By Lauren Ward |
SMB |
Comments Off on Writing a Business Plan: Step-by-Step Guide
A strong business plan can help you succeed at any stage in your company’s growth.
When you launch, it helps to prioritize and manage your funds. As you continue to evolve, writing a business plan gives you a roadmap to execute new opportunities. And at any point in time, it could be used to apply for loans and grants or set up a crowdfunding campaign.
Find out how to write a business plan for a small business that is designed to help you achieve your company’s unique goals.
The Importance of a Business Plan
Creating a business plan allows you to map out every crucial detail in launching and managing your company. Walking through each step helps you define your business goals, financial strategies, and both legal and organizational structures.
The document helps ensure that you focus on your core areas without getting distracted by opportunities that don’t support the plan. Externally, the business planning process helps identify funding needs and serves as support for financing applications, investor pitches, and even crowdfunding for small businesses.
When deciding how to make a business plan, first identify which type is better suited for your company. There are two primary categories: a traditional business plan and a lean startup plan.
Traditional Business Plan
A traditional business plan is the more in-depth option, discussing the company’s past, present, and future. The goal of writing a business plan is to provide a roadmap for the company. As such, it often includes:
• A discussion of the broader market to identify both upcoming challenges and opportunities the business may face.
• Any relevant expansion plans. The business plan generally outlines where the funding will come from (such as a small business loan) and what hiring needs to be done.
For a more basic business plan, you could opt for a lean startup model. Writing a lean startup model business plan requires less detail than a traditional plan and takes a more general approach to outlining the company’s information.
A lean startup business plan typically doesn’t have enough information to satisfy a lender or investor. But it can be a useful internal tool when you’re just starting out. It also provides the flexibility to experiment with business models and other details. In other words, it gives you more room to pivot as you gain experience with managing the company.
• Partnerships: Highlight the strategic partnerships that will help your business operation. This may include suppliers or manufacturers.
• Activities: In what ways will the company have a competitive advantage in the existing market? Things to consider here may be technology that could set you apart.
• Resources: What resources will allow you to create value for customers? This may be staff, intellectual property.
• Value proposition: What unique value does your company bring to the existing market?
• Customer relations: How will consumers interact with your company? Will their experience be in-person vs online?
• Customer segments: Identify your target market. Defining and understanding who your target market is can help inform overall business and marketing strategies.
• Cost structure: This section should explore the costs your business will face – such as labor or supplies. In this section, it can also be helpful to define whether your company will work on a cost-driven model or a value-driven model. Cost-driven models focus on lowering costs while value-driven models focus on creating premium value for customers.
• Revenue streams: How is the company going to make money?
There are a variety of templates, examples, and online resources that can help business owners navigate how to write a lean startup business plan.
Understanding how to write a business plan can help business owners be better prepared for both requesting funding, like a small business loan, and actually running your business.
Writing a business plan requires quite a bit of research to make sure you can clearly communicate about your company and your industry as a whole. You may not need to follow all of these business plan steps, especially if you’re a new company. But you can still provide a well-informed analysis of your market, your company’s competitive advantage, and your future plans.
As your business grows and evolves, it can be helpful to regularly update your business plan in the appropriate areas. This could give you the agility to jump on opportunities as they arise when you already have a well-prepared plan that only needs minor changes. Writing a business plan is a particularly wise investment of your time regardless of your company’s current stage.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.
Photo credit: iStock/milanvirijevic
SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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By Susan Guillory |
SMB |
Comments Off on How Do You Categorize Expenses for a Small Business?
If you run a small business, it’s important to categorize your expenses for tax purposes and to keep track of your small business spending. Many business expenses are tax deductible, which could save you hundreds, if not thousands, of dollars when it comes time to file.
Keep reading to learn what business expenses are, how to categorize them, which ones are tax deductible, and more.
What Are Business Expense Categories?
Business expenses include everything from paying rent and utilities to purchasing equipment and supplies to paying your employees. It can even include food and entertainment, travel, and purchasing office supplies.
By keeping track of what you spend and categorizing it appropriately, you’ll be eligible for more tax write-offs, which could save you and your small business thousands of dollars.
Why You Need to Categorize Business Expenses
Even if you work with an accountant, it may fall on you to make sure that the purchases you’re making for your business are entered into the appropriate categories in your accounting software.
There are, as you’ll soon learn, certain expenses you can deduct from your revenues for the year. That can help you pay less in taxes for your business. But to know how much, you’ll need to know what you spent in different categories so that you can file your taxes correctly with the IRS.
