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In the United States, anyone can start a new business. One of the first steps is choosing the best type of business entity for the company you’re starting. Let’s take a look at the types of business entities and the business entity definitions.

💡 Recommended: How To Incorporate

Sole Proprietorships

A sole proprietorship is the simplest type of business entity. Creating one requires little or no paperwork, and it isn’t a corporation. The owner is the business.

Definition and Characteristics

A sole proprietorship is an unincorporated business in which the owner is the only employee. There’s no need to register with the state, but to operate in certain industries, you may have to obtain a business license or permit. If you’d prefer not to do business under your legal name, you can create an alias known as a DBA, which stands for “Doing Business As.”

The advantages of a sole proprietorship are its simplicity and the low cost of creating it. Handling taxes is straightforward: You report the business’s profits on your personal tax return using Schedule C. The disadvantage is that you are personally responsible for any business losses, since there’s no legal separation between your individual and business finances.

Partnerships

A partnership will have multiple owners. This type of business entity has two kinds of legal structure: general partnerships and limited partnerships.

General Partnerships

A general partnership is basically a sole proprietorship with two or more owners. As with a sole proprietorship, you won’t need to file any paperwork with the state. But you will want to draw up a partnership agreement among the owners. The agreement should specify how the business partners will divide any profits or losses, which will be reported on the partners’ personal tax returns. General partnerships also do not shield participants from personal liability.

Limited Partnerships (LPs)

A limited partnership, or LP, requires registration with the state. This type of partnership specifies which people will operate the business and assume liability — called general partners — and which ones will act only as investors. The investors are known as limited partners or silent partners. If additional capital is needed, general partners can raise it via small business loans.

An LP structure makes it easy for general partners to run the business and raise money from limited partners, who aren’t liable for debts beyond their initial investment. If a limited partner decides to leave, the business can continue. Profits are shared based on the terms of the partnership agreement, which should include how and when profits are distributed.

For tax purposes, LPs are considered “pass-through” or “flow-through” entities. This means that the enterprise’s taxes are paid by the individual partners via their personal income tax returns, rather than separately by the partnership.

Another type of limited partnership is a limited liability partnership, or LLP. This is a type of partnership often used by professional services companies, such as law firms or dental practices. It shields each partner from extensive personal liability in cases of, say, malpractice. LLPs involve written partnership agreements and must typically file annual reports in most jurisdictions.

Recommended: Sole Proprietorships vs LLC: How to Choose

Corporations

Corporate types of business entities have more complicated legal structures. The two main types are C corporations and S corporations. The IRS automatically considers all corporations to be C corporations. To secure S corporation status, owners must take additional steps.

C Corporations

C corporations are owned by shareholders, operated by management, and overseen by a board of directors. As a business entity that’s legally separate from its shareholders, a C corporation files its own tax returns and pays income taxes at the corporate rate. Shareholders pay taxes on their share of the profits when they file their personal tax returns. This so-called “double taxation” is a disadvantage of C corporations.

S Corporations

A C corporation can become an S corporation — or “S corp,” as it’s commonly known — by filing IRS Form 2553 and meeting certain IRS eligibility requirements. S corps provide some tax advantages to their owners. In most states, the shareholders can pass the business’s profits and some losses through to their personal income taxes.

Like C corps, S corps still need to create bylaws and hold board meetings and shareholder meetings. But unlike C corps, S corps are limited to 100 shareholders and can issue only one class of stock.

You may have heard of B corporations. That’s not actually a type of business entity. Instead, B corp status is a certification issued by a third party. It’s meant to recognize a company’s commitment to public transparency and the highest standards of verified social and environmental performance.

Close corporations, also known as closely-held corporations, are typically smaller companies. They have less formal corporate governance and cannot publicly trade shares. A close corporation could be operated by a small group of shareholders without a board of directors.

Limited Liability Company (LLC)

A limited liability company, or LLC, has some features of unincorporated sole proprietorships and partnership, as well as elements of more formal S corps and C corps. Like a corporation, an LLC is a separate business entity that limits the liability of an individual. But LLCs require less paperwork, as you don’t need to have shareholders or a board of directors. As for taxes, owners of an LLC can choose to have the income taxed directly (as with a C corp) or pass it through to their personal tax filings.

