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If you’re in charge of your business’s finances, you’ll want to have a handle on all the various reports a small business can run to ensure its accounts are on the right track.

One report you may find helpful is a trial balance. Prepared at the end of every reporting period, a trial balance is a worksheet that provides a quick accuracy check of your books. If the trial balance shows equal credits and debits, you can use it to prepare your balance sheet. If it reveals an error, you can fix it before you prepare any official financial statements.

Here’s a closer look at what a trial balance sheet is, why you’d use one, and the difference between trial balance and balance sheets.

What Is a Trial Balance Sheet?

A trial balance sheet lists the balances of all general ledger accounts of a company at a certain point in time. The debit balance amounts are entered in one column (called “debits”) and the credit balance amounts are entered in another column (called “credits”).

Each column is then tallied at the bottom to prove that the total of the debit balances is equal to the total of the credit balances. The goal of preparing a trial balance is to make sure the entries in a company’s bookkeeping system are mathematically correct.

Generally, a trial balance is generated for internal use in a company and isn’t distributed publicly.

Recommended: How to Read Financial Statements: The Basics

How Trial Balance Sheets Work

The double-entry principle in small business accounting means that for every debit, there is an equal credit. As a result, every credit entered into a company’s account must have an offsetting debit somewhere else. In addition, the total credits from all ledger accounts must equal the total debits from all accounts.

A trial balance moves all credits and debits into one spreadsheet so that someone can make sure that everything lines up. If it does, the transactions posted in ledger accounts in terms of debit and credit amounts are correct. If it doesn’t, some work may be required to get them aligned.

The key difference between a trial balance and a general ledger is that the ledger shows all of the transactions by account, while the trial balance only shows the account totals, rather than each individual transaction.

What Trial Balances Include

Typically, a business initially records its financial transactions in bookkeeping accounts within the general ledger. Because of double-entry accounting, these transactions are recorded as both a credit and a debit to corresponding accounts. For example, if you have any type of small business loan, you credit accounts payable (liability account) and, though it may seem illogical, you also need to debit the cash account (an asset).

General ledger accounts typically include:

•  Assets

•  Equity

•  Income

•  Gains

•  Liabilities

•  Expenses

•  Losses

The trial balance is created by tallying all of the debits and credits from each account, then placing these sums in the debit or credit column for each account.

Something to note: If any adjusting entries were entered in the general ledger, such as a doubtful account allowance, you would also include that in the trial balance. The worksheet should show the figures before the adjustment, the adjusting entry, and the balances after making the adjustment.

Recommended: Net Present Value: How to Calculate NPV

Undetectable Errors in a Trial Balance

A trial balance is designed to provide a quick way to ensure that debits and credits match up. If they don’t, there’s an error somewhere. However, a trial balance may not show the following types of errors:

•  Reversal

•  Omission

•  Original entry

•  Commission

•  Principle

Errors of Reversal

When using double-entry accounting, there is a credit and a debit of the same amounts. Sometimes, however, a credit is entered incorrectly as a debit or vice versa. A trial balance won’t reveal this type of mistake.

Errors of Omission

If a transaction wasn’t entered into the accounting software, it won’t appear in the trial balance.

Errors of Original Entry

A trial balance won’t tell you if an incorrect amount was entered as a credit and a debit.

Commission Errors

This happens if the wrong account is debited or credited, and is often a mistake caused by oversight.

Principle Errors

This is another mistake that occurs when the wrong account is debited or credited. Rather than being an oversight, however, it may be a mistake in understanding accounting principles, and which types of expenses or revenues should be categorized under which types of accounts.

Recommended: What Is Invoice Financing?

Trial Balance Sheets vs Balance Sheets

While both a trial balance and a balance sheet look at debits and credits and must find equilibrium between the two, there are some differences between these two financial reports.

Recommended: Business Cash Management, Explained

Examples of Trial Balances

A trial balance lists all of the company accounts, along with the balance of credits and debits for each. Once all of the accounts and values are complete, you add up the total in each column. Here is an example:

If the totals match, as they do in the above example, there are no obvious errors in the ledger. If the totals are different, however, it tells you that something is wrong. The next step is to locate the problem in the ledger and correct it before you prepare any other financial statements.

Recommended: How Does Trade Credit Work?

Preparing a Trial Balance

Most accounting software systems can generate a trial balance with the click of a mouse. The system will also update your trial balance with each entry you make. However, it’s not hard to create a trial balance yourself. Simply follow these steps.

1.   Create a table with three columns entitled (from left to right): Account Name, Debits, and Credits. An optional fourth column (placed to the left of Account Name), would be Account Number.

2.   Use the company’s chart of accounts to locate all of the account names and list them in the Account Name column (if desired, include account numbers in the appropriate column).

3.   Go to each account and add up all of the debits and credits during the accounting period. Subtract the smaller number from the larger number and place the remainder in the appropriate column. For example, if the cash account had a total of $6,000 in debits and $5,000 in credits, you would place $1,000 in the debits column.