What deductible business expenses can do for you is reduce your taxable income. If your revenues last year were $250,000, but you had $50,000 in deductible business expenses, you would pay taxes on only $200,000 in revenue.
Categorizing business expenses can also help you keep an eye on where you’re spending money. Running an expense report can show you at a glance where you might be overspending so you can strategize about how best to cut back.
One good way to categorize expenses as a small business is by using accounting software like QuickBooks or Freshbooks. With programs like this, there will be some preset categories, like travel and payroll, but you may also want to add your own to keep a more detailed account of where you’re spending money.
Most accounting software will connect to your bank accounts and upload your transactions. It’s still a good idea to log in every week or month and review your transactions to make sure they’re appropriately categorized.
What Is a Deductible Business Expense?
As part of learning how to categorize expenses for small businesses, you’ll need to understand deductible business expenses.
According to the IRS, in order for a business expense to be deductible, it must be ordinary and necessary.
As an example, a vehicle you use for your contracting company would be considered ordinary and necessary for your business to operate. Thus, costs related to it, like interest on the loan and upkeep, would be deductible. But those same expenses for your personal vehicle would not qualify.
10 Key Business Expense Categories
Anything that isn’t considered working capital or cash in your accounting software is an expense. If you learn how to categorize expenses for your small business, your accounting will be easier. Here are a few common business expense categories.
1. Rent
You likely rent office or retail space for your business. You might even have an additional warehouse or storage unit. All of these should be categorized under rent.
2. Vehicle Expenses
If you use one or more vehicles for your business, you can categorize the following as business expenses:
• Auto lease
• Loan interest
• Gas
• Mileage
• Registration and fees
• Insurance
• Repairs and maintenance
• Parking
3. Advertising
If you pay for advertising or marketing for your business in the form of online ads, radio spots, or even hiring a marketing consultant, these expenses should all fall under the category of advertising.
4. Travel Expenses
Is traveling to see clients or attend trade shows part of your business? You can deduct business airline travel, hotels, rental cars, and meals while traveling when you file your taxes. Just keep all these items categorized under travel.
5. Food and Entertainment
Whenever you take a client out to dinner or host an employee lunch at the office, you’re spending money on food and entertainment for your business, so categorize it as such.
6. Office Supplies
You spend money on paper, ink, pens, printer cartridges, and other office supplies for your business. Create a category for office supplies and make sure all these expenses fall under it.
7. Payroll
Whether you have full-time employees, part-time staff, or contractors, you can categorize all of their wages under payroll. This also includes employee benefits and health insurance.
8. Services and Utilities
This category includes things like internet service and electricity, as well as phone service for your business.
If you’ve taken out a small business loan or line of credit, you may find it helpful to have a category for your loan payments. Keep in mind that only the interest on business loans is deductible on your taxes.
10. Taxes
While it’s not necessary, you may find it beneficial to create a category in your system for taxes that you’ve paid. This makes it so you can easily see how much you’ve paid year to year.
Which Business Expenses Are Tax Deductible?
All of the above business expenses are tax deductible. Some expenses are fully deductible, whereas others, such as food, receive a 50% deduction.
Other business expenses that are tax deductible include any charitable contributions made through the business, educational expenses such as workshops, courses, and webinars, childcare, and interest paid on investments.
If you work from home, you may be wondering which business expenses are tax deductible and what category a home office falls into. For home-based businesses, you can deduct (or write off) all the business expenses already listed, plus a home office.
When you file your taxes, you’ll have two options for how you claim your home office and business expenses.
• The simplified option: If you choose the simplified option, you will be asked for the size of your office space. This number is multiplied by a prescribed rate to determine your home office deductions.
• The regular method: Because you use a portion of your home for your office, you can deduct a portion of your home’s expenses, including rent or mortgage, utilities, internet, and home repairs. You’ll need to track those expenses and then determine what percentage your home office used, based on its size in proportion to your home’s total square footage.
The Takeaway
Setting up categories for your business expenses can help you pay less in taxes when you look at deductible expenses and it lets you see the big picture in terms of where your company is spending money.
Deductible business expenses include rent or interest paid on a mortgage, vehicle expenses, office supplies, marketing, and more. Interest paid on small business loans is also considered a tax deductible business expense.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.
FAQ
What can you write off as a business expense?
Any expenses considered ordinary and necessary for your business may be written off (i.e., deducted), thereby reducing your taxable income.
