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Choosing the right business structure is one of the most consequential decisions business owners face. The company’s structure has an impact on everything from taxes to liability.

An S corporation, or S corp, is one of several business structures you might choose, especially if you are seeking the benefits of a corporate structure without the taxes imposed on large businesses. Here’s a look at what an S corporation is and the details of how it works, so you can decide whether this structure is right for you.

S Corporation Definition and Structure

An S corporation is a type of business structure in which owners own shares of the business and a board of directors oversees the company’s operations. The S corp dispenses profits to shareholders through salaries or other distributions.

Importantly, S corps are “pass-through” business entities. This means that corporate income, losses, deductions, and credits are not taxed at the corporate level. Instead, they’re passed through to the shareholders, who pay federal income tax on it at individual rates on their Form 1040 returns.

S corps protect shareholders by limiting their liability if, say, a small business loan falls into default. Lenders can’t seize shareholders’ homes, bank accounts, or vehicles to satisfy corporate debts or legal judgments.

Recommended: Startup Business Loans

How S Corps Differ from C Corporations

The benefits of S corps become especially apparent when they’re compared to other types of business entities, including C corporations. Profits of C corps are taxed twice: once at the corporate rate and again at the individual rate when stockholders declare their share of the remaining profits on their individual tax returns.

Pass-Through Tax Entity Explained

A pass-through tax entity like an S corp avoids the problem of double taxation because all profits are passed directly to the company’s shareholders. Other pass-through entities include sole proprietorships and partnerships. Limited liability companies can also choose to be taxed as pass-through entities.

S Corporation Tax Benefits

Overall, S corps offer several tax advantages that make them an appealing choice for small business owners.

Avoiding Double Taxation

As mentioned above, one big advantage afforded by S corp status is that you avoid the double taxation that C corps face. For all C corporations, profits are taxed first at the corporate rate of 21%. When the remaining profits are passed to shareholders, that money is taxed again at each shareholder’s individual income tax rate. Marginal rates for individuals top out at 37%.

Self-Employment Tax Savings

The federal government levies self-employment taxes to cover the cost of Social Security and Medicare. Self-employed individuals typically must pay 15.3% of their income toward these taxes.

You have more control of your tax bill with an S corp, meaning you could pay less if you classify some of your income as salary and some of it as profit distributions. You’ll have to pay self-employment taxes on the salary portion, but not on the distribution portion. In most cases you will still have to pay federal income taxes on both the salary and the distribution.

Pass-Through Deductions and Credits

The Tax Cuts and Jobs Act allows households with income from S corps to exclude up to 20% of their qualified business income from federal income tax. However, some types of income (such as capital gains and wages from other employment) aren’t eligible for this deduction, so you’ll probably want to consult a tax professional about your particular situation.

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S Corporation Eligibility Requirements

If you’re wondering how to incorporate your business, the place to start is with IRS eligibility requirements. According to the IRS’s S corporation definition, a business must meet the following criteria:

•  It must be a domestic corporation.

•  Only certain kinds of shareholders are allowable, including individuals, certain trusts, and estates. Partnerships, other corporations, and non-resident aliens may not be shareholders.

•  The business cannot have more than 100 shareholders.

•  It issues only one class of stock.

•  The business cannot be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations.

How to Elect S Corporation Status

To elect S corp status, the business must submit Form 2553, “Election by a Small Business Corporation.” The form must be signed by all shareholders.

You may fill out and submit the form at any time during the year before the status is set to take effect. But if you want the status to take effect during the current year, the form must be filed within the first two months and 15 days of the tax year.

S Corporation vs Other Business Structures

How do you decide whether or not an S corp is appropriate for your business? First, consider how it differs from other business structures.

S Corp vs LLC Comparison

Like S corps, limited liability companies (LLCs) lessen your personal liability, as the name suggests. In both cases, your own assets are largely protected from the debts, obligations, legal penalties, and other liabilities of the business.

In general, LLCs tend to be relatively simple and adaptable compared to S corps, which have stricter requirements. As discussed above, S corps allow no more than 100 shareholders and may include only certain types of shareholders. LLCs, regulated by state statute, tend to have fewer ownership restrictions and often have simpler tax rules.

S Corp vs C Corp Differences

We’ve already covered some of the differences between S corps and C corps. Another important distinction is that C corps can issue multiple classes of stocks and have an unlimited number of shareholders. As a result, C corps are able to attract significant investor capital that they can use to purchase equipment, hire employees, and grow the business. The C corp is the standard structure for companies planning to sell shares on public stock markets.

S Corp vs Partnership Structure

A partnership is a simple structure for two or more people who own a business together. Partnerships are pass-through structures, like S corps, so profits are passed through and taxed at partners’ individual rates.

There are two common kinds of partnerships: limited partnerships and limited liability partnerships (LLPs). In a limited partnership, one partner will generally have unlimited liability, while the others’ liability will be limited. Partners with limited liability often have limited control in the company. LLPs are similar, but provide limited liability to all partners.

S Corporation Disadvantages and Limitations

S corps present several potential disadvantages.

For one, they are more complex to administer than other structures such as sole proprietorships or partnerships. Corporations require more extensive record-keeping, operational processes, and financial reporting.

S corps only allow you to issue a single stock class. As a result, all investors receive the same amount in dividends or other distributions. This can be a disadvantage if you’re trying to attract other types of shareholders. What’s more, this rule allows for less flexibility in allocating income or losses to specific shareholders.

There can be no more than 100 shareholders total, which can limit the company’s ability to raise funds by selling shares. Foreign ownership is prohibited entirely.