4.   Total each column and put the numbers at the bottom. If the totals are the same, your trial balance is balanced.

Recommended: How Business Banks Accounts Work

The Takeaway

A trial balance is a worksheet that helps ensure your company’s bookkeeping is accurate, up to date, and balanced. It’s a great report to use internally before creating your balance sheet. Unlike a trial balance, a balance sheet is an official financial statement that will be shared with external parties.

If you apply for a small business loan, for example, the lender will likely examine your balance sheet to see how much cash you have on hand, how much money is tied up in assets, and how much debt you currently have. They want to make sure that your business has enough available cash to manage your loan repayments.

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.

FAQ

What goes on to a trial balance sheet?

A trial balance sheet includes all accounts in the general ledger, including assets, equity, revenues, gains, liabilities, expenses, and losses. It lists the description of the account, and its final debit or credit balance. These balances are then totaled to arrive at total credits and total debits to make sure they are equal.

How are trial balance sheets and balance sheets different?

A trial balance sheet is an internal document that is often the first step in creating a balance sheet. It summarizes the closing balances of the accounts in the general ledger. A balance sheet, on the other hand, is shared externally and summarizes the company’s total liabilities, assets, and shareholder’s or owner’s equity.

What is the point of a trial balance?

A trial balance is prepared at the end of every reporting period to ensure that the entries in the company’s general ledger are correct.

​​Photo credit: iStock/deepblue4you

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.

SOSB-Q224-1880366-V1

Once your small business starts earning a profit, you have a key decision to make: Should you distribute those profits to yourself (and any other owners) or reinvest them back into the business?

While it can be tempting to pocket your company’s profits, funneling at least some of that money back into the business is worth considering.

For one, reinvesting can help improve the company or expand operations, leading to even higher profits down the line. For another, reinvested money is generally considered a business expense, which means you likely won’t have to pay income taxes on it.

Read on for a closer look at why you may want to reinvest a percentage of your profits back into your business, how this can impact your business taxes, and ways you might use profits to help expedite business growth.

What Constitutes Profits for a Business

Profit is the money a business pulls in after accounting for all expenses. Any profits earned funnel back to business owners, who can choose to either pocket the cash, distribute it to shareholders as dividends, or reinvest it back into the business.

Whether you own a small dog grooming business or a multinational corporation, the main goal of any business is to earn money. Thus, a business’s performance is based on profitability. For accounting purposes, companies will often report gross profit, operating profit, and net profit (the “bottom line”).

Recommended: How to Read Financial Statements: The Basics

What Are Businesses Taxed On?

Any profits that aren’t reinvested in a business are typically taxed as income. How that tax is paid depends on the structure of the business.

Most small businesses are pass-through entities, which means that the gains or losses are passed through to the owners on their personal income tax returns. Corporations, on the other hand, pay a flat tax on business profits.

Types of Business Taxes

When we refer to “taxes” for a business, we’re actually using an umbrella term for many different types of taxes a business may have to pay. Let’s take a closer look.

Income Taxes

Income taxes are based on the net income of your business for the tax year. Net income is the same thing as profit (income minus expenses). If you share a business with others, the net income is divided among the owners, based on your business agreement. Most small businesses pay both federal and state income taxes.

Estimated Taxes

Employees have taxes withheld from their paychecks, but as the owner of your business, no one is withholding taxes from the money you take out of the business.

Instead, you need to file estimated taxes throughout the year, based on the income you have earned up to that point in the year. Typically federal and state estimated tax payments are due on April 15, June 15, September 15 and January 15 for the previous tax year.

Self-Employment Tax

Employees generally have Social Security and Medicare taxes withheld from their paychecks. If you are a self-employed business owner, however, you must calculate and pay your own Medicare and Social Security tax through self-employment taxes.

Excise and Sales Taxes

Depending on which state you operate in, and what type of goods or service you sell, you may need to set up a system to collect sales tax from your customers and report and pay that tax to your state.
You may also need to pay federal and local excise taxes. An excise tax is a legislated tax on specific goods or services, such as fuel, tobacco, and alcohol.

Recommended: 3 Year Business Plan Structure

Payroll Taxes

If you have employees, you must withhold payroll taxes from their paychecks and pay applicable federal, state, and local taxes. The taxes usually withheld from employee paychecks include FICA (Medicare and Social Security taxes) and federal, state, and local income taxes. Employers and employees each pay half of the FICA tax.

Reducing Taxable Income

As a business owner, there are many strategies you can use to reduce the portion of your business income (or profits) that can be taxed. Here are some you may want to consider.

Reinvesting Business Profits Into the Business

Reinvesting means retaining net profits (the income left over after all operating costs and overhead are paid) and investing them in activities or expenses that can help increase the value of the business. As a business expense, reinvested income generally isn’t taxable.

You may, however, want to reinvest only a portion of your profits and look for other ways to infuse capital into the business, such as applying for a small business loan. Interest paid on business loans is typically tax deductible as a business expense.

Finding Deductions

There are numerous business tax deductions you may qualify for and, when you add them all up, they can amount to a significant reduction in your taxable business income. Here are some of the most common small business deductions.

