers.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

How long is a short-term business loan?

Short-term business loans typically have a term of three to 24 months for repayment.

What can short-term business loans be used for?

A short-term loan could be used in a variety of ways. If extra inventory or staffing is needed during an upcoming busy season (such as the holidays), a short-term loan could be helpful. Another example: This kind of loan might also help finance the expense of a repair or new piece of equipment needed by a business.

What is a long-term business loan?

A long-term business loan lends cash to an enterprise with a repayment schedule that usually lasts 10 to 20 years.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q425-017

EBITDA and revenue are two key metrics of a company’s health and financial performance. Revenue is the amount of money a company brings in from its operations, while EBITDA is the revenue that’s left after subtracting the cost of goods sold and some other operational expenses.

Analyzing revenue and EBITDA serves different purposes for a small business. Read on to learn why each metric is important, the differences between revenue and EBITDA, and how to calculate these numbers.

What Is EBITDA?

EBITDA is a measure of profitability that stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. In other words, it’s the earnings that a business has generated prior to any debt interest expenses, tax payments, and depreciation/amortization costs of the business.

While interest, taxes, depreciation, and amortization are expenses that get considered in other financial metrics, EBITDA doesn’t factor these values in because they are outside management’s operational control. Since EBITDA adds these values back to net income (which is gross business income minus all business expenses), many analysts believe that EBITA is a better way to measure how well a business is run.

It’s not required to include EBITDA in an income statement, but if it were, it would appear a few lines below the revenue line item. A business’s EBITDA number will always be smaller than its revenue figure, as certain operating expenses are deducted from revenue to arrive at it.

Recommended: What Is Adjusted EBITDA?

What EBITDA Does

EBITDA is often used by analysts to assess a business’s financial performance and operational efficiency. Because EBITDA adds back interest, taxes, depreciation, and amortization (expenses that don’t directly reflect a company’s decisions) to a company’s net income, it shines a light on a business’s ability to generate cash flow from its operations.

Depreciation and amortization, for example, are non-cash expenses – they’re considered costs on an income statement but do not require the actual outlay of money. While interest and taxes do require payment in cash, they are non-operating expenses not directly affected by the business’s primary activities.

EBITDA may be calculated by investors or when you’re applying for a small business loan to estimate how well your company will be able to pay its bills and maintain or increase net income.

Recommended: Comparing Operating Income and EBITDA

How EBITDA Is Calculated

One of the most common ways to calculate EBITDA is to start with net income (the bottom line of the income statement), and then add back the entries for taxes, interest, depreciation and amortization.

EBITDA Formula

Net income + Taxes Owed + Interest + Depreciation + Amortization = EBITDA

An alternative way to calculate EBITDA is to start with operating income. Operating income is also referred to as operating profit or EBIT (Earnings Before Interest and Taxes). It’s the amount of revenue left after deducting the direct and indirect operating costs from sales revenue. If you add depreciation and amortization to operating income, you get EBITDA.

Operating Income + Depreciation + Amortization = EBITDA

Recommended: EBITDA vs Gross Profit

Why Businesses Use EBITDA

Although EBITDA does not fall under Generally Accepted Accounting Principles (GAAP), it’s frequently used by companies seeking to compare their EBITDA with the standard in their field to see if they should work on improving business performance. It’s a relatively intuitive metric and easy to calculate, and it’s particularly useful for businesses that take on a lot of debt for investments or infrastructure.

Lenders may want to see the EBITDA of a company to get a sense of whether it will be able to make good on its debts, while investors use it to evaluate a company’s value.

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What Is Revenue?

Revenue (also referred to as sales or income) consists of all income generated by a business’s core activities before expenses are taken out. It generally includes both paid and unpaid invoices. On an income statement, revenue is listed on the top line, which is why accountants simply refer to it as the “top line.” (Some companies may also use a metric called “net revenue,” which subtracts any sales-related adjustments such as discounts and returns from revenue, but it’s not recognized under GAAP.)

Revenue can come from several different places, including:

•  Product sales

•  Fees charged for services

•  Rent

•  Commissions

•  Interest on money loaned

Revenue is typically reported quarterly and annually. Annual business revenue is how much income a company generates during one year.