Because of their complexity compared to sole proprietorships and partnerships, and because of the unique advantages they offer, they may be subject to greater IRS scrutiny than other types of structures.

Finally, not all states recognize the federal S corp designation. If they don’t, they may tax the business as a C corp, or they may have their own rules for S corps. Check the law in the states where your business operates to understand how S corps work there.

The Takeaway

An S corp is a business structure that can provide you with tax advantages, liability protection, and flexibility. It isn’t right for everyone, though. Understanding the requirements, procedures, and limitations can help you decide whether an S corp election supports your business goals.

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 does an S corporation differ from a C corporation?

S corps are structures that are typically more appropriate for smaller businesses. They only allow 100 shareholders maximum, one class of shares, and they offer pass-through tax advantages. C corps are what most large corporations are. They allow for unlimited shareholders, which can help businesses raise capital by selling shares. And C corp profits are taxed twice: once at the corporate level and then again when they are distributed.

What are the requirements to qualify as an S corporation?

The IRS requires your company to be structured as a domestic C corporation and limits the number of corporate shareholders to no more than 100 individuals (or certain trusts and estates). Only one class of stock may be issued.

What are the tax benefits of an S corporation?

S corps allow profits to pass through to shareholders where they are taxed at the shareholder’s personal income tax rates.

Can an LLC elect to be taxed as an S corporation?

Yes, LLCs can elect to be taxed as S corps.

What are the disadvantages of forming an S corporation?

S corps have several potential downsides. They can be complex to administer and may have less flexibility in distributing income. The number of shareholders cannot exceed 100, potentially limiting the company’s ability to raise capital by selling shares. S corps may be subject to special IRS scrutiny, and some states tax S corps as if they were C corps.

Photo credit: iStock/Antonio_Diaz

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

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

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

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

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

SOSMB-Q325-026

Timely cash flow is a crucial part of running a successful business, and the payment terms you negotiate as both a vendor and a customer have an impact on your company’s revenues. One key factor in cash flow management is how much time the customer has to pay their bill. Businesses use the phrase “net 30” on invoices to signify that payment is due within 30 days.

Learn more about the meaning of net 30 and how using that payment period can affect your business.

What Is Net 30?

“Net 30” is a shorthand phrase used to indicate a payment deadline. It specifies that the client or customer has 30 days to pay an invoice. Net 30 is one of the most commonly used payment time frames among small businesses in the U.S. Other options include net 15, 60, or 90.

Here’s a full net 30 definition, plus examples of how using net 30 compares to other options.

Net 30 Definition and Explanation

A net-30 payment term gives the customer 30 days from the billing date to pay the outstanding balance. (This credit arrangement with a customer is what’s sometimes called a net-30 account.) Thirty days provides time to get the invoice approved and the payment issued by the client’s accounting team. Typically, a net-30 invoice refers to calendar days, meaning that weekends and holidays count towards the due date.

It’s important to be clear on when the 30-day period begins. Many consider the invoice date to be day one, but others believe the clock starts ticking on the date the invoice is received by the customer.

Either convention is okay, but it’s crucial to indicate clearly which one your company follows. This is especially important if you mail out your invoices instead of sending them electronically, as there may be several days’ difference between the day you send a bill and the day the customer receives it.

What does net 30 mean in practice? Let’s say your small business sends out all its invoices at the end of each month. In this case, we’ll say net-30 invoices are sent on Oct. 30. The due date would be Nov. 30, even though there is a federal holiday during the month.

Comparison With Other Payment Terms

Though net 30 is a very common payment term, you may come across (or decide to adopt) other time frames that affect your company’s cash flow.

•   Net 15: For a vendor, net 15 billing gets you paid faster. But clients may have difficulty executing payment so quickly, especially larger companies with multiple approval levels in place.

•   Net 60 or net 90: These longer terms can cause cash flow issues for a small business waiting for payment. Net 60 and net 90 are more common among larger companies.

It’s wise to calculate your cash flow, examine when customers typically pay their invoices, and discuss payment terms with suppliers. That way you can figure out what net terms suit your small business.

Be sure your payment setup works with your business model. Cash flow issues are a major reason for the high percentage of businesses that fail in their first five years.

How Net 30 Terms Are Typically Structured

As noted above, a typical net-30 payment structure has certain basic elements. A customer contract and invoice should explicitly state “net 30” and specify the starting date for the 30-day period. Provisions about late fees and penalties should be spelled out upfront in the contract. Many businesses offer a discount for early payment; a common one is a 2% price break on invoices paid within 10 days (expressed as 2/10).

How Businesses Use Net 30

Businesses use net-30 payments in various ways, depending on how they operate best.

•  Cash flow management: Businesses often benefit by paying their vendors via net-30 terms, rather than immediately. That way, they can keep cash on hand for a longer period of time, making it easier to juggle other financial commitments and inventory.

•  Business credit: A net-30 account essentially serves as a free, short-term loan or credit line. If your vendor offers net-30 terms on an invoice, you can spread out your payments and escape the interest charges you’d incur by using a bank loan or credit card.

•  Customer relations: If your business sends out net-30 invoices, the long payment term could potentially help you entice or retain customers.

Advantages of Net 30

The advantages of net-30 invoices vary, depending on whether your business is the buyer or the seller in the transaction. Here are a few aspects you might consider when determining whether to use net 30 when dealing with your customers or vendors.

Benefits for sellers include:

•  May attract more clients or customers: Net 30 is a favorable payment term that might not be offered by your company’s competitors.