•  Inventory

•  Business property rent

•  Startup costs

•  Utilities

•  Company vehicle expenses

•  Insurance

•  Rent and depreciation on equipment and machinery

•  Office supplies

•  Furniture

•  Advertising and marketing

•  Business entertainment

•  Travel expenses

•  Interest paid on all types of small business loans

Tax Audits

As a small business owner, it makes financial sense to explore all your options for reducing your tax bill. However, when it comes to deductions, you need to be careful. It’s particularly important, for example, to keep your business and personal expenses separate. If your deductions look suspicious to the IRS, the agency could potentially audit your business.

Investing in Employees

One great way to reduce your company’s taxable income is to invest in your employees. Generally speaking, any wages, bonuses, or other compensation you pay your workers in a given year are tax deductible as a business expense. That includes any fringe benefits you offer — such as gifts, health plans, employee discounts — as well.

Rewarding your workforce can do more than lower your tax liability, however. It can also help boost their morale, increase productivity, attract the top talent, and grow your business.

Choosing Purchases and Investments Wisely

While it’s clearly important to invest in your business, the question remains: Where should you focus your funds? Here are a few purchases and investments you may want to consider.

•  Equipment It can be smart to reinvest profits into new machinery and equipment as your current assets age and become expensive to maintain. Upgrading equipment can increase efficiency and help you stay on the cutting edge of your industry.

•  Software Investing in software, such as payroll and accounting software, can help streamline tedious tasks and free you up to focus on more important matters, such as growing your business.

•  Inventory In some cases, using business profits to buy more inventory can be a smart business move. If you often sell out of popular products, for example, beefing up inventory can help you capture sales you’ve been missing out on.

•  More marketing You might consider hiring a marketing person or agency to help create buzz about your business, improve search rankings, and expand your customer base.

Recommended: Business Cash Management, Explained

How Can a Business Be Tax Efficient?

One of the best ways to make your business tax efficient is to pay attention to tax credits and not just deductions.

Tax credits are particularly valuable because, unlike deductions, which reduce your taxable income, credits reduce your tax bill on a dollar-for-dollar basis. For example, if your small business owes $25,000 in taxes, a $5,000 tax credit means you can subtract $5,000 from your tax bill and only owe $20,000.

There are a number of tax credits your business might qualify for, including:

•  Credit for Small-Business Health Insurance Premiums

•  Employer Credit for Paid Family and Medical Leave

•  Work Opportunity Credit

•  Credit for Increasing Research Activities

•  Disabled Access Credit

•  Credit for Employer-Provided Childcare Facilities and Services

•  New markets credit

The Takeaway

It takes hard work to establish and grow your business. But once you’re able to cover all your expenses, pay yourself a salary, and still have money left on the table, it may be time to consider putting that extra money into your business.

Reinvestment means pouring a percentage of your company’s profits back into your business. It can be a great way to increase the value of your company and to help your company grow. What’s more, reinvesting can reduce your business tax liability at the end of the year, for the ultimate win-win.

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.

FAQ

How much is a small business able to make before paying taxes?

If you operate your business as a pass-through (which means your business income is taxed as part of your personal income), then the tax-free threshold, or standard itemized deduction, for 2024 is $14,600 for single filers and $$29,200 for married couples filing jointly.

There is no tax-free threshold for corporations.

What does the 20% business tax deduction do?

Qualifying business owners who use the pass-through method on their taxes may be able to deduct up to 20% of their net business income from their income taxes. However, this deduction is scheduled to end on January 1, 2026.

What are 100% write-offs for businesses exactly?

Any expense for a product or service that is used solely for business purposes (such as equipment, inventory, or office rent) is considered a direct business expense and is typically 100% deductible.

Photo credit: iStock/Andrii Yalanskyi

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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SOSB-Q224-1858568-V1

If you own a farm, ranch, or other agricultural business, you may find yourself in need of extra capital. You may want to upgrade equipment, cover seasonal gaps in revenue, purchase land, or expand your operations. Or if you’re just starting out in the farming industry, you may need access to a fair amount of cash to get your business up and running.

Fortunately, there are a number of business loans available to farmers and agricultural entrepreneurs, including federal farm loan programs, farm loan programs offered by commercial lenders, short-term loans, and business lines of credit.

The best business loan option will depend on the size of your business, your credit profile, your collateral, how much capital you need, and how long your farm has been in operation.

Here’s what you need to know about small business agriculture loans.

What Is a Farm Loan?

A farm or agricultural business loan is intended to help someone maintain, expand, or start a farming business. Farm loans can provide the capital needed at the start-up phase of an agricultural business, as well as help established farmers manage cash flow during off seasons, purchase heavy equipment, fund construction or irrigation, hire workers, or improve/ expand their operations.

Farm loans come in the form of short- and long-term installment loans, lines of credit for incremental purchases, equipment financing, and more. Many different entities provide business farm loans, including government programs for agriculture businesses, as well as banks, nonprofits, and online lenders.

How Do Agricultural Loans Work?

Just as there are different types of small business loans, there are many types of farm loans, and each one operates a little differently.

What Can Farm Loans Be Used For?

Government-backed farm loans can typically be used to start, buy, run, or expand a farm. These loans are similar to traditional term loans. You receive a lump sum (the principal) up front and then are given a period of time — anywhere from 10 to 40 years — to pay it back, with interest, during which you would make predetermined, fixed monthly payments.

