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Collateral refers to an asset or item of value that you promise to a lender when you take out a loan. If you default on the loan by not making payments, the lender can take that asset. If you pay back the loan as promised, then the asset/collateral remains yours.

Collateral generally makes lenders more comfortable lending money to you and can often translate into higher loan amounts with lower interest rates. However, not all lenders require a specific type or value of collateral to approve a loan.

Read on to learn the pros and cons of using collateral to secure a business loan, as well as what can be used as collateral and how to get financing even if you don’t have collateral.

What Is Collateral?

As stated above, collateral is an item of value that you use to secure a loan with a lender. Traditional lenders, like banks, will often ask what collateral you have as part of the small business loan application process.

While secure assets, like real estate or equipment, are often used as collateral, anything of value the lender can easily sell in order to satisfy your debt should you default might be accepted as collateral.

A lender’s claim to a borrower’s collateral is called a lien — a legal right or claim against an asset to satisfy a debt. The borrower has a compelling reason to repay the loan on time because if they default, they stand to lose the assets they pledged as collateral.

How Collateral Works

Before a lender processes a loan, it must verify that you have the ability to repay any amount you borrow. Ideally, you’ll do this through regular monthly payments, but what happens if you’re suddenly unable to do so?

Does the bank write the loan off as a loss? If you took out a secured loan (which requires collateral), the answer is no. The collateral is liquidated and sold to pay off all or most of the loan balance. Therefore, collateral is used as a form of security for the lender. It guarantees they won’t lose money by lending to you (or at least minimize their losses).

The type of collateral you use typically depends on the type of loan you need. For example, if you need the loan to purchase a business vehicle, the vehicle itself will likely be used as collateral. If you need it to purchase an office building, the building itself could be used to secure the loan.

In many cases, however, a small business loan isn’t taken out specifically to purchase a hard asset like real estate or equipment. When this is the case, you’ll typically need to use another type of asset, such as equipment, buildings, cash reserves, accounts receivable, or inventory, to secure the loan. Generally, an asset qualifies as collateral if it can be sold by the bank for cash.

Recommended: Small Business Owner Unemployment

What Can and Can’t Be Used as Collateral

Collateral is an asset that has value — but not all assets can function as collateral, and some forms of collateral are preferred over others.

From a lender’s perspective, the best collateral is an asset that it can liquidate quickly, meaning the asset can be easily converted into cash. Therefore, cash reserves a business has is often favored as collateral.

Here are some other things that a business may be able to use to secure a loan.

•  Accounts receivable (invoices you’ve sent out)

•  Buildings

•  Equipment

•  Home equity

•  Future sales

•  Inventory

•  Real estate

•  Securities

•  Certificates of deposit

•  Corporate bonds

•  Stocks

•  Treasury bonds

•  Vehicles

The only assets that generally don’t qualify as collateral are ones you intend to sell. Once an asset is listed as collateral, part of the debt covenant (rules regarding the loan) will likely be that the asset cannot be sold until the loan is paid off.

If your business doesn’t have enough assets to provide the collateral required, a lender might require a business owner to pledge personal assets, such as their car or home, in addition to business assets.

How Much Collateral is Required for Business Loans?

Typically, a borrower should offer collateral that matches the amount they’re requesting.

However, some lenders may require the collateral’s value to be higher than the loan amount to help reduce their risk.

How much collateral you need to provide will typically depend on two things: the “Five C’s” and loan-to-value ratio (LTV) of your collateral.

Lenders often use the Five C’s as an indicator of your business’s overall financial health. They stand for:

•  Capacity: What is your debt-to-income ratio?

•  Capital: How much money do you have?

•  Character: What is your credit history? Do you have a history of on-time payments?

•  Collateral: Do you have any assets that can act as collateral for the loan?

•  Conditions: How much do you need, and what do you need it for? What are the going interest rates right now?

Different lenders will approach these factors in their own way. For example, if you aren’t able to meet the collateral criteria but have an otherwise qualified application, you may still qualify for the loan.

Loan-to-value (LTV) ratio is another key metric lenders use to decide the collateral they need. LTV is the amount a lender will loan you based on the value of the collateral. For example, you may be allowed to borrow 70 percent of the value of the appraised real estate or 60 to 80 percent of ready-to-go inventory.

So, if the LTV is 70 percent of the asset you’re putting up as collateral, and that asset is worth $100,000, you would be able to borrow $70,000.

Individual lenders consider the LTV ratio differently, so it’s a good idea to ask your lender how they intend to set that value. The following table offers examples of how much collateral may be needed for a business loan.