What are the biggest kinds of business expenses?
Your biggest business expenses may vary, depending on the business. For some businesses, it might be a commercial mortgage or equipment you need to manufacture products. For many others, payroll may be the largest expense.
How are you supposed to track your business expenses?
The easiest way to track expenses is through accounting software. Most will connect to your business bank account so that your transactions are automatically uploaded. However, you may need to review them to make sure they are categorized correctly.
How do you categorize business expenses?
Business expenses are categorized automatically through accounting software, but you can also manually categorize your spending. Business expense categories include rent, employee salaries, inventory and supplies, travel, marketing expenses, childcare, interest paid on small business loans, and more.
What categories are used for business taxes?
Categories used for business taxes include rent or interest paid on your mortgage, travel, food and entertainment, marketing expenses, interest paid on small business loans, employee wages, vehicle expenses, charitable contributions, and more. To make sure you don’t miss a deduction, it’s wise to categorize all of your business spending.
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.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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.
By Lauren Ward |
SMB |
Comments Off on A Guide to Collateral and Business Loans
Collateral refers to an asset or item of value that you promise to a lender when you take out a loan. If you default on the loan by not making payments, the lender can take that asset. If you pay back the loan as promised, then the asset/collateral remains yours.
Collateral generally makes lenders more comfortable lending money to you and can often translate into higher loan amounts with lower interest rates. However, not all lenders require a specific type or value of collateral to approve a loan.
Read on to learn the pros and cons of using collateral to secure a business loan, as well as what can be used as collateral and how to get financing even if you don’t have collateral.
What Is Collateral?
As stated above, collateral is an item of value that you use to secure a loan with a lender. Traditional lenders, like banks, will often ask what collateral you have as part of the small business loan application process.
While secure assets, like real estate or equipment, are often used as collateral, anything of value the lender can easily sell in order to satisfy your debt should you default might be accepted as collateral.
A lender’s claim to a borrower’s collateral is called a lien — a legal right or claim against an asset to satisfy a debt. The borrower has a compelling reason to repay the loan on time because if they default, they stand to lose the assets they pledged as collateral.
How Collateral Works
Before a lender processes a loan, it must verify that you have the ability to repay any amount you borrow. Ideally, you’ll do this through regular monthly payments, but what happens if you’re suddenly unable to do so?
Does the bank write the loan off as a loss? If you took out a secured loan (which requires collateral), the answer is no. The collateral is liquidated and sold to pay off all or most of the loan balance. Therefore, collateral is used as a form of security for the lender. It guarantees they won’t lose money by lending to you (or at least minimize their losses).
The type of collateral you use typically depends on the type of loan you need. For example, if you need the loan to purchase a business vehicle, the vehicle itself will likely be used as collateral. If you need it to purchase an office building, the building itself could be used to secure the loan.
In many cases, however, a small business loan isn’t taken out specifically to purchase a hard asset like real estate or equipment. When this is the case, you’ll typically need to use another type of asset, such as equipment, buildings, cash reserves, accounts receivable, or inventory, to secure the loan. Generally, an asset qualifies as collateral if it can be sold by the bank for cash.
Collateral is an asset that has value — but not all assets can function as collateral, and some forms of collateral are preferred over others.
From a lender’s perspective, the best collateral is an asset that it can liquidate quickly, meaning the asset can be easily converted into cash. Therefore, cash reserves a business has is often favored as collateral.
Here are some other things that a business may be able to use to secure a loan.
• Accounts receivable (invoices you’ve sent out)
• Buildings
• Equipment
• Home equity
• Future sales
• Inventory
• Real estate
• Securities
• Certificates of deposit
• Corporate bonds
• Stocks
• Treasury bonds
• Vehicles
The only assets that generally don’t qualify as collateral are ones you intend to sell. Once an asset is listed as collateral, part of the debt covenant (rules regarding the loan) will likely be that the asset cannot be sold until the loan is paid off.
If your business doesn’t have enough assets to provide the collateral required, a lender might require a business owner to pledge personal assets, such as their car or home, in addition to business assets.
How Much Collateral is Required for Business Loans?
Typically, a borrower should offer collateral that matches the amount they’re requesting.
However, some lenders may require the collateral’s value to be higher than the loan amount to help reduce their risk.
How much collateral you need to provide will typically depend on two things: the “Five C’s” and loan-to-value ratio (LTV) of your collateral.