Forming an LLC is more expensive than creating a sole proprietorship or partnership. The cost of creating an LLC can range between $35 and $300. And while some states don’t charge an annual fee to renew an LLC, most do; California’s annual $800 fee is the highest.

An LLC can have one member or multiple members. For a multi-member LLC, you need to create an operating agreement that sets out the rules and structure for the business.

Licensed professionals such as doctors and lawyers have the option of creating a professional limited liability corporation, or PLLC. The specific criteria vary by state.

Recommended: What Are the Tax Benefits of a LLC?

Factors to Consider When Choosing a Business Entity

Given the many types of business entities, it’s important to carefully choose the one that best suits your needs. For people who are just starting a business on their own, a sole proprietorship offers a speedy, simple and low-cost solution that enables them to begin doing business immediately. There are few tax implications, but also no liability protections.

It’s easy to convert a sole proprietorship into a partnership as your business grows, if that’s what you choose. That way, even with more than one owner, the company retains all of the advantages of a sole proprietorship.

For other businesses, creating an LLC will make more sense. Choosing LLC status offers you a way to quickly register your business, and it allows for the eventual hiring of employees. An LLC’s key advantage over a sole proprietorship or a partnership is the owner’s limited exposure to liability and loss.

A C corp can be a wise choice for businesses that anticipate substantial growth. It requires the creation of a board of directors; protects the owners from personal liability; and allows you to sell shares, making it easier to raise funds. However, profit from a C corp is subject to corporate taxes in addition to personal taxes paid by the shareholders. If your company qualifies as an S corp, you can escape this double taxation.

The Takeaway

The various types of business entities come with different advantages, costs, levels of complexity, and tax challenges. Not all of them will be suitable for your new business. As you consider your options, research their financial, legal, and recordkeeping details to ensure you choose the one that makes the most sense for your business needs.

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

Photo credit: iStock/visualspace

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.

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

SOSMB-Q424-046

Business owners require capital to start and grow their companies — and occasionally they need that funding right away. To close a gap in cash flow or jump on a fleeting business opportunity, some owners will take out same-day business loans. Let’s take a closer look at what the varieties of same-day loans are, what they require, and how to get one.

What Are Same-Day Business Loans?

Same-day business loans are those that are approved and available within 24 hours, as the name suggests. This is a much shorter turnaround time than most types of business loans. Some lenders have streamlined their approval processes for same-day loans to require less-extensive paperwork.

Types of Same-Day Business Loans

Short-term loans, lines of credit, merchant cash advances, and invoice financing are all commonly used for same-day business funding. The terms and conditions tend to differ from those of regular small business loans. The details of these four same-day options will help you identify which kind of instant business loan best meets your needs.

Short-Term Loans

Term loans require the borrower to make regular, fixed payments on a set schedule. Short-term business loans often call for repayment within 12 months or less, though some may last up to 24 months. A short-term business loan may or may not require collateral.

Business Lines of Credit

A business line of credit, like a credit card, enables the borrower to spend the available funds at any time. Repayment terms are flexible: A business can take money out, repay it, and borrow again, as often as necessary.

Merchant Cash Advances

A merchant cash advance is a type of short-term loan. The lender advances a lump sum to a business, with repayment conditions based on a percentage of future sales. This type of loan can be funded quickly, but be aware that its interest rate can be significantly higher than other forms of financing.

Invoice Financing

This arrangement enables a business to borrow money against invoices — that is, against the outstanding balances due from its customers. Typically invoice financing is meant to help a business with its cash flow while it pays its employees and suppliers. One type of invoice financing, known as invoice factoring, involves selling your unpaid invoices to a third party that collects its money from each bill when it’s paid.

Who Qualifies for Same-Day Business Loans?

Requirements for same-day business loans will vary by lender. Most will have a minimum credit score that could be as low as 500, but is often 600 or higher. Some lenders that offer same-day business funding may want to look at several months of bank statements, while others may also consider a business’s outstanding invoices.

Advantages of Same-Day Business Loans

The primary attraction of instant business loans is their speed. When a lucrative deal presents itself, quick access to capital may allow a business to place orders right away and start meeting demand for its goods and services.

Another advantage of same-day business loans is the lack of paperwork. While a long-term business loan could take weeks or months of preparation, you can often apply for a same-day loan in minutes.