Is Collateral Necessary for Business Loans?

No, collateral is not necessary for business loans. There are both secured and unsecured loans on the market. An unsecured business loan is a business loan without collateral.

With unsecured business loans, lenders typically look at personal and business credit scores, as well as the business’s overall health, time in operation, and regular cash reserves. It can be a good idea to explore both secured and unsecured loans and compare small business loan rates before deciding what will work best for your business.

Unsecured Business Loans

Getting a loan without collateral is often faster because there is less paperwork. However, to qualify, both you and your business will likely need to have a strong credit score. You should also expect the lender to heavily scrutinize all of your finances.

There are a few downsides to getting an unsecured business loan. For starters, no matter what your credit score is, it’s unlikely you will get as large a loan without collateral, since collateral tends to make lenders more comfortable lending higher amounts.

In addition, your interest rate may be higher. Interest acts as a safeguard to lenders whether you have collateral or not. When you don’t have collateral, however, that interest rate is likely to be higher than it would be if you did have collateral.

If you don’t have any collateral and your credit score could be higher, you may want to look into business loans for bad credit.

Specific Collateral vs General Liens

Some lenders, including many online lenders, don’t require specific collateral, but rather require a general lien on your business assets (without valuing those business assets) and a personal guarantee to secure the loan.

This can make qualifying for a loan easier and/or faster, depending upon the nature of your business and your business assets.

Borrowers may be more comfortable with specific collateral because they know exactly what they may lose. With a general lien, every aspect of the business is potentially put into jeopardy should there be a default.

However, because the loan is not based upon LTV of specific collateral, you might end up qualifying for more than you would with a traditionally collateralized loan.

Recommended: Categorizing Business Expenses

The Takeaway

Collateral is an asset that a lender accepts as security for a loan, acting as a form of protection for the lender. If the borrower defaults on their loan payments, the lender can seize the collateral and sell it to recoup some or all of its losses.

A lack of sufficient business collateral, however, doesn’t mean you can’t get a small business loan to grow your company (a strategy known as using leverage). Your business may qualify for a general lien on all your business assets collectively, or you may be able to get an unsecured loan, which doesn’t require any collateral.

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

Photo credit: iStock/kate_sept2004

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

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

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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While business loan requirements vary depending on the lender and type of loan, they typically include a minimum credit score, number of years in business, and annual revenue.

Many lenders also consider a number of other factors, such as your debt-to-income ratio and the type of industry you’re in, and will ask for a fair amount of paperwork.

Read on to learn exactly what banks and other lenders are looking for when deciding who they will lend to, how much they will lend, and what interest rate they will charge, plus tips on how to up your odds of getting approved when you apply for a small business loan.

What Is a Business Loan?

A small business loan is money that is loaned to a small business owner by a bank, credit union, or online lender, and must be repaid. The money is to be used for business purposes (such as operating expenses, equipment purchases, and marketing and advertising) and should not be used for personal expenses.

Loan amounts vary, as do repayment periods and interest rates. Fortunately, there are various types of business loans that can accommodate just about every business need you may have.

Pros and Cons of Small Business Loans

A small business loan generally shouldn’t be taken out on a whim. Before signing any loan agreement, it can be a good idea to consider both the benefits and drawbacks of taking on business debt.

Why Do Business Loan Lenders Have Requirements?

Many small businesses fail each year. In order to reduce the risk that comes with loaning money to a small business, lenders generally have a list of requirements.

1. Credit Score

Personal

If your business is new and doesn’t have a strong credit history, lenders will likely look at your personal credit profile. If your personal credit score is strong enough, it may get you access to credit for your business that it wouldn’t otherwise be able to get. However, you may have to sign a personal guarantee, which means that if you are unable to pay off the loan, your personal assets could be at risk.

Business

Yes, there are credit scores for businesses, too. As long as you have an Employer Identification Number (EIN) from the IRS, your business will begin developing a credit score. To expedite matters, you may want to open a business bank account and business credit card and register as much as you can in your business’s name.

If you pay your business’s bills on time and keep its debts low, you can help your business build a strong credit profile. The stronger your business’s credit, the more likely banks will lend to you at an attractive rate and without a personal guarantee.

2. Revenue

A business with a strong, predictable revenue stream has a good chance of getting approved for a high loan amount with a low interest rate. If you’re just starting out and your monthly revenue is still picking up steam, you may have trouble taking out certain types of business loans. In fact, it’s common for lenders to advertise business loan requirements dictating what your monthly revenue needs to be in order to qualify.