•  Pushes December revenue into the new year: Collecting the debt a month later could lower the income you have to report on the current year’s IRS Form 941.

•  Allows you to add an early payment discount: Customers might settle up faster if you give them an opportunity to pay a little less.

Some potential pluses for buyers might be:

•  Extending cash flow: Having 30 days to pay a bill may ease the pressure of business purchases.

•  Scoring possible discounts for early payment: Lowering the overall cost of goods or services could increase your profit margin, everything else being equal.

When deciding on payment terms, weigh the importance of such factors, especially if you’re the seller. You’ll want to be sure the health of your company isn’t harmed by longer invoice terms.

Potential Drawbacks of Net 30

Sometimes it’s a disadvantage for a business to issue net-30 invoices. Here are some possible situations.

•  Late payments can delay a closing date even further. Even waiting 30 days may create cash flow challenges. If there are issues, a small business loan or line of credit could be a fallback to help get you through the month.

•  Having to follow up on extended payment terms may slow down processing. Revisiting an outstanding bill could increase your business’s administrative overhead, whether it’s done manually or with invoicing software.

•  Early payment discounts could hurt your overall profitability. Make sure any discounts are comfortably within your profit margins.

Implementing Net 30 in Your Business

If you decide to use net-30 accounts for your business, communicate this payment information when you first engage a new client. You may not have the capacity for net 30 if you run a sole proprietorship or other type of small business, as you’ll want to make sure your cash flows easily throughout the month.

If you have standalone contracts with your clients, include all payment instructions in there as well. This makes your agreement more formal and gives you legal recourse if necessary. A contract is also a good place to cite any late fees you’d charge after the 30-day window closes.

You should also include these payment terms on the invoices you send. State directly on the invoice that payment terms are net 30, and be sure to include the due date so there’s no confusion.

Tips for Managing Net 30 Effectively

With a net-30 payment period, you’re extending a free short-term loan to your customers. So, in your role as a lender, you may want to take some common-sense precautions. For example, vet your new and existing clients to confirm that their financials and business conduct are solid. Set default payment terms for newcomers and apply them to existing clients too as needed.

Internally, monitor your business’s cash flow to make sure the 30-day payment period isn’t hampering your ability to cover costs. Consider using invoicing software that can help with cash management.

Clear Invoicing and Terms

To avoid misunderstanding, make sure each client invoice includes an invoice number, invoice date, the total amount due, a clear due date for the payment, and accepted payment methods. Use simple, straightforward language, and spell out consequences for late payments and incentives for early payments.

Following Up on Late Payments

Even with a 30-day window, some clients may pay late. It’s smart to have a thoughtful follow-up plan in place so you can get paid and, if possible, salvage the relationship as well.

Typically you’d start with a cordial but upfront reminder email just after the payment date. If a week elapses without a response, a firmer email or a phone call may be in order.

If nonpayment continues, you might want to pause any new or ongoing work, as providing additional goods or services to a nonpaying client would mean taking on extra risk.

If your client contract includes specific language about late payment penalties (and it should), those details are worth mentioning in later emails, along with negotiation terms you’d entertain. Failing any resolution, your options include collections or legal action.

Alternatives to Net 30

For added flexibility, you may want to think about certain variations on the net-30 payment term.

•   Early payment discounts: Along with the net terms on your invoice, you may want to give the customer a price break for paying the invoice early. Usually the discount is a small percentage of the total invoice amount. For instance, as mentioned earlier, the message 2/10 net 30 on an invoice means you’ll give the customer a 2% discount if they pay within 10 days of receipt.

•   End-of-month (EOM): An end-of-month term sets a due date that’s a certain number of days after the month is over. For instance, an invoice sent in July reading “Net EOM 10” would be due 10 days after July 31.

•   Financing options: If you’re a vendor who needs money soon, you may want to look into invoice financing. This is when a vendor taps into the value of outstanding invoices, selling them to a financing company for as much as 90% of their worth. The financing company collects the money from the customers and remits the rest (minus a fee) to the borrower once the bill is paid.

The Takeaway

The payment term “net 30” is common on invoices in the business world. It means businesses receiving goods or services have 30 days to pay for them. This arrangement has pros and cons, depending on the details of your business. Before you start offering this option to clients, make sure you have the cash flow to support the slight delay in payment.

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 does “net” mean in “net 30”?

“Net” is business shorthand for the total, final amount that is owed for a purchase after all discounts, expenses, or other deductions are accounted for. So for a net 30 invoice, that final amount must be paid in full within 30 days.

Can net 30 terms affect business credit?

Yes, net-30 terms can affect business credit. If your suppliers invoice you on a net-30 basis, your business gets what amounts to a no-cost one-month loan. That frees up cash for paying other bills during the month and can help you maintain good credit. When you offer net-30 terms to your customers, though, you’re providing them with the free loan, essentially financing their payments for up to 30 days. If that leads to a cash crunch for your business, you could fall behind in payments and your business credit could take a hit.

Do all vendors offer net 30 terms?

Not all vendors offer net 30 terms. Payment terms are based on the vendor’s policies and the nature of their business. Some vendors may prefer shorter terms like net 15, while others might offer longer terms like net 60 or net 90.

How do you offer net 30 terms as a small business?

If you decide to offer net 30 terms for your small business, you’ll want to communicate that billing information clearly to all clients. Include net-30 payment terms in contracts where appropriate, and put “net 30” on the invoices you send. To avoid confusion, it helps to specify the due date. Cash flow issues may be less likely if you ensure that your incoming and outgoing payment schedules align.