Lenders often use the Five C’s as an indicator of your business’s overall financial health. They stand for:
• Character: What is your credit history? Do you have a history of on-time payments?
• Collateral: Do you have any assets that can act as collateral for the loan?
• Conditions: How much do you need, and what do you need it for? What are the going interest rates right now?
Different lenders will approach these factors in their own way. For example, if you aren’t able to meet the collateral criteria but have an otherwise qualified application, you may still qualify for the loan.
Loan-to-value (LTV) ratio is another key metric lenders use to decide the collateral they need. LTV is the amount a lender will loan you based on the value of the collateral. For example, you may be allowed to borrow 70 percent of the value of the appraised real estate or 60 to 80 percent of ready-to-go inventory.
So, if the LTV is 70 percent of the asset you’re putting up as collateral, and that asset is worth $100,000, you would be able to borrow $70,000.
Individual lenders consider the LTV ratio differently, so it’s a good idea to ask your lender how they intend to set that value. The following table offers examples of how much collateral may be needed for a business loan.
Type of Loan
Types of Collateral
Loan-to-Value Ratio
Invoice Financing
Future earnings
Up to 80%
Commercial Real Estate
Property purchased
60% to 90%
Equipment Loan
Equipment purchased
Up to 100%
General Purpose
Most types of collateral are acceptable
Depends on type of collateral
Inventory Loan
Inventory purchased
Up to 50%
Is Collateral Necessary for Business Loans?
No, collateral is not necessary for business loans. There are both secured and unsecured loans on the market. An unsecured business loan is a business loan without collateral.
With unsecured business loans, lenders typically look at personal and business credit scores, as well as the business’s overall health, time in operation, and regular cash reserves. It can be a good idea to explore both secured and unsecured loans and compare small business loan rates before deciding what will work best for your business.
Unsecured Business Loans
Getting a loan without collateral is often faster because there is less paperwork. However, to qualify, both you and your business will likely need to have a strong credit score. You should also expect the lender to heavily scrutinize all of your finances.
There are a few downsides to getting an unsecured business loan. For starters, no matter what your credit score is, it’s unlikely you will get as large a loan without collateral, since collateral tends to make lenders more comfortable lending higher amounts.
In addition, your interest rate may be higher. Interest acts as a safeguard to lenders whether you have collateral or not. When you don’t have collateral, however, that interest rate is likely to be higher than it would be if you did have collateral.
Pros of Unsecured Business Loans
Cons of Unsecured Business Loans
Shorter loan application process
Requires strong personal credit score
No collateral needed
Requires strong business credit score
You’re not putting any of your assets in jeopardy
May require a large amount of cash reserves (not for collateral, but as an indicator of how likely you’ll make your payments on time)
Lower interest rates
Higher interest rates
Higher loan amounts
Smaller loan amounts
If you don’t have any collateral and your credit score could be higher, you may want to look into business loans for bad credit.
Specific Collateral vs General Liens
Some lenders, including many online lenders, don’t require specific collateral, but rather require a general lien on your business assets (without valuing those business assets) and a personal guarantee to secure the loan.
This can make qualifying for a loan easier and/or faster, depending upon the nature of your business and your business assets.
Borrowers may be more comfortable with specific collateral because they know exactly what they may lose. With a general lien, every aspect of the business is potentially put into jeopardy should there be a default.
However, because the loan is not based upon LTV of specific collateral, you might end up qualifying for more than you would with a traditionally collateralized loan.
Collateral is an asset that a lender accepts as security for a loan, acting as a form of protection for the lender. If the borrower defaults on their loan payments, the lender can seize the collateral and sell it to recoup some or all of its losses.
A lack of sufficient business collateral, however, doesn’t mean you can’t get a small business loan to grow your company (a strategy known as using leverage). Your business may qualify for a general lien on all your business assets collectively, or you may be able to get an unsecured loan, which doesn’t require any collateral.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.
Photo credit: iStock/kate_sept2004
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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
By Lauren Ward |
SMB |
Comments Off on Guide to Typical Small Business Loan Requirements
While business loan requirements vary depending on the lender and type of loan, they typically include a minimum credit score, number of years in business, and annual revenue.
Many lenders also consider a number of other factors, such as your debt-to-income ratio and the type of industry you’re in, and will ask for a fair amount of paperwork.
Read on to learn exactly what banks and other lenders are looking for when deciding who they will lend to, how much they will lend, and what interest rate they will charge, plus tips on how to up your odds of getting approved when you apply for a small business loan.