Business farm loans from commercial lenders work in a similar way, except they may require higher down payments, shorter payback periods, and higher interest. Commercial lenders also offer farmers business lines of credit, equipment loans, and invoice factoring.

Does It Differ From Business Loans for Other Industries?

The United States Department of Agriculture’s Farm Services Agency (FSA) has several farm loan programs designed to fit the needs of new and established farming and agriculture businesses. Some commercial lenders also market loans specifically to farmers and agricultural businesses. However, these so-called “farm loans” work in a similar way to traditional business loans. Standard small business loans, offered by banks and other business lenders, are also often available to farmers.

Types of Loans for Agricultural Businesses

Below are some small business agriculture loans options you may want to consider.

USDA Farm Loans

The USDA Farm Service Agency (FSA) has several farm loan programs that can provide needed capital to farms, ranches, and agriculture businesses.

Operating loans

The FSA’s Direct Farm Operating loan program provides loans up to $400,000 for starting or operating a farm or ranch. The funds can be used for a range of purposes, including purchasing livestock, buying farm equipment, paying operating expenses, improving/repairing buildings, and developing land. Down payments can be as low as 5%, and interest rates are fixed, and tend to be low.

Microloans

With microloans ($50,000 or less), borrowers are allowed to take out two microloans for a total of $100,000. One microloan can be used for the land while the second microloan can be used for equipment or operating expenses.

Guaranteed farm loans

The FSA also has Guaranteed Farm Loan programs that make it easier for farmers to receive loans through commercial lenders. Through these programs, the FSA guarantees a large portion of a business loan and, thus, makes farmers more attractive as borrowers.

Long-Term Farm Loans

Long-term business loans, available to farmers through banks and other lenders, are defined as having repayment terms that range from two to 25 years. The loan proceeds can typically be used for any business purpose, including purchasing supplies or inventory, buying livestock, or using the funds as working capital.

Farmers receive the entire loan amount all at once, then make fixed monthly payments, based on the loan amount, term, and interest rate. Because the repayment period is long, lenders are known to have strict qualification requirements, including being in business for at least two years and having a strong credit profile.

Business Lines of Credit for Farms

A business line of credit (LOC) can be a good option if you don’t know exactly how much capital you’re going to need for your farm. An LOC works in a similar way to a credit card: You get approved for a credit limit and then draw money on demand at any time up to the credit limit.

You are only responsible for paying interest on what you actually borrow. Many farmers and ranchers use LOCs to remedy intermittent cash flow issues or cover unexpected expenses.

Short-Term Loans for Agricultural Business

A short-term loan can be a good option if you need money quickly or have been turned down by traditional lenders. Offered by alternative and online lenders, this type of business farm loan provides a lump sum of cash that gets paid back (with interest) over a short period of time, often six to 18 months. Short-term loans are typically repaid through daily, weekly, or monthly payments.

Qualification requirements aren’t as strict as with traditional long-term loans, and you can often get access to funds within 24 hours. Because they can be funded quickly, short-term loans work well for working capital, filling seasonal revenue gaps, or covering an emergency expense.

However, these loans tend to come with higher costs than other types of financing.

Equipment Loans

Equipment loans are a common loan for agricultural businesses, as farm-related machinery is typically expensive and may exceed a farm’s typical cash flow.

Generally, the way an equipment loan works is that the vehicle or machinery you are purchasing is used to secure the loan, which means you shouldn’t have to put up any additional collateral. Another plus of equipment financing is the loan terms often mirror the actual life expectancy of the equipment itself. So, if the machinery you’re purchasing has an expected useful life of 15 years, you may be able to get a repayment period of the same length.

SBA Loans

Small Business Administration (SBA) loans are a type of long-term business loan backed by the government, which means that if a borrower defaults, the SBA will cover most of the cost. Though SBA doesn’t offer any loan products specifically targeted to agricultural or farming businesses, it does serve the industry.

Because the SBA guarantee lessens the risk to the lender, SBA loans typically offer large amounts, low rates, and long repayment terms (up to 25 years). However, these loans are tough to qualify for and require a lengthy application and underwriting process that can take several months.

Invoice Factoring

Invoice factoring is a form of fast financing in which you sell your unpaid invoices to a third party lender, who immediately gives you a large portion of the invoice amounts up front. The lender is then responsible for collecting on those invoices and, when they do, they give you the balance of the invoice, minus fees (called factoring fees, which are a percentage of the invoice amounts).

Because this type of financing is based on invoices, your credit score isn’t a factor. And, no collateral is required. However, invoice factoring tends to be more costly than other financing options.

Business Credit Cards

A small business credit card can be a handy financial tool to have in your back pocket. It can allow you to buy supplies, cover operating expenses, or handle an emergency without waiting to get approved for a loan.

With some research, you may be able to find business credit cards with low interest rates. Some cards even offer a 0% introductory APR (which may last as long as 21 months). This might allow you to cover an unusually high farming expense, then pay the card off before the standard interest rate kicks in.

Recommended: Small Business Payroll Loans

Pros and Cons of Loans for Agricultural Business

Taking out a loan for your farm or agricultural business can be a lifesaver — it can help you manage seasonal dips in revenue, purchase new equipment, hire more workers, and make changes that can boost your profits. If you’re just getting into the agricultural business, a farm loan can provide the cash you need to get you through the startup phase.