3. Debt-to-Income Ratio

Debt-to-income ratio (DTI) shows how much of your small business’s monthly earnings go to repaying your existing debts. Lenders look at DTI because it helps demonstrate how affordable new debt repayments are likely to be and your business’s likelihood to meet those commitments.

DTI is normally shown as a percentage. To calculate your company’s DTI, you simply add up all of your monthly debt repayments, then divide this amount by your business’s monthly gross profits. Multiply the result by 100 to get your DTI ratio percentage. To be considered for a loan, your DTI ratio should be below 50%. To improve your chances of loan acceptance, aim for a DTI ratio of 36% or less.

4. Business Plan

What do you intend to use the money for? How do you anticipate it will increase your company’s profits? Some loans (including traditional term loans and SBA loans) require you to submit a business plan or loan proposal as part of your application. This can be a great opportunity to show your lender that you’ve thought through all the potential opportunities and challenges for your business and how you’re going to grow a successful company.

5. Collateral

Lenders often require borrowers to put up a fixed asset (like property or equipment) to secure the loan. This reduces risk for the lender because, should you default on the loan, they can seize your collateral and sell it to make up for some of the money they’ve lost. If you’re applying for an SBA loan or bank loan, for example, lenders will want to know what kind of collateral your small business has to offer and the value of that collateral.

Not all loans require collateral though. As you explore small business loans, ones that don’t require collateral are called unsecured loans. However, in place of collateral, the lender may require a personal guarantee or charge higher interest rates.

6. Time in Business

The magic number many banks want to see is often two years. It’s not uncommon for a new business to fail shortly after they’ve opened, so the fact that you’re still standing after two years is a good sign to a lender.

However, if you haven’t been in business for two years, this doesn’t mean you won’t be able to get a loan. You may have trouble with some of the more traditional options — such as SBA loans and bank loans — but online lenders will often have more flexible requirements with regard to your time in business.

Recommended: Guide to SBA Loans

7. Industry

Every industry has a level of risk, so lenders will want to know what type of business you own when considering your eligibility. In addition, some lenders have certain industries that they won’t lend to (such as firearms businesses) that could affect their reputation. Others have less obvious restrictions, so it’s a good idea to check with a lender regarding any ineligible industries before submitting your application.

You’ll also want to be sure you correctly identified your business’s industry in your loan application. There are two main industry code systems: Standard Industrial Classification (SIC) and North American Industry Classification System (NAICS). The application will guide you on how to look up your code.

8. Bank Statements

Many lenders will ask for at least four months of bank statements during the underwriting process. They do this to make sure the claims you are making about your company’s financial history are accurate, and make sure you’ll be able to afford the loan payments. These statements also give them insight into how well you are managing the money that is coming into the business each month.

9. Business License and Permits

Business licenses vary by state and industry, but a lender will want to see proof that you are the owner and are legally allowed to run your business. You may also need to supply any relevant permits, such as sign permits, zoning permissions, fire permits, sales tax, and health department permits.

10. Loan Amount

A lender will ask you to specify how large a business loan amount you want to take out. Large commercial banks tend to offer the largest loans, as much as $1 million and more. If you’re in need of a smaller amount of capital (say $250,000 or less), you may be better off with an SBA loan, online term loan, or microloan.

Before you submit this loan requirement, you’ll want to think carefully about what you will use the loan for (such as expanding your business, start-up costs, etc.), then come up with a detailed budget that includes all the expenses involved. You may also want to add a small cushion to cover any unexpected expenses.

11. Loan Purpose

A loan purpose is similar to your business plan. The only real difference is that you’ll answer this question on the loan application itself.

When stating your loan purpose, you’ll want to be as specific as possible. This shows the lender that you have a very specific plan for the money, and it may even lead them to introduce different loan products that are more suitable for your needs, such as business loans for LLCs.

12. Down Payment

Depending on your loan type and other qualifications, you may be required to make a down payment to get a business loan. For example, bank loans and SBA loans typically require you to put 10% to 20% of the loan principal down in order to secure the loan.

13. Other Factors

Lenders may ask for a number of other documents during the application process, including:

•  Your personal and business tax returns

•  Accounts receivable and balance sheets

•  Proof of collateral

•  Copy of your commercial lease

•  Disclosure of other debt

•  Legal contracts and agreements

Recommended: Alternative to Small Business Loans

How to Increase Your Chances of Getting a Small Business Loan

To improve the odds that you’ll get approved for a loan, it’s important to understand how business loans work. Below are some simple things you can do to present a strong application.