What Is a Business Loan?
A small business loan is money that is loaned to a small business owner by a bank, credit union, or online lender, and must be repaid. The money is to be used for business purposes (such as operating expenses, equipment purchases, and marketing and advertising) and should not be used for personal expenses.
Loan amounts vary, as do repayment periods and interest rates. Fortunately, there are various types of business loans that can accommodate just about every business need you may have.
Pros and Cons of Small Business Loans
A small business loan generally shouldn’t be taken out on a whim. Before signing any loan agreement, it can be a good idea to consider both the benefits and drawbacks of taking on business debt.
Pros of Small Business Loans
Cons of Small Business Loans
Can propel your business’s growth
May have to sign a personal guarantee
Allow you to get financing without giving up equity
Interest rates may be high if you don’t have a strong credit profile
Help your company with initial start-up costs or cash-flow issues
Could lose business or personal assets if you default on payment
Some loans don’t require collateral
Many small business loans require making a downpayment
Small and large loan amounts are offered
Monthly payments can limit your budget
Why Do Business Loan Lenders Have Requirements?
Many small businesses fail each year. In order to reduce the risk that comes with loaning money to a small business, lenders generally have a list of requirements.
1. Credit Score
Personal
If your business is new and doesn’t have a strong credit history, lenders will likely look at your personal credit profile. If your personal credit score is strong enough, it may get you access to credit for your business that it wouldn’t otherwise be able to get. However, you may have to sign a personal guarantee, which means that if you are unable to pay off the loan, your personal assets could be at risk.
Business
Yes, there are credit scores for businesses, too. As long as you have an Employer Identification Number (EIN) from the IRS, your business will begin developing a credit score. To expedite matters, you may want to open a business bank account and business credit card and register as much as you can in your business’s name.
If you pay your business’s bills on time and keep its debts low, you can help your business build a strong credit profile. The stronger your business’s credit, the more likely banks will lend to you at an attractive rate and without a personal guarantee.
2. Revenue
A business with a strong, predictable revenue stream has a good chance of getting approved for a high loan amount with a low interest rate. If you’re just starting out and your monthly revenue is still picking up steam, you may have trouble taking out certain types of business loans. In fact, it’s common for lenders to advertise business loan requirements dictating what your monthly revenue needs to be in order to qualify.
3. Debt-to-Income Ratio
Debt-to-income ratio (DTI) shows how much of your small business’s monthly earnings go to repaying your existing debts. Lenders look at DTI because it helps demonstrate how affordable new debt repayments are likely to be and your business’s likelihood to meet those commitments.
DTI is normally shown as a percentage. To calculate your company’s DTI, you simply add up all of your monthly debt repayments, then divide this amount by your business’s monthly gross profits. Multiply the result by 100 to get your DTI ratio percentage. To be considered for a loan, your DTI ratio should be below 50%. To improve your chances of loan acceptance, aim for a DTI ratio of 36% or less.
4. Business Plan
What do you intend to use the money for? How do you anticipate it will increase your company’s profits? Some loans (including traditional term loans and SBA loans) require you to submit a business plan or loan proposal as part of your application. This can be a great opportunity to show your lender that you’ve thought through all the potential opportunities and challenges for your business and how you’re going to grow a successful company.
5. Collateral
Lenders often require borrowers to put up a fixed asset (like property or equipment) to secure the loan. This reduces risk for the lender because, should you default on the loan, they can seize your collateral and sell it to make up for some of the money they’ve lost. If you’re applying for an SBA loan or bank loan, for example, lenders will want to know what kind of collateral your small business has to offer and the value of that collateral.
Not all loans require collateral though. As you explore small business loans, ones that don’t require collateral are called unsecured loans. However, in place of collateral, the lender may require a personal guarantee or charge higher interest rates.
6. Time in Business
The magic number many banks want to see is often two years. It’s not uncommon for a new business to fail shortly after they’ve opened, so the fact that you’re still standing after two years is a good sign to a lender.
However, if you haven’t been in business for two years, this doesn’t mean you won’t be able to get a loan. You may have trouble with some of the more traditional options — such as SBA loans and bank loans — but online lenders will often have more flexible requirements with regard to your time in business.
Every industry has a level of risk, so lenders will want to know what type of business you own when considering your eligibility. In addition, some lenders have certain industries that they won’t lend to (such as firearms businesses) that could affect their reputation. Others have less obvious restrictions, so it’s a good idea to check with a lender regarding any ineligible industries before submitting your application.