While revenue is vital to a company’s longevity and financial health, it doesn’t show the complete picture. Because it’s a top line item, it doesn’t take into account how much the company had to spend to make that money.

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What Revenue Does

Revenue is a measurement of all sales activity and can indicate how well a business is doing in the market. Revenue is also what allows a business to pay its employees, purchase inventory, pay suppliers, invest in research and development, sustain itself, and grow.

Revenue can also be used as a measure of how sales are increasing or decreasing over time. If revenue is increasing from one quarter or year to the next, then the company is seeing success with its initiatives. Declining revenues year over year means that a company is shrinking or faltering.

Businesses generally aim to increase their revenue and lower their expenses in order to maximize profit.

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How Revenue Is Calculated

Revenue is the sum of income from the sale of goods and services. Money received from one-time events and investment income are usually listed separately.

The formula for total revenue is:

Price x Quantity Sold = Total Revenue

Revenue does not take any expenses into account.

Types of Revenue (Operating vs. Non-Operating)

Companies may find it useful to differentiate between operating vs. non-operating revenue. Operating revenue is generated by sales of the company’s core products. Non-operating revenue is the result of one-time events, like being awarded cash in a lawsuit or selling a large asset, such as a building. It’s much less predictable than operating revenue. The two are usually shown separately on an income statement.

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Comparing EBITDA vs. Revenue

While EBITDA and revenue are related financial metrics, they have some distinct differences. Here’s a look at how they compare.

Recommended: EBIDA Explained

Similarities Between EBITDA vs. Revenue

Both EBITDA and revenue are measures of a company’s financial performance and can be important predictors of a business’s future prospects.

The more revenue a company generates, for instance, the more money it has to work with to pay down expenses and generate a profit. (This is also true when we look at net revenue vs. EBITDA.) A strong EBITDA number, on the other hand, indicates that a company will be able to pay its bills and maintain or increase net income. It also suggests that a company is being run well.

Investors will often look at both revenue and EBITDA to gauge the health of a business.

Differences Between EBITDA vs. Revenue

The main difference between revenue and EBITDA is that revenue measures sales activity, while EBITDA measures how profitable the business is. (Again, this is also true for net revenue vs. EBITDA.)

Revenue is calculated by adding up income from all business operations, whereas EBITDA takes that revenue and then subtracts expenses in order to measure profit.

Another key difference is that the Financial Accounting Standards Board (FASB), which establishes the rules and standards of GAAP, requires revenue to be reported on the income statement, but not EBITDA.

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When to Use EBITDA vs. Revenue

Both these metrics can be useful, but it’s important to use them appropriately, based on what they actually measure.

Revenue is particularly useful for measuring growth. By tracking it over time, you can see if your company is expanding or contracting and you can compare your company’s revenue against that of others in your industry to see where it falls in the range of similar companies.

EBITDA can help you (as well as lenders and investors) understand how efficiently your company is operating. By eliminating financial factors over which you have no control, it focuses on how well your company is doing. It can also be used to compare different companies.

Pros and Cons of EBITDA

Where EBITDA Shines

Many analysts, business owners, and investors prefer EBITDA over other business metrics because it specifically measures the operational profitability of a firm.

When calculating EBITDA, the only costs subtracted from revenue are ones that are directly linked to the company’s operations (such as rent, salaries, marketing, and research). Capital structure decisions, which are reflected in depreciation, amortization, and debt expenses, aren’t included. As a result, it gives analysts a way to more accurately compare performance between companies with different capital structures.

Limitations of EBITDA

However, EBITDA doesn’t reflect a business’s actual net earnings (gross business income minus all business expenses). Indeed, some companies can report a seemingly strong EBITDA while stating negative profits on the bottom line.

EBITDA can sometimes be misleading because costs associated with debt aren’t included. This means that you may overlook any unhealthy debt decisions made by the company if you review only the EBITDA.

EBITDA also excludes depreciation and amortization expenses. However, machines, tools, and other assets lose their value over time, and copyrights and patents expire. EBITDA fails to account for these costs.