•  Put up collateral. By offering collateral, you lower the risk for the lender. While it’s not a guarantee, it can increase your chances of getting a loan approval.

•  Pay off your debts. If your DTI is high, it indicates to a lender that you’re using a lot of your income to pay off other loans. That’s a sign of risk for any lender, so it can be a good idea to pay off some of your other debts before applying for a loan.

•  Work on building a better credit profile. The minimum credit score needed to qualify for a business loan will vary by lender. But, generally, the stronger your personal and business credit, the higher your chances of getting approved for a business loan.

•  Choose the right lender. Not all lenders have the same requirements. If you have thin or poor credit, for example, you will likely stand a greater chance of getting approved for a business loan with an alternative, online lender than with a traditional bank.

•  Wait a year or so. If your business hasn’t been around for at least two years, you may want to hold off applying for a loan and put your efforts into building a strong foundation for your business and increasing your revenue. This will make it likely that you’ll be approved for a loan in the future.

The Takeaway

Small business lenders typically have a long list of requirements for a loan. It’s a good idea to do some preparation before you apply for a loan, including thinking about how you will use the loan, determining how much you will need, assessing your company’s financials, and collecting all the necessary documents. While you cannot use a personal loan for business expenses, it could help you to consolidate high-interest credit card debt you might have incurred, for instance.

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 business loans require down payments?

Business loans do not always require a down payment. Instead of a down payment, however, they may require collateral.

Do business loans require personal guarantees?

If your business’s credit score is low or thin, then you may be asked to sign a personal guarantee. However, this does not mean the loan is not in your business’s name. It means that, should you default on payments, the lender can come after your personal assets.

How much deposit is required for small business loans?

It depends on the lender and the loan amount. Many loans do not require an initial deposit or down payment. Bank loans and SBA loans, however, typically require you to put 10% to 20% of the loan principal down in order to get the loan.

What is good business credit?

Business credit scores are different from personal credit scores. Instead of ranging from 300 to 850, business credit scores range from 1 to 100. The ranges are as follows:

•  80-100: Good

•  50-79: Fair

•  0-49: Bad

If you have a good credit score, this means that you are making your payments on time and possibly in advance. If this is the case, you can expect to receive some of the best rates and the highest loan offers.

Photo credit: iStock/Drazen Zigic

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

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

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Operating income and EBITDA are both ways to measure a company’s financial performance, but they have some key differences.

Operating income is how much a company makes from its core business activities after operating expenses have been taken into account. It’s compliant with the generally accepted accounting principles (GAAP), the accounting standards public companies in the U.S. must follow.

EBITDA, on the other hand, is how much a company makes before the effects of interest, taxes, depreciation, and amortization. It is not GAAP-compliant, but can be a good formula for comparing the financial health of two different companies in the same industry.

While many people wonder whether EBITDA is the same as operating income, the short answer is, no. While these two metrics are related, operating income adds back some of the expenses that EBITDA strips out. Here’s what you need to know about operating income vs. EBITDA, how they are similar and different, and why they are both important.

What Is Operating Income?

Operating income is the amount of profit a company earns from its operations, after deducting operating expenses such as wages, depreciation, and cost of goods sold (COGS). To calculate operating income, any expenses that revolve around the production of goods, or the execution of any services, are subtracted from operating revenue.

Of the three financial statements a business must produce (balance sheet, income statement, and cash flow statement), operating income appears on the income statement.

Analyzing operating income is helpful to investors because it doesn’t include taxes and other one-off items that might skew profits. Lenders may also look at operating income (from current and previous income statements) when a business owner applies for a small business loan. A company that shows an increasing amount of operating income is viewed as doing a good job of generating more revenue while controlling expenses, production costs, and overhead.

How Operating Income Is Calculated

This is the basic formula for calculating operating income:

Operating Income = Gross Income – Operating Expenses

Gross income is defined as the total amount a business earns minus the cost of goods sold (COGS).Operating expenses are expenses a business incurs through its normal business operations, including: selling, general, and administrative expenses; depreciation and amortization;and other operating expenses.

What does operating income not include?

Operating income does not take into account any money received or lost through non-core or non-operating business activities. This means the following data is not taken into account when calculating operating income:

•  Real estate sales

•  Investment income

•  One-time transactions

•  Stock market gains

•  Dividend income

•  Interest income

•  Interest on debt

•  Taxes

•  Lawsuit settlements

On its own, operating income is not a complete picture of a company’s financial health, but it is a very important facet. While a company may make a sizable amount of money from non-operating activities, most companies generate a majority of their revenue from their operating revenue. Because of this, operating income illustrates a majority of their cash flow.