You’ll also want to be sure you correctly identified your business’s industry in your loan application. There are two main industry code systems: Standard Industrial Classification (SIC) and North American Industry Classification System (NAICS). The application will guide you on how to look up your code.
8. Bank Statements
Many lenders will ask for at least four months of bank statements during the underwriting process. They do this to make sure the claims you are making about your company’s financial history are accurate, and make sure you’ll be able to afford the loan payments. These statements also give them insight into how well you are managing the money that is coming into the business each month.
9. Business License and Permits
Business licenses vary by state and industry, but a lender will want to see proof that you are the owner and are legally allowed to run your business. You may also need to supply any relevant permits, such as sign permits, zoning permissions, fire permits, sales tax, and health department permits.
10. Loan Amount
A lender will ask you to specify how large a business loan amount you want to take out. Large commercial banks tend to offer the largest loans, as much as $1 million and more. If you’re in need of a smaller amount of capital (say $250,000 or less), you may be better off with an SBA loan, online term loan, or microloan.
Before you submit this loan requirement, you’ll want to think carefully about what you will use the loan for (such as expanding your business, start-up costs, etc.), then come up with a detailed budget that includes all the expenses involved. You may also want to add a small cushion to cover any unexpected expenses.
11. Loan Purpose
A loan purpose is similar to your business plan. The only real difference is that you’ll answer this question on the loan application itself.
When stating your loan purpose, you’ll want to be as specific as possible. This shows the lender that you have a very specific plan for the money, and it may even lead them to introduce different loan products that are more suitable for your needs, such as business loans for LLCs.
12. Down Payment
Depending on your loan type and other qualifications, you may be required to make a down payment to get a business loan. For example, bank loans and SBA loans typically require you to put 10% to 20% of the loan principal down in order to secure the loan.
13. Other Factors
Lenders may ask for a number of other documents during the application process, including:
How to Increase Your Chances of Getting a Small Business Loan
To improve the odds that you’ll get approved for a loan, it’s important to understand how business loans work. Below are some simple things you can do to present a strong application.
• Put up collateral. By offering collateral, you lower the risk for the lender. While it’s not a guarantee, it can increase your chances of getting a loan approval.
• Pay off your debts. If your DTI is high, it indicates to a lender that you’re using a lot of your income to pay off other loans. That’s a sign of risk for any lender, so it can be a good idea to pay off some of your other debts before applying for a loan.
• Work on building a better credit profile. The minimum credit score needed to qualify for a business loan will vary by lender. But, generally, the stronger your personal and business credit, the higher your chances of getting approved for a business loan.
• Choose the right lender. Not all lenders have the same requirements. If you have thin or poor credit, for example, you will likely stand a greater chance of getting approved for a business loan with an alternative, online lender than with a traditional bank.
• Wait a year or so. If your business hasn’t been around for at least two years, you may want to hold off applying for a loan and put your efforts into building a strong foundation for your business and increasing your revenue. This will make it likely that you’ll be approved for a loan in the future.
The Takeaway
Small business lenders typically have a long list of requirements for a loan. It’s a good idea to do some preparation before you apply for a loan, including thinking about how you will use the loan, determining how much you will need, assessing your company’s financials, and collecting all the necessary documents.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.
FAQ
Do business loans require down payments?
Business loans do not always require a down payment. Instead of a down payment, however, they may require collateral.
Do business loans require personal guarantees?
If your business’s credit score is low or thin, then you may be asked to sign a personal guarantee. However, this does not mean the loan is not in your business’s name. It means that, should you default on payments, the lender can come after your personal assets.
How much deposit is required for small business loans?
It depends on the lender and the loan amount. Many loans do not require an initial deposit or down payment. Bank loans and SBA loans, however, typically require you to put 10% to 20% of the loan principal down in order to get the loan.
What is good business credit?
Business credit scores are different from personal credit scores. Instead of ranging from 300 to 850, business credit scores range from 1 to 100. The ranges are as follows:
• 80-100: Good
• 50-79: Fair
• 0-49: Bad
If you have a good credit score, this means that you are making your payments on time and possibly in advance. If this is the case, you can expect to receive some of the best rates and the highest loan offers.
Photo credit: iStock/Drazen Zigic
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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
By Lauren Ward |
SMB |
Comments Off on Comparing Operating Income and EBITDA: Similarities and Differences
Operating income and EBITDA are both ways to measure a company’s financial performance, but they have some key differences.