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How Investors Use Revenue and EBITDA in Valuation

When investors are determining the value of a company, they may use the company’s revenue or EBITDA metrics in conjunction with valuation multiples (financial ratios that compare the value of a company to different metrics).

For companies that are young and high-growth, have negative or uneven earnings, or prioritize long-term growth over immediate profitability, investors may look at revenue, in relation to revenue valuation multiples, to assess the company’s value. For companies that are more established, profitable, and in traditional industries, investors are more likely to use EBITDA and EBITDA valuation multiples in their evaluations.

The Takeaway

Both revenue and EBITDA are used to analyze and evaluate how well a company is performing. Revenue is the key top line on a financial statement, showing income generated by the company’s sales activities before expenses are deducted. EBITDA starts at the bottom of the income statement with net income, then adds back expenses (like interest on debt) that aren’t directly related to a company’s operations.

EBITDA can be helpful for seeing how a business performs from year to year, but it does not reflect a company’s real income. That’s why if you’re exploring business loans or looking to attract an investor, EBITDA will likely be one of several metrics used to gauge the health of your business.

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

Are EBITDA and revenue the same?

No. Revenue measures sales while EBITDA (earnings before interest, taxes, depreciation, and amortization) measures the profitability of a business.

Can EBITDA be higher than revenue?

No. EBITDA (earnings before interest, taxes, depreciation, and amortization) will always be lower than revenue because it tells you how much revenue is left after subtracting the cost of goods sold and some other operational expenses.

What is considered a good EBITDA-to-revenue ratio?

EBITDA-to-revenue ratio, also known as EBITDA margin, shows how much cash a company generates for each dollar of sales revenue, before accounting for interest, taxes, amortization, and depreciation. A “good” EBITDA margin depends on the industry, but, generally speaking, an EBITDA margin of 10% or higher is considered good.

Why is EBITDA better than net income?

EBITDA will be higher than net income because it’s the net income plus interest, taxes, amortization, and depreciation. While EBITDA is not necessarily “better” than net income, it is a better indicator of whether or not the business is functioning well.

Is EBITDA a profit or loss?

EBITDA reflects the core offering profitability of a business. It shows earnings before interest, taxes, depreciation, and amortization.

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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-Q425-011

Just like mortgages and car loans, small business loans can often be refinanced. Refinancing a business loan can allow you to secure a lower interest rate or loan terms that better align with your company’s financial goals. But there are costs and other considerations to keep in mind.

Read on to learn more about refinancing business debt, including what refinancing a business loan means, the pros and cons of refinancing a business loan, loan options for refinancing, and steps to apply for business loan refinancing.

What Is Business Loan Refinancing?

Business loan refinancing involves applying for a new small business loan, either with the same lender or a different one. You go through the same application as you would for any business loan, and, once approved, you get a loan that pays off the original business loan.

Generally, the goal of refinancing is to secure a new small business loan that has better rates and/or terms, such as:

•  A lower annual percentage rate (APR)

•  Lower monthly payments

•  A longer or shorter repayment period

Whether or not a lender will offer you a loan refinance typically depends on your qualifications (such as your time in business, revenues, and credit profile), as well as how much you have paid off and how much you have left to pay on your first loan.

Pros and Cons of Refinancing a Business Loan

As with any type of small business financing, there are benefits and drawbacks to refinancing a small business loan. Here’s a look at how they stack up.

Pros

•  Lower loan costs: A lower APR or a shorter loan term can reduce the total cost of the loan.

•  Improve cash flow: Lower payments can mean more cash is available to cover operating costs, invest in new equipment, or hire more employees.

•  Pay off your loan sooner: If you refinance with a loan that has a shorter term, you’ll be able to pay off your debt faster.

•  Get a larger loan: If the new lender approves you for a larger loan amount, you could use the capital to help grow your business and potentially avoid having to take out a second loan down the line.

Cons

•  Could negatively impact credit: The new lender will need to make a hard credit pull before approving you for a loan, and that can slightly lower your score in the short term.

•  Longer loan terms can lead to higher costs: While a longer term lowers monthly payments, you can end up paying more in interest over the life of the loan.