What Is EBITDA?

EBITDA is earnings before taxes, interest, depreciation, and amortization. It’s not an official GAAP calculation because it removes the effects of all of those variables, which are real expenses. However, from an analyst’s or investor’s viewpoint, there are good reasons to not include them when understanding a business.

Let’s take a look at why.

Interest: This refers to interest on debt, including all types of business loans. The reason EBITDA excludes it is that how much debt a company takes on will depend on the financing structure of a company. Different companies have different capital structures and, as a result, different interest expenses. To better compare the relative performance of different companies, EBITDA adds interest paid on debt back to net income.

Taxes: Income tax varies from one location to another. Two companies with identical sales numbers could pay significantly different amounts depending on where they are located. Therefore, taxes do not illustrate a company’s financial performance or revenue potential. When comparing the performance of two different companies, it’s only logical to remove their tax burdens.

Depreciation & Amortization: Depreciation and amortization involve spreading out the cost of an asset over the course of its useful life. For many companies, depreciation and amortization are very real costs that cannot be avoided. However, EBITDA adds these non-cash expenses back to net income because they depend on the historical investments the company has made, not on its current operating performance. Plus, there are not always hard and fast rules about how to calculate depreciation and amortization, which means methods can vary from company to company.

Recommended: NOI vs EBITDA

EBITDA vs Cash Flow

Is EBITDA the same as operating cash flow? Not exactly. When comparing cash flow vs. EBITDA, keep in mind that both track the cash flow generated by a business’s operations and ignore cash flow from investing or financing activities. However, EBITDA doesn’t factor in interest or taxes, whereas operating cash flow does, since they are cash expenses.

How EBITDA Is Calculated

EBITDA is calculated by adding certain expenses back to net income. To calculate it, the following data is required:

•  Net income

•  Interest expenses

•  Taxes

•  Depreciation costs

•  Amortization costs

Recommended: Business Loans and Tax Implications

Comparing EBITDA vs Operating Income

EBITDA and operating income have both similarities and differences. Here’s a look at how they stack up.

Similarities

•  Both are a measure of a company’s profitability

•  Neither consider the costs of interest and taxes

•  Neither is indicative of a company’s overall financial health

Differences

•  EBITDA adds depreciation and amortization back to net income: operating income subtracts them from operating revenue

•  EBITDA includes gains or losses from non-operating income; operating income does not
Operating income suggests how much profit can be gained from operating revenue if operating expenses are lowered;

•  EBITDA suggests a company’s income potential if certain variables like interest or taxes can be mitigated.

How Operating Income and EBITDA Are Related

Both operating income and EBITDA measure a company’s profitability. EBITDA strips out some of the costs of doing business in order to more clearly show the profitability of a company’s core operations. Operating income adds some of those costs back in to show the company’s actual net profit.

EBITDA Formula

There are two formulas for EBITDA.

Option 1:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Option 2:
EBITDA = Operating income + Depreciation + Amortization

Recommended: Net Present Value: How to Calculate NPV

How Operating Income Fits Into the Formula

Operating income is used in the second formula to calculate EBITDA (Operating income + Depreciation + Amortization). However, both formulas are doing the same thing — figuring out what the company’s earnings would be if taxes, interest, amortization, and depreciation were not taken into account.

Operating Income vs EBITDA Example

To understand how much EBITDA can change a company’s numbers, let’s take a look at Adobe. The following data was pulled from Adobe’s 2023 annual income statement.

(Note: All data listed is in U.S. thousands.)

For 2023, Adobe reported an operating income of $6.65 billion. Let’s look at how they got that number:

Operating Income = Gross Income – Operating Expenses

According to their income statement, Adobe had a gross profit of $17.055 billion and total operating expenses of $10.405 billion. Putting those numbers into the formula, we get:

Operating Income = $17.055 billion – $10.405 billion = $6.650 billion

Unlike net income (which tells you a company’s total earnings or losses after accounting for all sources of income and all expenses), operating income tells you how much of a company’s total profit comes from its core business activities (or operations). As we can see with Adobe, operating income tends to be higher than net income ($6.650 billion vs. $5.428 billion)

Now, let’s look at Adobe’s 2023 EBITDA. Unlike operating income, EBITDA is not an official GAAP measurement, so companies are not required to disclose on their financial statements. However, you can calculate a firm’s EBITDA using the numbers on the income statement, like so:

EBITDA = Net Income + Interest + Taxes + Depreciation/Amortization

EBITDA = 5,428 billion + $113 million + 1.371 billion + 168 million

EBITDA = 6.08 billion

EBITDA offers a more positive look at Adobe’s profits for 2023 — roughly 6.1 billion compared to around 5.4 billion. This is typically the case since EBITDA includes non-operating income and adds back most expenses.