Operating income is how much a company makes from its core business activities after operating expenses have been taken into account. It’s compliant with the generally accepted accounting principles (GAAP), the accounting standards public companies in the U.S. must follow.
EBITDA, on the other hand, is how much a company makes before the effects of interest, taxes, depreciation, and amortization. It is not GAAP-compliant, but can be a good formula for comparing the financial health of two different companies in the same industry.
While many people wonder whether EBITDA is the same as operating income, the short answer is, no. While these two metrics are related, operating income adds back some of the expenses that EBITDA strips out. Here’s what you need to know about operating income vs. EBITDA, how they are similar and different, and why they are both important.
What Is Operating Income?
Operating income is the amount of profit a company earns from its operations, after deducting operating expenses such as wages, depreciation, and cost of goods sold (COGS). To calculate operating income, any expenses that revolve around the production of goods, or the execution of any services, are subtracted from operating revenue.
Of the three financial statements a business must produce (balance sheet, income statement, and cash flow statement), operating income appears on the income statement.
Analyzing operating income is helpful to investors because it doesn’t include taxes and other one-off items that might skew profits. Lenders may also look at operating income (from current and previous income statements) when a business owner applies for a small business loan. A company that shows an increasing amount of operating income is viewed as doing a good job of generating more revenue while controlling expenses, production costs, and overhead.
How Operating Income Is Calculated
This is the basic formula for calculating operating income:
Operating Income = Gross Income – Operating Expenses
Gross income is defined as the total amount a business earns minus the cost of goods sold (COGS).Operating expenses are expenses a business incurs through its normal business operations, including: selling, general, and administrative expenses; depreciation and amortization;and other operating expenses.
What does operating income not include?
Operating income does not take into account any money received or lost through non-core or non-operating business activities. This means the following data is not taken into account when calculating operating income:
On its own, operating income is not a complete picture of a company’s financial health, but it is a very important facet. While a company may make a sizable amount of money from non-operating activities, most companies generate a majority of their revenue from their operating revenue. Because of this, operating income illustrates a majority of their cash flow.
What Is EBITDA?
EBITDA is earnings before taxes, interest, depreciation, and amortization. It’s not an official GAAP calculation because it removes the effects of all of those variables, which are real expenses. However, from an analyst’s or investor’s viewpoint, there are good reasons to not include them when understanding a business.
Let’s take a look at why.
Interest: This refers to interest on debt, including all types of business loans. The reason EBITDA excludes it is that how much debt a company takes on will depend on the financing structure of a company. Different companies have different capital structures and, as a result, different interest expenses. To better compare the relative performance of different companies, EBITDA adds interest paid on debt back to net income.
Taxes: Income tax varies from one location to another. Two companies with identical sales numbers could pay significantly different amounts depending on where they are located. Therefore, taxes do not illustrate a company’s financial performance or revenue potential. When comparing the performance of two different companies, it’s only logical to remove their tax burdens.
Depreciation & Amortization: Depreciation and amortization involve spreading out the cost of an asset over the course of its useful life. For many companies, depreciation and amortization are very real costs that cannot be avoided. However, EBITDA adds these non-cash expenses back to net income because they depend on the historical investments the company has made, not on its current operating performance. Plus, there are not always hard and fast rules about how to calculate depreciation and amortization, which means methods can vary from company to company.
Is EBITDA the same as operating cash flow? Not exactly. When comparing cash flow vs. EBITDA, keep in mind that both track the cash flow generated by a business’s operations and ignore cash flow from investing or financing activities. However, EBITDA doesn’t factor in interest or taxes, whereas operating cash flow does, since they are cash expenses.
How EBITDA Is Calculated
EBITDA is calculated by adding certain expenses back to net income. To calculate it, the following data is required:
EBITDA and operating income have both similarities and differences. Here’s a look at how they stack up.
Similarities
• Both are a measure of a company’s profitability
• Neither consider the costs of interest and taxes
• Neither is indicative of a company’s overall financial health
Differences
• EBITDA adds depreciation and amortization back to net income: operating income subtracts them from operating revenue
• EBITDA includes gains or losses from non-operating income; operating income does not
Operating income suggests how much profit can be gained from operating revenue if operating expenses are lowered;
• EBITDA suggests a company’s income potential if certain variables like interest or taxes can be mitigated.