What’s the difference between net 30 and 2/10 net 30?

The difference between net 30 and 2/10 net 30 involves a discount for prompt payment. With net 30 the customer has 30 days to pay the full amount on the invoice. With an invoice marked “2/10 net 30,” the customer can take a 2% discount if they pay within 10 days of the invoice date. If they don’t, the full amount is due within 30 days.

Photo credit: iStock/AndreyPopov

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

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

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

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

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

SOSMB-Q325-028

Depreciation and amortization are methods for deducting the cost of business assets over several years, rather than writing off the entire cost the year you make the purchase. The concept behind both methods is to match the expense of acquiring an asset with the revenue it generates.

The key difference between depreciation and amortization is the type of asset that’s being expensed. Depreciation is used for tangible (physical) assets, while amortization is used for intangible (non-physical) assets.

Read on to learn about depreciation vs. amortization, how these two accounting methods are similar and different, and when to use one or the other.

Amortization vs Depreciation

Similarities

Both depreciation and amortization are accounting methods used to spread the cost of an asset over a specified period of time. Both methods enable you to deduct a certain portion of the asset’s cost — and reduce your tax burden — annually for each year that asset is of value to your business.

In addition, both depreciation and amortization are non-cash expenses, which means they are reported on the company’s income statement, but no cash is spent.

Differences

The key difference in amortization versus depreciation is that amortization is used for intangible property (that is, property you can’t pick up and hold), such as a patent or a computer software program.

Depreciation, on the other hand, is used for fixed or tangible assets (meaning property that’s physical in nature), such as computer hardware, manufacturing equipment, and cars.

Another distinction: With depreciation, you cannot deduct the full cost of the asset. You must account for the asset’s resale value (also called salvage value) at the end of its useful life. For example, imagine you pay $20,000 for a piece of farming equipment with a useful life of 10 years, and you expect that in 10 years, you’ll be able to sell it for $5,000. In that case, you would deduct $15,000 (your net cost for the equipment) over the course of 10 years.

In addition, amortization is almost always implemented using the straight-line method, whereas depreciation can be implemented using either the straight-line or an accelerated method. The depreciation method you choose can have an effect when valuing your business, as different approaches may recognize assets’ decline in value at varying rates.

Recommended: How to Read Financial Statements

What Is Amortization and How Does It Work?

Amortization is a method of spreading the cost of an intangible asset over a specific period of time, typically the course of its useful life. Intangible assets are non-physical in nature, but are nonetheless considered valuable assets to a business.

Intangible assets owned by a business may include:

•  Patents

•  Trademarks

•  Copyrights

•  Software

•  Franchise purchase agreements

•  Licenses

•  Organizational costs

•  Costs of issuing bonds to raise capital

Amortization is typically expensed on a straight-line model. To do so, you would divide the total cost of the asset by the number of years it will be of use to the business; the result of that equation is the amount you’d deduct each year.

To determine an intangible asset’s useful life, you need to consider the length of time that the asset is expected to produce benefits for the business. An intangible asset’s useful life can also be the length of the contract that allows for the use of the asset.

(Something to note: The term “amortization” is also used in a different way in relation to loans, such as the amortization of a car loan or mortgage. The loan amortization process involves making fixed payments each pay period with varying interest, depending on the balance.)

Amortization Example

How amortization works is relatively simple. Let’s say you purchase a license for $10,000 and the license will expire in 10 years. Since the license is an intangible asset, it would have no salvage value, so the full cost would be amortized over that 10-year period.

Using the straight-line method of amortization, your annual amortization expense for the license will be $1,000 ($10,000 divided by 10 years), meaning the asset’s value will decline by $1,000 every year. As a result, you would be able to deduct that $1,000 each year on your taxes.

What Is Depreciation and How Does It Work?

Depreciation is another method of spreading the cost of a tangible or fixed asset over a specific period of time, typically the asset’s useful life. Tangible business assets (which the IRS refers to as “property”) are high-cost physical items that are owned by a business and are expected to last more than a year. They may be items you’ve financed through a small business loan. They include:

•  Buildings

•  Equipment

•  Computers

•  Office furniture

•  Vehicles

•  Machinery

Unlike intangible assets, tangible assets typically still have some value even after they are no longer of use to a business. As noted above, this is the resale or salvage value. Because the IRS assumes you will sell the asset at some point, this amount must be accounted for in the beginning.

So how do you know the useful life of a tangible asset? There’s guidance in IRS Publication 946, which lists useful life by asset type. For office furniture, for example, it’s seven years. For computers, it’s five years. This time frame is also called the recovery period.

To calculate depreciation, you first need to figure out the depreciable amount, also known as its depreciable basis. You’d do this by subtracting the asset’s estimated salvage value from its original price.

The straight-line method divides the depreciable basis by the number of years in the recovery period. The result is the amount your business can deduct each year. (In this way, there’s little difference in depreciation vs. amortization.)

There are other methods of depreciation that accelerate the process, meaning that a larger portion of the asset’s value is expensed in the early years of the asset’s life. (We’ll go into more detail on those below.)

Recommended: Business Cash Management, Explained

Depreciation Example

Straight-line depreciation works in a very similar way to amortization, except that you must account for salvage value. Let’s say you purchase a $3,000 computer for your company. Per the IRS, a computer has a useful life of 60 months (or five years). You determine that after five years, you’ll likely be able to sell it for $500.

Here are the calculations you would make:

$3,000 – $500 = $2,500

$2,500 / 5 = $500

Result: Each year for five years, you would be able to deduct $500 from your taxable income.