•  Might have to pay a prepayment penalty: Some lenders charge a penalty fee if you pay off your loan early. Check with your current lender to see if there is a fee and how much it would be. You’ll want to be sure any prepayment penalty doesn’t offset the savings you’d get with the new loan.

•  May need to pledge collateral: Even if your first lender didn’t require business collateral, the new lender might require you to pledge an asset (such as cash, equipment, or inventory) to secure the loan. While collateral can help lower your interest rate, you could lose the asset if you run into difficulty repaying the loan.

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Types of Business Loans Which Can Be Refinanced

Here’s a look at the different types of business loans that can often be refinanced.

Business Lines of Credit

With a business line of credit, you’re able to borrow what you need (up to an approved limit) when you need it, and only pay interest on what you borrow. Once you repay the funds, they are available to borrow again. A business line of credit can be secured (requiring collateral) or unsecured (no collateral required).

Equipment Loans

Equipment loans provide the funds you need to purchase equipment or machinery for your business. The equipment typically serves as collateral for the loan, making the loan relatively low risk for the lender. As a result, equipment loans often come with attractive rates and terms.

Business Credit Card Debt

Though not a traditional loan, business credit cards are one of the most common forms of small business financing. If you’ve racked up expensive credit card debt, you may be able to refinance it with a balance transfer card that has a lower rate, or take a business loan with a lower rate to pay off the balance.

Short-Term Business Loans

Short-term business loans typically provide quick access to a lump sum of cash you then repay in installments (which could be daily, weekly, or monthly) over a period of three to 18 months. They can be useful for temporary gaps in cash flow and emergency expenses.

Working Capital Loans

A working capital loan is a type of short-term financing that can be used to cover a company’s day-to-day operating costs and to help level out cash flow. These loans can come in several forms, including term loans, lines of credit, and Small Business Administration (SBA) loans.

SBA Loans

SBA loans are partially guaranteed by the government and offered through various banks and other lenders. Refinancing an SBA loan isn’t always easy, however. Generally, you can only refinance an SBA loan if you have a new financing need and your current SBA lender has refused to increase or modify your loan. You may, however, be able to refinance an SBA loan with a non-SBA loan.

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How to Choose the Best Refinance Loan for Your Business

Just like when you decided on your original loan, when you refinance a business loan, there are a number of factors you should look at closely. To make an informed decision, consider the following.

Interest Rates and Loan Terms

When you’re choosing a business refinance loan, in many cases you’re likely to be looking for a lower interest rate. Perhaps the market has changed and interest rates have dropped or maybe your credit score or your business’s has improved. Either way, refinancing to a lower rate could save you money, both on a monthly basis and in how much interest you’ll pay throughout the life of the loan.

In some cases, you may be looking for a different loan term. For example, if you want to reduce the amount of your monthly payments, you might extend your loan term. While this would mean you spend longer paying back your loan and end up costing you more in total interest, it would reduce the amount of your monthly payments. On the other hand, if you can afford to repay more each month, refinancing to a shorter term would mean that you could save on what you pay in interest overall as well as letting you pay off the loan sooner.

Fees and Prepayment Penalties

As you’re considering whether to refinance a business loan, you’ll also want to take into account the potential costs of refinancing. For example, refinance loans generally include fees such as origination fees, which can be either a percentage of the loan amount or a flat fee, depending on your lender.

In addition, it’s a good idea to check whether your original lender will charge a prepayment penalty if you pay the loan off early. When lenders do charge these fees, they’re typically between 1% and 5% of the loan amount. Even if you would have to pay a prepayment penalty, bear in mind that the refinance may still be worthwhile. However, you’ll want to get all the facts so that you can assess how viable the refinance is before proceeding.

Lender Reputation and Support

Finally, as you look at possibilities to refinance business loans, consider how well regarded your potential lender is. If you have a business advisor or acquaintances in the business community, it may be helpful to ask for their recommendations. Additionally, you’ll want to be sure any potential lender offers the support that you want, such as helping you find a loan that you’re comfortable with and discussing potential risks with you in as much detail as you wish.