Because there are several government-backed lending programs available to farmers, you may be able to get financing with a low interest rate and favorable terms. And, if you get an equipment loan, the item you’re purchasing can serve as collateral.

On the downside, farm loans with attractive terms and rates can be difficult to qualify for and the application process can be extensive. In addition, you will most likely need to make a down payment on any farm loan. You may also have to put up an asset as collateral or sign a personal guarantee (which would put your personal assets at risk).

Finding Farm Loans

Farm loans can be found from many lenders. The USDA’s FSA program can be a good place to start your search, since these loans offer some of the lowest interest rates and a down payment requirements. You may also want to look into SBA loans, which also offer low rates and attractive terms.

Many private lenders also offer loan products that can be useful for farmers, including short-term loans, business lines of credit, and equipment financing. These loans may be easier to qualify for and faster to fund, but generally come with shorter payback terms and higher rates than FSA or SBA loans.

Applying for Farm Loans

The process of applying for a business loan for your farm will depend on the lender and type of loan you’re trying to get.

For all business loans, however, you will need to provide basic information about yourself and your agricultural business, such as your name, business name, address, phone number, social security number, and federal tax ID.

You will also likely need to prove that your farm is creditworthy and has the means to pay back the loan. Additional documentation to receive a farm loan may include:

•  Business and personal bank statements

•  Income statements

•  Business and personal tax returns

•  Balance sheets

•  Profit and loss statements

•  Business and personal credit scores

Approval times vary based on the loan you’re trying to get. Government farm loans may take several weeks or months, while some alternative loans are instantly approved. To make the loan process as efficient as possible, follow the application instructions to the letter, and make yourself available in case any questions come up.

Recommended: A Guide to Hotel Loans

Alternative Financing Options

If you don’t qualify for financing, or prefer not to take out a loan, there are some other funding options for your farming business. These include:

Farm Grants

Financial support for small farms and farm-related businesses in the form of grants is available from a variety of federal, state, and local agencies, as well as private organizations.

Value-added

The USDA offers Value-Added Producer Grants, which can be used by farmers to expand marketing opportunities, create new products, and boost income.

Research and education

To research grant options available to farmers, you can go to the USDA’s resource page. Many farm grants are also available at the state level. To learn more about local grant opportunities, visit your state’s Department of Agriculture website.

Help for Agricultural Entrepreneurs

PA Farm Link connects new farmers with retiring farmers. As part of the program, the retiring farmers provide financial assistance to the new farmers until they are able to get their farms up and running. This can be a helpful alternative for anyone struggling to get startup capital for their farm.

The Takeaway

If you’re looking for capital to start or grow your agricultural business, there are a number of financing options you can explore. Finding the right loan at the right price, however, can take a fair amount of time and legwork.

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.

FAQ

What are agribusiness loans?

Agribusiness loans are usually made by a lending institution to a person for the purpose of financing or refinancing land acquisition or improvement; soil conservation; irrigation; construction, renovation, or expansion of buildings and facilities; purchase of farm fixtures, livestock, poultry, and other items.

Can you start a farm with no money?

Yes, there are ways to get going without money. You can gain experience from other farmers, research grants for farms, and look for deals on the market, for starters.

Can you get an agricultural business loan with bad credit?

Yes, farmers with bad credit can often still get an agricultural business loan, especially if your other financials are strong and you have enough cash to make a downpayment.

What are typical interest rates on farm loans?

The interest rate on a farm loan depends on many factors, including the type of loan, the lender, and your credit score. FSA farm loans can be as low as 2.5%, while interest rates for an online loan often start around 7.5%.

Are there startup loans for farms?

Yes, the USDA’s FSA program offers loans to help finance a new farm or agricultural business.

Photo credit: iStock/artiemedvedev

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 .

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.

SOSB-Q224-1880411-V1

The acronyms NOPAT vs EBITDA are actually important business valuation methods, and the debate about them can lead you into the finer details of a company’s financials.

NOPAT (net operating profit after tax) is the amount of money a business makes from its day-to-day operations after taxes. Because analysts start with a company’s operating income, both cost of goods sold and operating expenses are important variables that contribute to the calculation of a company’s NOPAT.

EBITDA (earnings before interest, taxes, depreciation, and amortization) also zeroes in on a firm’s operational efficiency, but it so by adding interest expenses, tax payments, and depreciation/amortization expenses back to net income. By doing this, it removes the effects of certain variables that can cloud a company’s financial performance.

Read on for a closer look at EBITDA vs NOPAT, how these valuations are calculated, and how they compare.

What Is NOPAT?

NOPAT, which stands for Net Operating Profit After Tax, is a performance metric that tells you what a company’s income from operations would be if it had no debt (i.e., no interest expenses from small business loans or related tax write-offs).

By eliminating interest — and, thus, the impact of a company’s capital structure — NOPAT makes it easier to compare two companies in the same industry, even if one is much more highly leveraged than the other. NOPAT can also be used to compare a company’s performance from one year to the next.

NOPAT also doesn’t include one-time losses or charges, which can temporarily skew a company’s bottom line.