Keep in mind that after the computer’s recovery period ends, you can (but are not obligated to) sell that computer. Either way, you would stop deducting the item’s depreciation as a business expense.

Common Methods of Depreciation and Amortization

As mentioned above, a business can amortize the full cost of an intangible asset at the same rate each year throughout the asset’s useful life. For tangible assets, the business can deduct the asset’s depreciable basis (the cost of acquiring it, minus salvage value) at a steady pace over a set number of years (the recovery period) — or it can opt to deduct variable amounts each year using other accounting methods.

The depreciation method you choose will affect how much your business is allowed to deduct as a business expense in a given year. Here’s a quick overview.

Straight-Line Method

The amortization example above is an example of the straight-line method. This method calculates the annual deduction amount through simple division: For a 10-year software license, paid upfront, you’d deduct one-tenth of the license cost each year.

You can also use the straight-line method to depreciate tangible assets. You start by calculating the depreciable basis (acquisition cost minus salvage value). Then you divide the depreciable basis by the number of years in the IRS’s designated recovery period. The result, in dollars, is each year’s depreciation expense deduction.

Units of Production Method

This method works for depreciating certain kinds of property, such as equipment. It’s based on an estimate of how many product units the property can generate during its useful life, and a measure of how many it produces in a given year. To calculate the depreciation rate, you’d divide the estimated lifetime units by the number of units actually produced during the year.

For example, if a machine is expected to produce 1,000 units during its useful life, and it produces 100 units in the first year, this represents 10% (that is, 100/1,000) of its total expected output. So the expense deduction for that year is 10% of the machine’s depreciable basis.

Declining Balance Method

This method enables business owners to front-load the depreciation deduction for some types of tangible assets. Accelerated depreciation allows you to claim larger tax deductions in the early years of the recovery period and smaller deductions later. Put another way, this lowers your taxable income more in the earlier years than it does later on.

The declining balance method involves several steps.

•  Step 1: You use the straight-line method to calculate the asset’s depreciation rate.

•  Step 2: You multiply that rate by an IRS-specified factor of 2; for that reason, this method is sometimes called the “double declining balance method.” (IRS Publication 946 lays out the rules and options.)

•  Step 3: You apply that doubled rate to the asset’s “book value” (basis) to calculate the depreciation amount. This is the amount you deduct on your company’s tax return as a business expense.

Depreciation amount = (Straight-line depreciation rate × 2) × Asset’s book value at beginning of year

•  Step 4: You then subtract last year’s depreciation amount from last year’s book value. What’s left is the new book value, which you’ll use in the upcoming tax year.

•  Step 5: You repeat this process for each year of the recovery period. At the end of the recovery period, you’ll have a book value that’s roughly equal to the salvage value.

Sum-of-the-Years-Digits (SYD) Method

Another way to speed up depreciation on an asset is to use the sum-of-the-years-digits (SYD) method. This method uses a fraction to calculate the asset’s rate of depreciation for each year.

Start with the denominator. The method is to number each year in the asset’s useful life and then add them all together. For instance, a five-year depreciation schedule would result in a denominator of 15 (1 + 2 + 3 + 4 + 5).

The year numbers, in reverse order, serve as numerators. So for the first year, you’d divide 5 by 15 and get a depreciation rate of 33.33% (5/15). You’d apply that rate to the asset’s depreciable basis to get the dollar amount of your depreciation deduction.

So if your basis was, say, $1,200, your first year’s depreciation amount would be $400. The second year’s rate would be 4/15 or 26.7% of the full depreciable basis, which comes out to about $320. In year three, the rate would be 3/15 or 20%, which is $240. The percentages (and thus the depreciation amounts) get smaller over the life of the asset, until just the salvage value remains.

The Takeaway

Depreciation and amortization are both methods of calculating the value of business assets over time. Whether you use amortization versus depreciation just depends on the type of asset you’ve acquired for your business.

Amortization is used for intangible (non-physical) assets, while depreciation is used for tangible (physical) assets. As a business owner, you will want to calculate these expense amounts in order to claim them as a tax deduction and reduce your business’s tax liability.

If you’re in the market to purchase an asset (tangible or intangible) for your company but don’t want to deplete your cash reserves, you may want to explore funding options, such as a small business loan, equipment financing, or inventory financing.

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

FAQ

Do buildings depreciate or amortize?

Buildings are fixed assets, so they depreciate. Depreciation is used for physical assets like buildings to account for their wear and tear over time.

Can an asset amortize and depreciate at the same time?

No, an asset cannot amortize and depreciate at the same time. Amortization is used to spread out the cost of an intangible asset over time, while depreciation is used to spread out the cost of a tangible asset over time. An asset is either tangible or intangible — it can’t be both.

Is rent considered amortization?

No, paying rent is an operating expense for your business. If you own a rental property, however, you can use depreciation to spread the cost of buying or improving the property across the useful life of the property.

What types of assets are typically amortized?

Intangible assets such as patents, trademarks, copyrights, software, franchise agreements, and licenses are typically amortized. These assets are not physical, but they represent business costs and provide value to the company.

How does amortization affect a company’s financial statements?

Amortization affects a company’s financial statements by spreading the cost of intangible assets over their useful life. This means a portion of the asset’s cost can be deducted each year from the business’s taxable income, lowering the tax bill. As a non-cash expense, amortization is reported on the income statement even though it doesn’t involve an immediate cash outlay.