Recommended: What You Should Know About Short-Term Business Loans

Pros and Cons of Using Operating Income

Recommended: Personal Business Loans: Risks, Appeals, and Alternatives

The Takeaway

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It can be useful when comparing the financial performance of two different companies because it removes the effects of any accounting or financing decisions that owner’s have discretion over.

Operating income is how much a company makes from its core business operations after any related expenses are taken into account. It adds back some (but not all) of the numbers that are excluded from EBITDA.

Looking at both operating income and EBITDA provides a more complete picture of a company’s financial performance and potential than either one alone.

When it comes to getting approved for a small business loan, lenders will often look at both of these metrics. EBITDA tells them whether your business is generating more cash flow than the amount of the loan payments. Growth in operating income indicates that your company is likely to continue to be profitable.

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

FAQ<

How do you calculate operating income from EBITDA?

Operating income and EBITDA have two different formulas.

Operating income formula:
Operating Income = Gross Income – Operating Expenses

EBITDA Formula:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
OR
EBITDA = Operating Income + Depreciation + Amortization

Is operating income the same as EBITDA or the same as EBIT?

Operating income is similar to EBIT (earnings before interest and taxes), since it does not incorporate the cost of interest or taxes into its calculation. EBIT, however, includes non-operating income and non-operating expenses, while operating income does not. Operating income is solely focused on the net profit gained from operating expenses.

Is operating income or EBITDA better?

It depends on your purpose. For comparing two companies in the same industry, many analysts and investors prefer EBITDA because it removes variables that are unique and vary from business to business. Some analysts, however, prefer operating income over EBITDA because depreciation and amortization are still expenses that need to be accounted for.

Business owners may find operating income to be more useful than EBITDA, especially if they are looking for ways to lower overhead in order to increase profits without increasing sales.

Photo credit: iStock/Morsa Images

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

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

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

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Grants can give your business an injection of working capital when you need it the most. And, unlike loans, the money does not need to be repaid. However, in most cases, grants are taxable income for a business. It’s important to understand the terms and conditions of any grant program you apply for so that your company is financially prepared come tax season.

Read on for a closer look at how business grants work, how to find and apply for one, plus tips for doing your taxes if you receive one.

What Are Business Grants?

A business grant is a lump sum of money given to a small business for either a specific purpose or to help cover general operating expenses in order to help that business succeed. Business grants are offered by government agencies, nonprofit organizations, and private businesses. Depending on the program, you could receive anywhere from a few hundred dollars to hundreds of thousands of dollars.

Small business grants can be helpful for all types of small businesses, particularly those that are just getting off the ground and may not qualify for traditional types of financing, such as small business loans.

How Business Grants Work

Business grants often become available when a government agency, nonprofit organization, or corporation decides to set aside money for a particular area of interest or concern. Their focus might be helping minority- or women-owned businesses, promoting research and development in a specific industry, or bringing more businesses into an underserved community. Whatever their concern, the organization, agency, or business will then start a grant program by putting money aside and establishing qualifications and an application process.

Grants differ from small business loans in that they typically don’t have to be repaid. However, that doesn’t mean there are absolutely no strings attached. Often, the grantor will have strict reporting requirements to make sure you adhere to the terms of the funding. For example, if you received a grant to develop a specific product or achieve a specific goal, you will likely need to provide paperwork to show that you are indeed using the money for this purpose.

Types of Business Grants

Just as there are many types of business loans offered by a variety of lenders, there are also different types of small business grants offered by various entities. Here are some of the most common types of business grants.

•  Federal business grants: These are offered by federal government agencies, including the U.S. Small Business Administration (SBA), to businesses that benefit the public or focus on certain areas of research and development.

•  State and local government grants: Many small business grants are offered at the state and local government level. States often provide grants to businesses that can help further their economic goals, such as child care centers or companies that are developing alternative sources of energy.

•  Startup grants: This type of grant is designed to provide the seed funding for a company that is just getting off the ground.

•  Grants for women- and minority-owned businesses: Some organizations offer grants specifically to help underserved groups, such as women and minorities, start or grow their own businesses.