A same-day business loan can also offer flexibility, in that your company is permitted to use it for any purpose. In contrast, many long-term business loans are only approved for specific uses.

Potential Drawbacks

Same-day business loans have drawbacks as well. For example, same-day business loans often have higher interest rates and fees, to account for the lender’s increased risk of loss. A same-day loan will also have shorter repayment terms. And if a business uses multiple short-term loans — potentially to pay off existing ones — it risks getting caught in a debt cycle that can be difficult to resolve.

How to Apply for a Same-Day Business Loan

Applying for a same-day business loan can be quick, but you’ll still need to take some time to prepare your application. You’ll want to select the right type of loan for your needs, and then shop around to find the best combination of rates, terms, and fees that you can qualify for.

Then you’ll need to gather the required documentation. This can include your bank statements, profit and loss statements, and even your outstanding invoices.

But once you’ve filled out the application and provided the required documentation, you should get a decision within hours.

Alternative Financing Options for Businesses

It’s easy to apply for instant business loans, but there are other possible sources of short-term capital to bear in mind as well.

A small business credit card lets you access funds and gives you a secure, convenient repayment method. Small business credit cards are approved based on the applicant’s personal credit history and other qualifications, meaning that the primary cardholder is always responsible for repayment. Some small business credit cards will offer up to a year of interest-free financing on new purchases, and nearly all cards will offer a grace period in which interest can be avoided if the statement balance is paid in full.

For longer-term financing at lower interest rates, traditional bank loans are also available to small businesses. In particular, business owners may want to approach the U.S. Small Business Association (SBA). The SBA backs small business loans that are provided by designated lenders who approve and manage their loans. It facilitates 7(a) bank loans for various business purposes.

Your company may qualify for 504 loans, fixed-rate financing for major assets provided by community-based, nonprofit SBA Certified Development Companies regulated by SBA. The agency also arranges microloans of $50,000 or less for businesses and certain childcare centers.

Best Practices for Using Same-Day Business Loans

Because same-day business loans can be easy to obtain, it’s crucial that business owners keep in mind a few best practices for handling that money.

First, it makes sense to only get a loan for the amount you actually need. Overborrowing will lead to higher payments over the life of the loan, forcing you to spend money your business may need elsewhere.

Once you have the loan, it’s important to make your payments promptly. Short-term loans typically have high interest rates and fees that can be extremely costly if you miss a payment.

The best way to avoid late fees and other penalties is to set up automatic payments. Autopay helps you increase the amount of your monthly payments to the maximum you can afford. Making larger payments will enable you to pay off the loan sooner, thereby saving money on interest charges.

If you find yourself unable to pay off the same-day loan early, you may want to add some long-term financing. Long-term business loans at lower interest rates can save you money if you use the principal to pay off your higher-interest short-term loans.

The Impact of Same-Day Loans on Business Credit

As with any lender, your same-day loan provider is likely to supply balance and payment information to the major consumer and small business credit bureaus. During the repayment phase of your same-day loan, owing a large amount may temporarily lower your business’s credit score. When you make timely payments on your loans, though, it’s likely to help your business credit rating. Successfully paying off your debt will add positive information to your business credit report.

The Takeaway

Same-day small business loans often help companies meet urgent business needs in the short term. If you’re considering one, start by calculating how much debt your business can afford to take on. Then figure out which instant business loans might work best for your company by comparing the lenders’ rates, terms, fees, and turnaround time.

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.

Photo credit: iStock/wutwhanfoto

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.

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.

SOSMB-Q424-045

When you’re starting a business, you may opt to structure it as a sole proprietorship. A sole proprietorship is one of the simplest and easiest business entities to establish, which is why many consultants, contractors, and entrepreneurs decide to go this route.

What Is a Sole Proprietorship?

A sole proprietorship is a business run by just one person, as its name implies. Here, we take a look at this type of business entity to give you a clear picture of its pluses and minuses.

Definition and Basic Characteristics

A sole proprietorship is an unincorporated business that’s owned and operated by one individual.

If you’re the only member of a domestic limited liability company (LLC) and choose to treat it as a corporation — as many business owners do for tax purposes — the IRS does not consider you a sole proprietor.