Photo credit: iStock/Pinkypills

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

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

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

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

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

SOSMB-Q325-027

A new SoFi survey reveals groundbreaking news that turns many assumptions about female entrepreneurs on their heads. Women business owners are no longer content to just “stay in their lane.” Instead, they are branching out into fields previously dominated by men, such as construction, transportation and warehouse, and tech/software and AI, according to our research.

In the Summer 2025 SoFi survey of over 1,000 women business owners across the U.S., the majority of respondents reported that they had no financial help or support network when they launched their businesses. Instead, they used their own savings to get their venture off the ground and relied on their experience and know-how.

And forget investors — many female founders are getting the job done with their own money, hard work, ingenuity, and determination.

Why Business Growth Equals Personal Growth

There are over 14 million female-owned businesses in the U.S., and they generate $3.3 trillion of revenue.

Most women business owners say they are very confident in their financial management skills — and those abilities are clearly paying off. However, they do worry about the broader financial situation in the U.S. The majority of SoFi survey respondents cite “current economic uncertainty” as the biggest challenge they face right now in terms of managing their business finances.

The bottom line is that despite the unpredictability of today’s economy, women have discovered that owning a business can be deeply rewarding—and that there can be unexpected opportunities in fields that may have once seemed off-limits. In fact, 30% say that entering a new industry has been the biggest professional reward they’ve gained.

Source: Based on a SoFi survey conducted on June 12-18 of 1,000 women business owners in the U.S. ages 18 and up.

Percentages have been rounded to the nearest whole number, and some questions allowed for multiple answers, so some data may not add up to 100%.

Bridging the Gender Gap

As noted above, women are discovering opportunities in business spaces that were once men-only. Sixteen percent of SoFi respondents say their business is in an industry that’s male dominated, and 39% percent report that the industry they’re in is evenly divided between men and women. By comparison 38% say they’re in an industry that’s female dominated, and 7% don’t know the make-up of their industry.

For many women entrepreneurs, venturing into new territory has had a positive effect:

•   44% say the gender makeup of their industry has motivated them to prove themselves and stand out.

•   29% report that it allows them to distinguish themselves from the competition.

•   20% say they’ve been able to build stronger networks because of it.

•   26% of respondents say gender hasn’t had any impact at all.

Easier Than Expected

While breaking into a male-dominated field might sound intimidating, it was actually fairly simple, SoFi’s survey found: 61% of women business owners say it was not at all difficult — or just slightly difficult — to enter their industry.

•   Not at all difficult: 37%

•   Slightly difficult: 24%

•   Moderately difficult: 28%

•   Very difficult: 8%

•   Extremely difficult: 3%

The Challenges Women Entrepreneurs Faced When Entering Their Industry

The main obstacles women business owners face had less to do with discrimination and more about building a support system, according to SoFi’s survey. Networking and finding a mentor were top challenges for 68% of respondents. Surprisingly, this was more than twice as challenging as securing funding.

•   Difficulty building a network: 40%

•   Lack of access to funding: 29%

•   Limited mentorship or guidance: 28%

•   Lack of industry knowledge or experience: 25%

•   Gender bias or discrimination: 18%

How Women Overcame the Biggest Challenges to Launching Their Business

A few roadblocks didn’t slow down these female entrepreneurs, however. In fact, many women business owners found the hurdles motivating.

•   I worked harder to prove myself: 51%

•   I built my own network or support community: 39%

•   I adapted my business model to overcome obstacles: 29%

•   I pursued additional training or education: 27%

•   I sought advice or mentorship from other women entrepreneurs: 22%

•   I haven’t overcome them yet: 10%

Where the Money Comes From

Most women business owners in the SoFi survey dug into their own savings to launch. Only 18% secured a business loan or Small Business Administration (SBA) loan. Perhaps it’s a good thing then that many of them required less than $10,000 to set up shop.

How Women Funded the Launch of Their Business

•   Personal savings: 68%

•   Friends or family: 25%

•   Credit cards: 24%

•   Business loan (bank or private): 13%

•   SBA loan or assistance: 5%

•   Government grants: 4%

•   Venture capital or angel investors: 3%

•   Crowdfunding platforms: 3%

•   Other: 7%

The Initial Funding Their Business Required

•   Less than $10,000: 44%

•   $10,000–$24,999: 12%

•   $25,000–$49,999: 9%

•   $50,000–$99,999: 9%

•   $100,000 or more: 6%

•   My business didn’t require any initial funding: 19%

Even though they primarily had to use their own savings or credit cards to launch, 47% of women business owners say they haven’t had any funding obstacles.

Recommended: Small Business Grants: Where to Find Funding

Financially Fluent

The overwhelming majority of women business owners report that they have good money management skills — and they’re proud to use them. Only 3% outsource this task to a professional.

When asked how confident they are in managing business finances, respondents answered:

•   Very confident: 42%

•   Somewhat confident: 49%

•   Not very confident: 7%

•   Not confident at all: 2%

Most women business owners learned financial management skills on their own: 62% say they are self-taught through experience. Others had a little help, including 15% who learned from an advisor or mentor, and 12% who took classes or workshops. Eight percent of women entrepreneurs say they are still learning.

What Keeps Them Up At Night

Just like any business owner, female founders have concerns about specific financial issues. A substantial number of them are worried about the state of the U.S. economy.

Here’s what they said when asked: What are the biggest challenges related to managing your business finances?