NOPAT is often considered one of the more realistic performance metrics because it includes many expenses that others don’t (most notably depreciation and amortization).

NOPAT Formula

NOPAT = Operating Income X (1 – Tax Rate)

To calculate NOPAT, operating income (also known as operating profit), must be determined. This is the amount of profit a company makes after the cost of goods sold (COGS) and operating expenses (OPEX) are taken into account.

To determine a company’s operating income, subtract operating expenses from gross profits:

Operating Income = Gross profits – Operating Expenses

The formula to calculate gross profit is:

Gross Profit = Revenue- Cost of Goods Sold

Here’s a further breakdown of each variable you’ll need:

•  Revenue: Revenue is the total sales generated by services and/or the sale of goods. It is how much money a company brought in.

•  Cost of Goods Sold (COGS): COGS is any direct costs associated with the selling of goods or services. Common expenses associated with COGS include:

◦  Factory labor

◦  Freight

◦  Parts used during manufacturing/ production

◦  Raw materials

◦  Storage

◦  Wholesale price of goods

•  Operating expenses (OPEX): Any costs associated with the day-to-day running of a company. Common operating expenses include:

◦  Advertising

◦  Equipment

◦  Depreciation

◦  Insurance

◦  Inventory

◦  Maintenance

◦  Marketing

◦  Office supplies

◦  Payroll

◦  Property taxes

◦  Rent

◦  Repairs

◦  R&D

Recommended: Net Operating Income vs EBITDA

How Does NOPAT Work?

NOPAT measures a company’s financial performance without taking into consideration its capital structure — meaning if it were unleveraged and had no debt. By doing this, financial analysts can more easily compare two companies operating within the same industry.

To assess a business’s performance, analysts can look at a company’s sales (the “top line”), but sales alone do not give any insight into operating efficiency. A company can have great sales and still go out of business if it has high operating expenses or COGS.

You can go the opposite route and just look at the “bottom line,” or net income. This figure includes operating expenses. However, it also includes tax write-offs like interest on debt, which can cloud a company’s performance.

NOPAT is effectively somewhere in the middle. It doesn’t just look at sales, and it removes the influence of leverage to offer a more accurate picture of operating efficiency. Think of it as a hybrid of total sales and net income.

Calculating NOPAT

To calculate NOPAT, analysts and investors need access to a company’s income statement (because operating income is a direct line item on the income statement).

The effective tax rate is the percentage amount needed for taxes, so the remainder (1 – the effective tax rate) is the amount left after allowing for taxes. So, for example, if a company’s effective tax rate is 30%, the net operating profit after tax would be 70% of the company’s operating profit. (or 1 – .30).

What NOPAT Tells You

NOPAT shows you a firm’s after-tax profits from its day-to-day business operations. As a result, it tells you what a company’s profitability would be if it did not receive tax benefits from holding debt. It also highlights how well a company uses assets to generate profits for core operations.

Analysts use the NOPAT to compare business performance to past years, and to assess how a company is performing against its competitors.

What Is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a metric often used by investors, analysts, and sometimes companies to measure a firm’s operational profitability because it excludes any effects caused by capital expenditure decisions (that result in non-cash charges like depreciation and amortization) and financing choices (which are reflected in interest payments).

A lender might also consider your EBITDA when you apply for a small business loan (along with your credit scores, revenues, and other metrics) to get a fuller picture of your company’s financial health.

To truly understand EBITDA, it helps to understand the mindset behind removing the expenses listed in its name. Here’s a closer look.

•  Interest: This refers to interest paid on debt, including various types of small business loans. EBITDA doesn’t include this because how much debt a company will vary depending on a company’s financing structure. Some companies are more leveraged than others and, as a result, have widely different interest expenses. To better compare the relative performance of different companies, EBITDA adds interest paid on debt back to net income.

•  Taxes: A company’s tax burden is based on its structure, total revenue, and location. Therefore, two companies with the same amount in sales could pay very different amounts in taxes.

•  Depreciation: Depreciation allows a company to spread out the cost of a physical asset over the course of its useful life (minus any salvage value). While depreciation is a very real cost, it can vary significantly from one firm to the next, depending on the historical investments it has made. Since this does not reflect a company’s current operating performance, EBITDA leaves it out of the equation.

•  Amortization: Similar to depreciation, amortization is the process of spreading out the cost of intangible assets, such as patents, copyrights, and trademarks, over their useful life. Some companies have more costs associated with intangible assets than others. Once again, the mindset is that regardless of what those costs are, it does not reflect a company’s operational efficiency.

In addition to EBITDA, there is also adjusted EBITDA, which removes non-recurring, irregular, and one-time items that may distort EBITDA. This can help level the playing field even more.

Recommended: Typical Small Business Loan Fees

NOPAT vs EBITDA Compared

So the question at this point is: NOPAT vs EBITDA, what is better? The answer depends on what you are looking for. Here’s a look at their similarities and differences.

Similarities

•  Both EBITDA and NOPAT are used to calculate the financial strength of a company.

•  Interest from loans is not considered for both EBITDA and NOPAT.

•  Both place value on a company’s profits from its core areas of business.