Legal Status of Sole Proprietorships

Anyone who starts doing business without incorporating is considered a sole proprietor. Legally there is no separation between you and your business, so the company’s debts and assets are treated as your personal debts and assets.

In some states, sole proprietors in certain industries must apply for various business licenses or permits. You may also be required to register a name for your business.

Advantages of Sole Proprietorship

Sole proprietorships are popular for several reasons. First, it’s easy to set one up. Depending on your state, you may have a minimal amount of paperwork that’s easy to complete online, or you may not have to file anything at all. Also, being a sole proprietor gives you complete control of your company. There are no employees or supervisors to manage; it’s just you.

Finally, there’s the flexibility. You can convert your sole proprietorship into another type of business entity, such as an LLC or an S corporation, at any time. You can do this later as you acquire employees or find that your business needs have changed.

Disadvantages of Sole Proprietorship

Sole proprietorships have their downsides as well. As mentioned above, a sole proprietorship treats your business assets as personal assets, meaning you’re individually liable for any company losses. If your business were to lose a lawsuit, you yourself would be responsible for any damages. Getting small business loans can be more difficult for sole proprietors, as banks can consider these businesses to have a higher risk.

Furthermore, sole proprietors may find that having a one-person business can complicate their work-life balance. When your business is run by you and you alone, it may seem like you’re always at work.

Operating as a sole proprietorship also limits the business’s lifespan. When you retire, the business will cease to exist. You will be able to sell off the business’s assets, but not the business as a whole.

Sole Proprietorship vs. Other Business Structures

When planning your new business, also consider alternatives to a sole proprietorship. Each will have its pros and cons.

Limited Liability Company (LLC)

An LLC structure can protect owners’ personal assets from bankruptcy or lawsuits, unlike a sole proprietorship. Getting a business loan for an LLC is easier than getting one for a sole proprietorship. However, setting up and maintaining an LLC costs more, due to state fees and annual reports, and taxation rates and rules may differ.

Partnerships

If more than one person will own the new business, it’s automatically a general partnership (unless the owners opt to make it an LLC). Establishing and running a partnership is simple, but as with a sole proprietorship, owners have no financial protections; they are personally responsible for any losses or damages incurred by the business. An LLC can be equivalent to a partnership for tax purposes.

Corporations

A standard corporation — often called a C corporation — is its own entity, legally separate from its owners. This means that the corporation, not its owners, are held legally liable for damages. There are also tax considerations. The corporation pays tax on its profits, while its owners and employees also pay taxes on their earnings. An S corp is a distinct type of corporation that, like a sole proprietorship, avoids this type of double taxation.

Recommended: Sole Proprietorship vs LLC: How to Choose

Who Should Consider a Sole Proprietorship?

A sole proprietorship can be ideal for a small business owner without employees who wants to get a company up and running quickly. This structure can work well for small business owners who have very little exposure to legal liability. Examples would include freelance writers, artists or online product resellers.

Setting Up a Sole Proprietorship

With little or no paperwork involved, anyone can start a sole proprietorship in minutes and start charging for their products or services. Bookkeeping is often simple, with billing based on standard “Net 30” invoices.

Depending on your field and the state you’re doing business in, there may be no legal requirements at all to operate as a sole proprietor. Nevertheless, for certain industries — such as barbers, electricians, plumbers, and architects — you may be obligated to register or get a business license.

With a sole proprietorship, you can use your own legal name as the name of your business. You may wish to file DBA (“Doing Business As”) paperwork to register your business name. Depending on which state you’re in, this step may not be necessary, but it does help you establish a separate identity for your business.

For example, instead of operating a roofing business as just “Bob Smith,” you could call your company “The Roofing Guy,” “Tri-State Roofing,” or any other name that’s available.

Tax Implications for Sole Proprietors

Sole proprietors’ income is subject to pass-through taxation. This means that the business owner reports business income or losses on their personal tax return. With their annual IRS Form 1040, they must file a Schedule C, as well as a Schedule SE for self-employment tax used in calculating Social Security benefits.

In addition, each quarter sole proprietors must pay estimated taxes using Form 1040-ES.

Recommended: What Are the Tax Benefits of a Limited Liability Company (LLC)?

Growing and Evolving Beyond Sole Proprietorship

If your business outgrows its sole proprietorship status, you can easily convert it to another type of business. All you need to do is to file the appropriate documents for an LLC, partnership, or corporation. Nothing else is needed to dissolve the sole proprietorship.