•   Current economic uncertainty: 38%

•   Setting prices or fees: 32%

•   Understanding taxes or compliance: 27%

•   Budgeting and expense tracking: 21%

•   Forecasting revenue: 20%

•   Managing cash flow: 20%

•   I haven’t had major financial challenges: 19%

•   Access to capital or credit: 15%

Recommended: Mompreneurs: Generational Wealth and Real-Time Struggles

Reaping the Rewards

In the SoFi survey, women business owners revealed that money was less of a motivation to start their company than personal fulfillment. Thirty percent say they were inspired by the desire for flexibility and autonomy, and 27% launched to pursue a strong vision or passion. Just 23% say they started a business to generate income after a job loss or life change.

But for most respondents, the rewards have been well worth it.

Greatest Personal Rewards of Owning a Business

•   Flexibility and control over my time: 63%

•   Personal growth or self-confidence: 48%

•   Doing meaningful or impactful work: 38%

•   Financial independence or growth: 36%

•   Being able to provide for my family: 34%

•   Gaining respect or recognition: 28%

•   Growing savings for my family: 27%

•   Creating opportunities for others: 21%

Greatest Professional Rewards of Owning a Business

•   Expanding my client base or market: 42%

•   Achieving revenue growth: 36%

•   Successfully entering a new industry: 30%

•   Launching new services or products: 21%

•   Hiring a strong team: 18%

•   Receiving industry recognition or awards: 16%

Best Advice for Other Aspiring Women Business Owners

When asked what they would tell other women who are starting a business, the female entrepreneurs SoFi surveyed had a lot to say. Here are some of their best tips and words of wisdom:

“Try going out on a limb to achieve your dreams. You never know what you are capable of.”

“Don’t treat your business like a hobby. Keep trying and put all your efforts into it.”

“Be strong, classy, and in control. There’s nothing you can’t do if you put your mind to it.”

“Find support from other women.”

“Know the field well. I had twenty years of experience before I started my own business.”

“Learn as much as you can from someone who is in the same field or a similar one. Shadow them if you can.”

“It’s not always a direct path. Be open to changes.”

“Don’t be afraid to ask for help.”

“Save up your own money, start small and grow, and don’t give up if you have a good concept.”

“Do your homework, make sure you have good business and financial skills, evaluate risk, and don’t depend on one major customer.”

“Be tenacious, do your research, and have a two-year plan, a five-year plan, and a 10-year plan.”

“Keep learning and asking questions as you go.”

“Do your research, stay the course, and make connections everywhere you go. You never know where you will find an opportunity.”

The Takeaway

Women business owners are entering traditionally male-dominated industries in growing numbers. On the whole, they are finding the challenge motivating, according to SoFi’s 2025 survey of female entrepreneurs. Female founders have learned how to stand out from the competition, built stronger networks, and pivoted to adapt their business model to better compete.

These women business owners are confident in their financial management skills, the survey found. That may be because they’ve been doing it since the start — for many of them, funding their business was a DIY operation. They mainly relied on personal savings and credit cards to get the money they needed to launch.

Funding methods other aspiring women business owners may want to pursue include grants and loans. It can be helpful to explore all financial options when putting a business plan into action. 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.

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.

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

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

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

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

SOSMB-Q325-012

Finding the right emergency business loan can mean the difference between making it through a difficult time and having to shut your company’s doors for good. Fortunately, there are many options available, each with its own advantages and disadvantages.

Whether you’re coping with supply chain delays, inflationary increases, or a sudden, unforeseen problem with your business, there are ways to get help. Read on to learn about the different types of emergency funding for small businesses.

What Is an Emergency Business Loan?

An emergency small business loan is financing that helps your company make it through a difficult period that your normal working capital or cash reserves can’t cover.

Your emergency could be a national or regional problem, like a pandemic or an earthquake. Or it could be a problem that’s unique to your business, like uninsured fire damage or a flood in your storeroom.

Emergency loan products may be available in different types of loan structures, and eligibility requirements may differ among lenders. But you should be able to use the funds to repair damage, to replenish stock, and/or for normal operating costs, like paying your employees.

Recommended: Fast Business Loans

Pros and Cons of Emergency Loans for Businesses

Pros

Compared to other types of loans, an emergency business loan requires far less documentation when you apply. If you seek an emergency loan online, some lenders may even approve and distribute funds within one to three business days.

Small business emergency loans come with a variety of terms. You may be able to pay back the money over several months to several years.

Cons

Most emergency loans are unsecured business loans, which means you may have to meet rigorous criteria in order to get approved. This can be difficult if you haven’t been in business for long.

Interest for an emergency loan might be higher than it would be for a long-term loan. Also, this is a place you may find predatory lenders, so exercise caution.

Recommended: Restaurant Loans Guide

5 Types of Emergency Loans Used for Businesses

Different types of small business financing come with their own specific pros and cons. The best choice for you depends in part on the type of emergency your business is experiencing. Get to know some of the most common options out there to make the right choice.

1. SBA Emergency Loans (EIDLs)

The SBA offers Economic Injury Disaster Loans (EIDL) to help small businesses face financial challenges that wouldn’t have arisen if not for the disaster. With an EIDL, the SBA can provide up to $2 million to help meet financial obligations and operating expenses following certain types of disasters. The loan amount will be based on your actual economic injury and your company’s financial needs, regardless of whether the business suffered any property damage.

If you need the money right away, SBA Express Bridge Loans are also available to help business owners quickly obtain up to $25,000. To apply, however, you do need to have a relationship with an Express Lender already. This temporary financing serves as a bridge loan and should be repaid with an EIDL.