Operating Income
EBITDA
Gives you information about a company’s profitability
✓
✓
Indicative of a company’s overall financial health
X
X
Official GAAP measurement
✓
X
Includes income from primary business operations
✓
✓
Includes income from investments and asset sales
X
✓
Excludes interest and taxes
✓
✓
Excludes depreciation and amortization
X
✓
How Operating Income and EBITDA Are Related
Both operating income and EBITDA measure a company’s profitability. EBITDA strips out some of the costs of doing business in order to more clearly show the profitability of a company’s core operations. Operating income adds some of those costs back in to show the company’s actual net profit.
EBITDA Formula
There are two formulas for EBITDA.
Option 1:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Option 2:
EBITDA = Operating income + Depreciation + Amortization
Operating income is used in the second formula to calculate EBITDA (Operating income + Depreciation + Amortization). However, both formulas are doing the same thing — figuring out what the company’s earnings would be if taxes, interest, amortization, and depreciation were not taken into account.
Operating Income vs EBITDA Example
To understand how much EBITDA can change a company’s numbers, let’s take a look at Adobe. The following data was pulled from Adobe’s 2023 annual income statement.
(Note: All data listed is in U.S. thousands.)
Total revenue
19,409,000
Cost of revenue
2,354,000
Gross income/profit
17,055,000
Operating expense
10,405,000
SG&A
6,764,000
R&D
3,473,000
Depreciation/Amortization
168,000
Operating income
6,650,000
Net non-operating interest income
156,000
Non-operating interest income
269,000
Non-operating interest expense
113,000
Income before taxes
6,799,000
Taxes
1,371,000
Net income
5,428,000
For 2023, Adobe reported an operating income of $6.65 billion. Let’s look at how they got that number:
Operating Income = Gross Income – Operating Expenses
According to their income statement, Adobe had a gross profit of $17.055 billion and total operating expenses of $10.405 billion. Putting those numbers into the formula, we get:
Unlike net income (which tells you a company’s total earnings or losses after accounting for all sources of income and all expenses), operating income tells you how much of a company’s total profit comes from its core business activities (or operations). As we can see with Adobe, operating income tends to be higher than net income ($6.650 billion vs. $5.428 billion)
Now, let’s look at Adobe’s 2023 EBITDA. Unlike operating income, EBITDA is not an official GAAP measurement, so companies are not required to disclose on their financial statements. However, you can calculate a firm’s EBITDA using the numbers on the income statement, like so:
EBITDA = Net Income + Interest + Taxes + Depreciation/Amortization
EBITDA = 5,428 billion + $113 million + 1.371 billion + 168 million
EBITDA = 6.08 billion
EBITDA offers a more positive look at Adobe’s profits for 2023 — roughly 6.1 billion compared to around 5.4 billion. This is typically the case since EBITDA includes non-operating income and adds back most expenses.
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It can be useful when comparing the financial performance of two different companies because it removes the effects of any accounting or financing decisions that owner’s have discretion over.
Operating income is how much a company makes from its core business operations after any related expenses are taken into account. It adds back some (but not all) of the numbers that are excluded from EBITDA.
Looking at both operating income and EBITDA provides a more complete picture of a company’s financial performance and potential than either one alone.
When it comes to getting approved for a small business loan, lenders will often look at both of these metrics. EBITDA tells them whether your business is generating more cash flow than the amount of the loan payments. Growth in operating income indicates that your company is likely to continue to be profitable.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
Get personalized small business financing quotes with SoFi's marketplace.
FAQ<
How do you calculate operating income from EBITDA?
Operating income and EBITDA have two different formulas.
Operating income formula:
Operating Income = Gross Income – Operating Expenses
EBITDA Formula:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
OR
EBITDA = Operating Income + Depreciation + Amortization
Is operating income the same as EBITDA or the same as EBIT?
Operating income is similar to EBIT (earnings before interest and taxes), since it does not incorporate the cost of interest or taxes into its calculation. EBIT, however, includes non-operating income and non-operating expenses, while operating income does not. Operating income is solely focused on the net profit gained from operating expenses.
Is operating income or EBITDA better?
It depends on your purpose. For comparing two companies in the same industry, many analysts and investors prefer EBITDA because it removes variables that are unique and vary from business to business. Some analysts, however, prefer operating income over EBITDA because depreciation and amortization are still expenses that need to be accounted for.
Business owners may find operating income to be more useful than EBITDA, especially if they are looking for ways to lower overhead in order to increase profits without increasing sales.
Photo credit: iStock/Morsa Images
SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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.