You may also wish to file an IRS Form SS-4 to obtain an employer identification number (EIN). Like a Social Security number (SSN), an EIN is a nine-digit number that businesses use to identify themselves to the IRS for tax filing and reporting purposes. You may also use an EIN when applying for a small business credit card or for other banking purposes.

The Takeaway

A sole proprietorship is the easiest type of business to create. This type of business has both advantages and drawbacks, including tax and liability considerations. Understanding how a sole proprietorship differs from partnerships and various corporate entities will help you choose the best structure for your small business needs.

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

FAQ

How do I register a sole proprietorship?

If you’re operating your sole proprietorship under your legal name, no registration is required. Otherwise, you may wish to register a DBA (“Doing Business As”) name. Depending on the nature of your business, your state may also require that you obtain a license.

Can a sole proprietorship have employees?

No. In a sole proprietorship, the owner is the company’s only employee. But a sole proprietor may hire independent contractors as needed.

What happens to a sole proprietorship when the owner dies?

When a sole proprietor dies, the business ceases to operate. The business’s assets and liabilities become part of the owner’s estate.

Photo credit: iStock/Rockaa

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.

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.

SOSMB-Q424-018

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

What Is the Business Failure Rate?

According to the latest data from the U.S. Bureau of Labor Statistics (BLS), about one out of five new businesses will fail in the first year of operation. The rate of failure changes as businesses get older. There are several ways to define and measure business failures.

Defining Business Failure

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

Overall Statistics on Business Failure Rates

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

Recommended: Losing Sleep Over Small Business Financing

Failure Rates by Industry

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

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

By contrast, companies in mining, quarrying, and oil and gas extraction survived their first year at a rate of 79.40%. But after five years, the survival rate plummeted to 40.2%. Ten years in, a mere 24.5% of firms were still in business — the lowest 10-year survival rate of all 19 industries identified.

Factors Contributing to Business Failure

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

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

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

•  Poor management. For businesses in the same sector, the quality of executive management can make the difference between one company’s success and another’s failure. Poor management can be a factor in the failure to attract and retain employees, funding missteps, or shortsighted strategic decisions.

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

Recommended: The Six Reasons Small Businesses Fail

Business Survival Rates Over Time

When looking at how many businesses fail across all industries, the overall closure rates tell a sobering story. Approximately 20% of all startups fail in their first year; within five years, the rate is roughly 50%. By the 10-year mark, almost two-thirds (65.3%) of startups have failed.

How to Interpret Business Failure Statistics

Failure is a tough word, because nobody likes to fail. That’s why it’s important to know the odds. If your company operates successfully and profitably for 10 years before going out of business, you need not consider that a failure. After all, a mere 34.7% of businesses endure longer than a decade. The longer your business survives and thrives, the more the risk of starting it will have paid off — even if the business eventually ceases operations.

Strategies to Avoid Becoming a Statistic

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

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

Recommended: Mompreneurs: Generational Wealth and Real-Time Struggles

The Takeaway

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

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

FAQ

What percentage of businesses fail in the first year?

Statistics vary, but the consensus is that between 20% and 25% of all businesses fail in their first year.

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

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

Are certain locations associated with higher business failure rates?

Business failure rates do vary by state. Washington state has the highest one-year failure rate at just over 40%, with California’s being the lowest at 18.5%.

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

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

Photo credit: iStock/SIphotography

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.

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.

SOSMB-Q424-047

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.

💡 Recommended: What Is Working Capital?

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 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.

💡 Recommended: Refinance Business Loans

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, which 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 small 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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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 can be easier to qualify for than bank loans, since they are partially guaranteed by the Small Business Administration. However, you’ll still need to meet strict criteria to refinance with an SBA loan. These loans are also typically slow to fund.

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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.

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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 loan term

•  Payment schedule

•  Payment amount

•  Current APY

You’ll also want to determine if your existing 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 your documents. 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 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.

6. Apply for Business Loan Refinancing

Once you’ve determined the best refinancing option for your needs, you’ll want to gather 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 blindly rush into. 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.

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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.

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.

Business debt refinancing, 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.

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.

Photo credit: iStock/Daenin Arnee

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