•  Grants for veterans: There are a number of grants available specifically to assist business owners who are currently serving or have served in the U.S. military.

How to Get Business Grants

The first step to getting a small business grant is to do some research to find a grant your business qualifies for.

A good place to start your search is the federal government’s grant directory at Grants.gov. You can also check the SBA’s website at www.sba.gov (which offers a loans and grants search tool), along with your state’s official web page. If you are a woman, you may want to look into the Amber Grant. If you are a veteran, it can be worth looking into grants offered through the military.

Before you apply for a small business grant, you’ll want to make sure you meet all of the qualification requirements. Business grants are competitive and the application process can be labor-intensive. You don’t want to invest a lot of effort into a grant you aren’t likely to get. Also take note of deadlines to make sure the date hasn’t passed and you’ll have enough time to put together your application.

If you find a grant that fits the bill, the next step is to fill out the application and supply any other requested information or financial records. Take note of when the application period closes and when winners will be selected.

If you’re selected to receive a grant, the grantor will notify you about your funding along with the details about the process for reporting your use of the funds. Once you’ve agreed to the terms, you will receive the proceeds of the grant.

Are Grants to Businesses Taxable?

Typically, yes. Unless your company or the grant meets specific exemption requirements, any funds received as a grant counts as income. This applies to federal taxes and typically state taxes, as well. You will need to report any grant funds you’ve received as part of your business income for that tax year. Depending on your deductions, you may need to pay taxes on the funds.

Recommended: Is Business Loan Interest Tax Deductible?

Which Business Grants Are Not Taxable?

Business grants are not taxable in all situations. Exceptions include:

•  Nonprofit recipients: Not-for-profit businesses are usually considered tax-exempt under the 501(c)(3) section of the IRS code. Consequently, a grant would typically be considered nontaxable income if the purposes are relevant to the nonprofit’s mission.

•  COVID-19 relief grants: Two government grant programs related to pandemic are not taxable — the Shuttered Venues Grant and the COVID-19 EIDL.

•  Grants made by a federally recognized Indian tribe: If a grant is made by the government of a federally recognized Indian tribe to a member to expand an Indian-owned business on or near reservations, the grant is generally not taxable.

Business Grant Tax Tips

If you’re trying to determine whether or not small business grants are taxable, here are some tips that can help ensure you’re not caught with an unexpected tax bill.

•  Ask questions before (and after) receiving the grant. Read the terms and conditions of your grant agreement carefully (it may outline your tax obligations) and ask any questions you have. Understanding your tax liability can help you determine how much of the funding is available to use.

•  Set aside some grant money for taxes. Before you spend all of the proceeds from a business grant, it’s wise to set aside the amount you will likely owe in taxes. Typically, grant funds will be taxed at the same rate as any other business income.

•  Include grants in estimated taxes. If you pay quarterly estimated taxes, you’ll want to include any grant funds you received during that quarter when estimating how much you owe in taxes for that quarter.

•  Keep good records. If you received a government grant that is not considered taxable income, it’s important to keep records showing how the funds were spent in the event of an audit by the Internal Revenue Service (IRS).

•  Consult a tax professional. It can be a good idea to use a small business tax consultant to help with your taxes and review grant paperwork.

State and Local Tax Laws

While state tax laws vary, you may also have to report grant funds as income on your state tax returns. To help businesses understand their state tax obligations, some states have economic development corporations or agencies whose websites include tax guidelines for small businesses. You may also want to check your state’s Department of Revenue website.

Recommended: Grants for Georgia Small Business

The Takeaway

Grants can be a huge help for small businesses in any growth stage. And, while they are essentially free money, grant funds are still counted as business income in most instances. If you are able to secure grant funding, it can be a good idea to set aside some of that money to cover your federal and state tax obligations. Grants are typically taxed at the same rate as any other business income.

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

FAQ

Are all business grants taxable?

Most are. Exceptions include certain government relief grants, grants by and for federally recognized Indian tribes, and nonprofit recipients of grant funds.

How can you estimate taxes for a business grant?

A business grant is generally taxed at the same rate as any other business income. You can estimate how much tax you’ll owe by applying your usual tax rate.

Are there any downsides to accepting business grants?

While business grants are essentially free money, there are a couple of downsides to accepting a business grant. For starters, you may need to use the money for a specific purpose. You also may need to adhere to specific reporting requirements to prove that you are using the grant for its intended purpose. Also keep in mind that, unless you run a nonprofit business, you will typically need to pay taxes on any grant proceeds you receive.

Photo credit: iStock/Weekend Images Inc.

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.

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.