2. Emergency Term Loans

A term loan comes with a fixed interest rate and a set term length during which you repay your balance plus interest, usually in monthly payments. There are many sources for term loans, including traditional banks and online lenders.

Traditional Banks

A traditional bank may take longer to approve your loan, which can be a problem when you’re experiencing an emergency. But you may have a better chance for approval if you already have a relationship with the lender.

Online Lenders

A short-term loan offered by an online lender, in particular, may help you get cash quickly when your business is suffering from an emergency.

3. Emergency Lines of Credit

A business line of credit is different from a term loan because it can actually help you prepare in advance for a financial emergency. A business line of credit is similar to a credit card in that you draw on funds as you need them instead of getting a lump sum.

There’s generally a limit to how much you can draw at a time, but interest doesn’t accrue until you actually borrow funds. You may be subject to a variable interest rate when you start making payments, depending on the terms of your line of credit.

A line of credit works best as emergency funding if you already have it in place before the emergency hits. If your business’s finances tank, it’s hard to get approved for new funding. But if you apply for a line of credit when things are good, you can wait to take out funds until you truly need them. One drawback, however, is that some lenders may charge a maintenance fee.

4. Personal Loans

A personal loan is often easier to qualify for than a business loan. That’s because a personal loan application only asks you to prove your personal ability to keep up with the payments. For a business loan, however, your entire business may be evaluated. Plus, many lenders provide quick decisions and fund disbursement, so you can access the money fast.

Of course, there are a few downsides. Personal loans typically have lower limits than business loans, and your offer will be based on your income and other debts. You also put your personal finances and credit at risk when you use the funds for your business.

And finally, personal lenders may have restrictions that prohibit you from using their loans for business purposes. Be sure to check for limitations like these as you compare personal loans.

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

5. Invoice Factoring

Companies that take in payments through invoices rather than credit card transactions may consider invoice factoring as a way to raise emergency funding. Here, you sell unpaid invoices to a factoring company and receive a percentage of those invoices’ face value upfront from the factoring company.

Invoice factoring also means you have to turn over the invoice collection process to the factoring company. When it collects the full amount owed from a customer, it pays you the balance remaining after the initial percentage it already paid you, minus the factoring company’s fee.

Because the invoices serve as collateral, your business may be better positioned to qualify for this type of financing even when you’re experiencing a financial emergency. In addition to high fees, however, you may also not like someone else managing your customer relationships.

Recommended: Guide to Alternative Small Business Loan Options

What to Consider with Emergency Funding for Small Businesses

No matter what kind of emergency financing you’re looking at for your small business, be sure to understand the short- and long-term implications of each offer.

•   Compare the total cost: Look at how much it will cost you to borrow, including interest rates and fees.

•   Scrutinize how repayment works: Some lenders require you to enroll in an auto draft program that deducts money from your business bank account on a regular basis. Payments may be due monthly or as frequently as daily, which could potentially cause a cash crunch.

•   Consider timing: How long will it take to apply for and get your funding? Different emergency business loans proceed at different speeds. If getting funds fast is your priority, you may be limited to higher-cost solutions.

Tips for Applying for a Small Business Emergency Loan

If you’re wondering how to get a business loan during an emergency situation, try these tips to navigate the process more easily.

Calculate how much financing you need. Apply for the right amount so that you don’t have to worry about needing more money later on. Many lenders allow only one loan at a time, so you may be better off requesting the maximum amount you’ll need. That way, you don’t have to apply with multiple lenders at different points in time and face multiple payment schedules.

Factor in not only one-time costs to get you through a short-term emergency, but also working capital you may need for the longer term.

Pick the right loan. Review eligibility requirements for different emergency small business loans to see which you seem likely to qualify for. Then narrow your list based on pros and cons, including the costs involved.

Be ready with financial documents. Each type of emergency business financing comes with its own application requirements. Expect to submit things like:

•  Bank statements for both your business and personal finances

•  Tax returns for both your business and yourself

•  Business-related legal documents

•  Revenue statements

•  Accounts payable and accounts receivable

Finding a Business Emergency Lender

Once you understand the options for emergency business funding and the implications for each one, it’s time to take action.

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

FAQ

What are emergency loans?

An emergency loan for business is financing that helps you make it through a difficult period that your normal working capital or cash reserves can’t cover. Emergency funding may be available in different types of loan structures, and eligibility requirements may differ among lenders.

Where can I get emergency money?

Check with a variety of sources to compare your options for emergency money for your business. Avoid taking the first offer you receive without looking around, since there may be other loan products out there that fit your needs better. You may be eligible for SBA funding, or you may want to look at online lenders. Other options to explore include personal loans, invoice factoring, and merchant cash advances.

What can emergency loans be used for?

Emergency business loans can be used to cover urgent expenses that keep your company running. Common uses include paying payroll, rent, or utilities, repairing essential equipment, managing unexpected inventory costs, addressing cash flow gaps, covering medical or disaster-related damages, or funding short-term projects to stabilize business operations quickly.

How fast can I get approved for an emergency small business loan?

Approval for an emergency small business loan can happen quickly, especially with online lenders. Some approve applications within 24 hours and fund the loan in one to three business days. Timing depends on your lender, credit profile, loan amount, and how promptly you submit the required documentation.

Do emergency business loans affect credit?

Yes, emergency business loans can affect your credit. Lenders may run a hard credit check during application, which can temporarily lower your score. Once funded, timely payments can help build positive credit history, while late or missed payments can harm your business or personal credit, depending on loan terms.

Photo credit: iStock/pixdeluxe

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

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

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

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

SOSMB-Q325-039