Differences

•  NOPAT is after taxes, whereas EBITDA is prior to tax payments.

•  EBITDA also includes other non-operating income.

•  NOPAT accounts for depreciation and amortization charges, while EBITDA adds them back.

Here’s a side-by-side comparison of EBITDA vs NOPAT:

Pros and Cons of Using NOPAT

Here are the advantages and disadvantages of using NOPAT in chart form:

NOPAT vs Unlevered Free Cash Flow

Unlevered free cash flow (also known as free cash flow or UFCF) is a theoretical cash flow figure for a business. It measures how much cash a company would have after all operating expenses, capital expenditures, and investments in working capital have been made.

The formula for UFCF actually can use NOPAT or EBITDA:

NOPAT − Net Investment in Operating Capital = Free Cash Flow
OR
EBITDA – Capital Expenditures – Working Capital – Taxes = Free Cash Flow

Capital expenditures typically include any investments a company has made in tangible assets like machinery, buildings, or any type of heavy equipment.

Working capital, on the other hand, includes such items as the cost of inventory, accounts payable, and accounts receivable.

NOPAT, by contrast, does not take into account changes in net working capital accounts (such as accounts receivable, accounts payable, and inventory). As a result, a company’s NOPAT will be different from its unlevered free cash flow.

Example of NOPAT

Cheryl’s Chocolate, a fictional high-end chocolate store, had a total revenue of $800,000 the previous year. Its COGS was $250,000, and it spent $150,000 in operating expenses. It had an operating income of $400,000 ($800,000 – $250,000 – $150,000 = $400,000).

Cheryl’s Chocolate has a tax rate of 30%.

To calculate its NOPAT:

Operating income X (1- tax rate)

$400,000 X (1- 0.3)

$400,000 X (0.7)

NOPAT= $280,000

The Takeaway

Both EBITDA and NOPAT are useful performance metrics. NOPAT represents a company’s operating income after taxes and doesn’t account for interest expenses. EBITDA also shows a business’s earnings before interest, but further adds back non-cash charges like depreciation and amortization.

Both NOPAT and EBITDA can be used to track a company’s performance year over year as well as compare companies within the same industry. Some analysts prefer NOPAT to EBITDA because it includes more expenses.

Understanding these corporate metrics can be valuable as you work and make key decisions about expenses and funding, such as business loans.

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.

FAQ

How can you convert EBITDA to NOPAT?

You would first convert EBITDA (earnings before interest, taxes, depreciation, and amortization) into EBIT (earnings before interest and taxes) by backing out depreciation and amortization from the EBITDA number. Next, you would use this formula to calculate NOPAT (net operating profit after tax), using the formula NOPAT = EBIT X (1 – Tax rate).

Is NOPAT the same thing as net income?

No. Net income is calculated by deducting all the expenses incurred during the year from total revenue. NOPAT (net operating profit after tax), on the other hand, is calculated using just a company’s operating income, which is the amount of profit realized from a business’s operations.

What makes NOPAT a better performance measure than net income?

Unlike net income, NOPAT (net operating profit after tax) considers what a company’s income from operations would be if it had no debt or interest expense. As a result, it can be more useful than net income for comparing two companies in the same industry that may have different capital structures (such as one that is highly leveraged and one with no debt).

Photo credit: iStock/tdub303

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.

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A nongovernmental organization (NGO) is an organization independent of the government that focuses on social, environmental, educational, and other issues. These organizations generally aim to make the world a better place, whether that’s the American Red Cross holding a blood drive or the World Wildlife Fund working to protect and restore species in their habitats.

But how do NGOs raise the kind of money they need to operate, which may be on the order of millions, or even billions, of dollars? It depends on the NGO, but here’s a look at some of the key sources of NGO funding.

What Is an NGO?

The acronym NGO stands for non-governmental organization. These groups function independently of any government but may be involved in national or international philanthropic, developmental, or social missions. For example, Doctors Without Borders is an NGO that provides medical assistance and access to medicines to those in need throughout the globe.

Though they are independent from the government, NGOs may receive funds from government agencies.

How Do NGOs Work?

NGOs are typically nonprofit entities organized by private citizens. These organizations can pursue a wide range of goals for social, developmental, or political purposes, and may operate on a local, national, or even international level.

As nonprofits, NGOs can accept donations from private individuals, for-profit companies, charitable foundations, and governments (local, state, federal, and foreign). They also raise funds by charging membership dues and selling goods and services.

NGOs vs. Nonprofits

So what’s the difference between a nonprofit and an NGO? Technically, an NGO is a nonprofit, but there are a few key differences between the two.

NGOs tend to operate on a much larger scale than nonprofits. They’re not concerned with only helping people in one city or community; instead, they often support national and international projects for causes such as disaster relief and human rights. Their budgets tend to be much larger than that of a local nonprofit, and therefore the funding needed by an NGO is typically significantly higher.

Both nonprofits and NGOs, however, rely on fundraising, donations, and grants to sustain operations.

How Do NGOs Get Funding?

While NGOs aren’t affiliated with any governmental agency, funds for NGOs often come from grants that are offered by local, state, and federal governments. Grants can also come from foreign governments.