Business Loan Refinancing Options

If you’re thinking about refinancing a business loan, you generally have three different types of lenders to choose from.

Banks

Traditional banks typically offer the lowest interest rates and most attractive terms. However, they also tend to have the strictest qualification requirements and are generally slow to fund.

Alternative Lenders

Alternative lenders, also known as online lenders, are non-bank entities that can provide fast financing (often in a day or two) and typically have more flexible eligibility requirements than banks. Online loans tend to have higher interest rates than other options, however, so you’ll want to make sure that refinancing with one of these lenders will help cut your borrowing costs.

SBA Lenders

SBA loans typically offer competitive rates and terms, and SBA loan requirements can be more flexible than those for bank loans, since they are partially guaranteed by the Small Business Administration. However, you’ll still need to meet strict criteria and fill out paperwork to refinance with an SBA loan.

These loans are also typically slow to fund. SBA express loans are designed to require less paperwork and process more quickly than other SBA loans.

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6 Steps to Refinancing Business Loans

If you’re looking to refinance an existing small business loan, here’s a simple step-by-step guide.

1. Set Your Refinancing Goal

Before you start researching your refinancing options, it’s a good idea to consider why you want to refinance. This can help streamline your search process.

Some questions to consider:

•   Do you want to lower your monthly payments?

•   Do you want a shorter loan term?

•   Do you want to lower the total cost of your loan?

You may also want to think about your long-term business financial goals and how a refinance could affect those goals positively or negatively.

Recommended: What Is Adjusted EBITDA?

2. Calculate How Much You Owe

To find a refinance that has better rates or terms than your existing loan, you’ll want to have all these facts and figures at your fingertips:

•   Current loan balance

•   How much time is left on the loan term

•   Payment schedule

•   Payment amount

•   Current APY

You’ll also want to determine if your current lender has prepayment penalties — and if so, how the cost of those penalties could impact your refinance.

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3. Examine Your Business Financials and Documents

Before you begin looking at loan options, you’ll want to assess your qualifications. Lenders are typically interested in your:

•   Credit score (both business and personal)

•   Time in business

•   Annual revenue

•   Availability of collateral

Lenders may also want to review your company’s key financial documents, such as your income statement, balance sheet, and recent tax returns, so it’s a good idea to start gathering these documents, too. If certain aspects of your financial position — such as your business revenue or credit score — have improved since you applied for your initial loan, these are things you may want to point out when you apply for a refinance.

4. Compare Lenders

When you’re refinancing a business loan, you may have the option to apply for a refinance loan from your current lender or from a new lender. When comparing lenders and loan options, you’ll want to look at:

•  APYs (this comparison takes fees into account and enables you to compare loans apples to apples)

•  Loan amounts

•  Loan terms

•  Qualification requirements

•  Collateral requirements

5. Determine What You Qualify For

Once you’ve set your goals, assessed your financials, and researched your loan options, you’ll want to determine which loan you are most likely to qualify for.

When you apply for a loan, the lender will conduct a hard credit pull, so you want to make sure you’re confident about your eligibility to avoid multiple applications. Some lenders and online lending tools allow you to prequalify for a loan, which only involves a soft credit pull that won’t impact your credit. This can help you compare offers and hone in on the best option.

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6. Apply for Business Loan Refinancing

Once you’ve determined the best refinancing option for your needs, you’ll want to sit down with any documents you need, then complete and submit your business loan application.

When Is a Good Time to Refinance a Business Loan?

If you’ve been in business for a while and have high-interest loans from your early years, it could be a good time to refinance. But it’s not something you want to rush into without any thought. To help determine if the timing is right, here are some questions you may want to consider.

Will It Save You Money?

If you can find a loan that has a lower APR or a shorter term, it can lower the overall cost of the loan to your business, even if the monthly payment doesn’t necessarily go down. Just be sure to factor in any prepayment fees from your current lender to ensure refinancing will, in fact, lower your borrowing costs.

Has Your Credit Score Improved?

If you got your original loan when your business was new and had yet to establish credit, you may have gotten saddled with a high interest rate. If you’ve established a strong business credit profile since then, it may be worth applying for a refinance.

Recommended: What Is the Minimum Credit Score for a Business Loan?

Has Your Business Grown?

Lenders typically look at more than a company’s credit score to determine loan amounts, rates, and terms. They generally consider a number of factors, including a company’s business plan, time in business, revenues, cash flow, and available collateral. If your business has grown significantly since you applied for your original loan, it could be a good time to explore refinancing.

Are Business Conditions Favorable?

Making a realistic assessment of current conditions in your industry and the market at large is important as you consider the likelihood of your business’s growth and revenue increase. Particularly if you’re thinking about refinancing to a shorter loan term, you’ll need to be sure that realistically, you will be able to afford your new monthly payments as you repay the loan.

Business Debt Refinancing vs. Debt Consolidation

It’s not uncommon for people to use these terms interchangeably, but there is a difference between refinancing and consolidating your debt.

Debt consolidation is the process of combining multiple loans into one. You use the new loan to cover your existing debt, so instead of making multiple payments, you now only pay one lender and follow one repayment schedule.

While loan consolidation might save you money, that generally isn’t the primary goal. The main goal is to simplify your payments and make your debt easier to manage. Of course, it’s ideal if the new loan has a lower APR. That way, loan consolidation can also save your business money.

Refinancing business debt, on the other hand, is the process of taking out a new loan (generally with better rates or terms) to pay off one original loan.

Common Mistakes to Avoid When Refinancing

As you contemplate a business loan refinance, you’ll need to think strategically to make sure you’re making the best decision for your situation. Below are some common pitfalls to steer clear of.

Overlooking the Total Cost of Refinancing

When you’re looking at the benefits of refinancing – especially at lower interest rates and the money they can save you – it’s all too easy to forget about refinancing costs. Be sure you’re researching and taking the full picture into account, including potential fees, such as a loan origination fee, and any prepayment penalties that your original lender may impose. Refinancing may still be worth it, but doing the math beforehand can make you feel more secure that the refinance will save you a significant sum.

Not Reviewing Loan Terms Carefully

Your new loan won’t necessarily have the same terms as your old one. It’s essential – as it is with any loan – to read the fine print. Be sure you understand what your APY will be, how long you will be repaying the loan, whether the loan has a fixed rate or a variable one, and whether there will be prepayment penalties if you choose to pay it off early. If there’s anything that’s not clear to you, ask the lender to explain it or consult with a trusted business advisor.

Refinancing Too Early or Too Late

Timing is another key consideration. If you refinance soon after you take out a business loan, not only do you risk prepayment penalties, but you likely have not yet paid off much of your principal and conditions, including your credit score, may not have changed much. Conversely, it’s generally not advantageous to refinance toward the end of your loan term, when you don’t have much left to pay, since your savings would be minimal. What’s more, if interest rates drop and you drag your heels on refinancing, you lose the opportunity to save money with a lower rate.

The Takeaway

Business loan refinancing offers a strategic way for companies to lower interest rates, reduce monthly payments, and improve cash flow. By securing more favorable terms, businesses can free up resources to invest in growth or manage day-to-day operations more effectively.

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 you refinance a business loan?

Yes. You may be able to lower your borrowing costs by getting a new loan and using it to pay off your existing business loan.

How does refinancing business loans work?

To refinance a business loan, you apply for a new loan (either with the same or a different lender) that, ideally, has lower rates or better terms, and use it to pay off your existing loan.

Can you refinance a business’s debts with an SBA loan?

You may be able to use a Small Business Administration (SBA) loan to refinance a business loan, but you’ll have to meet specific eligibility criteria regarding your use of the loan, available collateral, and the existing loan’s interest rate.

What credit score do you need to refinance a business loan?

The minimum personal credit score lenders want to see to refinance business loans can vary significantly. However, in general, minimums can run from 500 to 680. And of course, the higher your score, the more likely you are to get better rates and terms. While there are a variety of business credit scores, many are on a scale of one to 100, and for those, lenders generally want a score of at least 70.

How long does it take to refinance a business loan?

Depending on your lender and your loan type, it can take anywhere from a few days to several months to refinance a business loan.

Photo credit: iStock/Daenin Arnee

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

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