NGOs may also accept private donations from individuals, charitable foundations, or corporations. They may also raise funds through sales, memberships, and fundraising campaigns.

6 NGO Funding Sources

Here are some of the ways an NGO may raise revenue to fund their operations and support their missions.

1. Grants

Often, a significant portion of the funds for NGO projects comes from grants offered by corporations, as well as local and federal governments. Unlike business loans, grants for businesses, nonprofits, and NGOs don’t have to be repaid. Competition for these awards, however, tends to be stiff. Writing a grant proposal can also take a fair amount of time, effort, and expertise.

Pros:

•  Money doesn’t have to be repaid

•  NGO may be able to automatically qualify for the same loans year after year

•  Can be for large amounts

Cons:

•  Funding for grants can dry up

•  There may be heavy competition to qualify for certain grants

•  Requires a grant writer on the team to fill out applications

2. Fundraising

Just like other nonprofits, NGOs often engage in a variety of fundraising activities to help fund their operations and fulfill their missions. Fundraising efforts can range from offering a website donation link to hosting elaborate events like galas, festivals, and auctions. There’s no limit to the possibilities when it comes to fundraising. In fact, Doctors Without Borders even organizes charity video game marathons to help raise funds.

Pros:

•  Money doesn’t have to be repaid

•  Funds can come from any donor who’s interested in supporting the NGO

•  Fundraising activities provide a way to publicize an NGO and its cause

Cons:

•  Planning fundraising events can be time-consuming

•  Fundraising needs to be ongoing; it’s not a one-and-done event

•  May require finding businesses and individuals to donate time or products

3. Private Donations

Funding from NGOs can also come from wealthy individuals who seek philanthropic activity. They may donate money annually or bequeath large sums in their wills upon their death.

Pros:

•  Money doesn’t have to be repaid

•  Donations can be sizable

•  For the donor, money given to NGO may be tax deductible

Cons:

•  Large donations aren’t guaranteed

•  Donors may want to be honored through a plaque in their name or a mention at an event

•  Donations may slow during sluggish economic times

4. Membership

Another way for NGOs to raise money is to charge for membership. To attract members, the NGO may offer exclusive benefits and perks. For example, PETA (People for the Ethical Treatment of Animals) offers members a subscription to its magazine as well as a calendar, vegan recipes, and discounts on products.

Pros:

•  Money doesn’t have to be repaid

•  The perks offered to members are usually low-cost

•  Members feel more invested in helping the NGO

Cons:

•  Membership fees are typically low, so it takes a lot of members to raise significant funds

•  NGO needs a membership coordinator or department to run program

•  Perks need to be enticing enough to draw members

5. Corporate Sponsorships

Just like private individuals, many corporations engage in philanthropy, and many do so by financially sponsoring NGOs. There are a variety of ways a corporation can sponsor an NGO, including direct donations, event partnerships, and matching gifts. This allows a corporation to give back, potentially get a tax deduction, and become affiliated with an NGO that has a powerful and positive mission.

Pros:

•  Corporate sponsorships can be of significant value

•  Partnering with a corporation can amplify the NGO’s message faster and further

•  Corporation may get tax benefits with the donation

Cons:

•  May require a dedicated individual or team at NGO to find corporate sponsorships and manage the relationships

•  Continual support from a corporation isn’t guaranteed

6. Business Loans

Like businesses, nonprofit organizations sometimes need cash in the form of a loan to operate their programs effectively. For example, an NGO may encounter a situation in which the timing of when they receive funds from grants and other sources and when they need to pay bills are out of sync. A cash flow loan or business line of credit can help bridge gaps in cash flow and enable an NGO to run efficiently.

Different types of business loans can also make it possible for an NGO to take advantage of a time-sensitive opportunity or make costly but key capital improvements. Sometimes a grant or in-kind donation can fit the bill, but in many cases, a loan with monthly payments may be the best funding tool.

Pros:

•  Can be easier and faster to get than a grant, corporate gift, or large donation

•  Can enable an NGO to take advantage of a short-term opportunity

•  Can help an NGO make capital investments that will improve operational efficiency

Cons:

•  Money has to be repaid, plus interest

•  NGO will need to prove it has sufficient revenue to repay the loan and may need to provide collateral

•  Lenders may charge nonprofits a higher interest rate due to higher risk involved

The Takeaway

With budgets sometimes in the hundreds of millions, finding sources for funding projects, operations, salaries, and other overhead costs is typically an ongoing effort for NGOs.

As nonprofit organizations, NGOs often rely on a variety of funding sources, including membership dues, the sale of goods and services, grants from corporations and governments, fundraising activities, and private donations. Loans can also be a tool that can help an NGO grow and succeed.

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.

FAQ

What does NGO stand for?

NGO stands for non-governmental organization.

What are some notable NGOs?

Some notable NGOs includeDoctors Without Borders, The World Wildlife Fund, Amnesty International, Greenpeace, Make-A-Wish Foundation, Habitat for Humanity, and Red Cross.

Are NGOs and nonprofits identical?

No. While an NGO is a nonprofit, a nonprofit isn’t necessarily an NGO. NGOs tend to have a larger, more global reach than nonprofits.

Photo credit: iStock/metamorworks

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

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