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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Starting or expanding a hotel or motel can be an expensive proposition. You may be looking to purchase property, renovate or remodel an existing structure, add a restaurant, hire staff, market your business, and more.

Fortunately, there are a number of different types of small business loans designed specifically for aspiring hoteliers, including conventions loans, acquisition loans, bridge loans, and low-interest SBA loans. Read on to learn how to find the right type of financing for your hospitality business.

What Are Motel and Hotel Loans?

A motel or hotel business loan refers to a type of commercial financing product designed to help businesses in the hospitality industry. These loans can be used for the purposes of building, acquiring, refinancing, or gaining working capital for a hotel, motel, resort, bed & breakfast, or RV park.

How Do Hotel Loans Work?

Many types of lenders offer hotel and motel loans, including banks, credit unions, private lenders, and alternative lenders. Bank and government-backed hotel loans typically have stricter lending criteria but charge lower interest rates, while private and alternative lenders tend to offer quick and easy approval, but come with higher financing rates.

The precise terms of a hotel loan will depend on the lender and type of loan. Hospitality financing often requires a downpayment of at least 10% to 15% of the loan amount and/or collateral in order to secure the loan. In some cases, the hotel property itself serves as collateral for the loan. There are also financing options that involve giving a company shares in the hotel in exchange for capital.

Times When a Hotel Loan Can Be a Good Idea

A hotel loan can be a good idea in a variety of situations, including:

•  The purchase of an existing hotel property

•  New construction

•  Refinancing an existing hotel loan

•  Funding operational expenses

•  Relocating

•  Remodeling

•  Hiring additional staff

•  Purchasing new hospitality equipment

•  Getting hotel bridge financing until permanent financing becomes available

•  Positioning the property for profitability

•  Stabilizing a distressed property

Common Types of Loans for Hotels

There are a variety of hotel and motel loans available. Here are some options you may want to consider.

Hotel Construction Loans

If your dream is to build a new hotel or motel, then a hotel construction loan can help get the wheels moving. Loan terms vary lender to lender, but it’s often possible for a construction loan to transition to a hotel commercial loan once the building is complete.

Hard Money Loans for Hotels

Hard money loans for hotels and motels are not offered by traditional lenders, but instead by individuals or private companies that accept property or an asset as collateral. Hard money loans typically involve minimal paperwork and fast funding, making them ideal if you need to make a hotel purchase happen fairly quickly. However, these loans generally come with higher interest rates than conventional hotel loans and shorter loan terms (often just a few years).

Hotel Bridge Loans

Hotel bridge loans fill in cash gaps between getting a new mortgage and obtaining a new asset or selling an older asset or piece of real estate. Bridge loans are particularly useful when building or acquiring a hotel. They can also be useful as a financial safety net during periods of slow cash flow or while waiting on another lender to close on their financing.

Conventional Loans

Also known as a classic loan, this type of financing is offered by conventional lenders like banks, savings institutions, and credit unions. Conventional loans typically come with a fixed interest rate and set repayment term. They can be used for hotel improvement projects, like buying hospitality equipment, hiring more employees, and hotel renovations.

Unlike loans backed by the Small Business Administration (SBA), conventional loans are not insured by the federal government. Consequently, they can be more difficult to qualify for. However, if you have a strong credit score, a conventional loan often comes with low rates and attractive loan terms for borrowers.

Recommended: Business Loans for Cafes

Permanent Loans

This type of financing is designed for entrepreneurs who want to build a hotel from the ground up. Permanent loans typically start out as hotel construction financing, then once the building is complete, get converted into a mortgage. Permanent loans save you from applying and qualifying for two separate loans and working with more than one lender.

Preferred Equity

With preferred equity financing, a private company extends credit to the hotel owner in exchange for preferred shares in the hotel. This puts the financing company in a priority position for repayment from any cash flow or profit earned from the hotel. Preferred equity financing is often used for securing the last mile of funding a bank didn’t offer for purchasing commercial real estate.

Mezzanine

Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to convert the debt to an equity interest in the hotel in case of default. Mezzanine financing can allow you to achieve goals that require capital beyond what a lender will extend. However, this type of financing typically comes with a higher interest rate than other types of hotel loans.

Fully Amortized

Amortization refers to the amount of principal and interest you pay each month over the life of the loan. Near the beginning of a loan, most of your payment goes toward interest. Over the course of your loan term, the ratio gradually tips the other way until nearly almost your entire payment goes toward paying off the principal. A fully amortized loan is a loan that, if you make every payment on time according to your loan schedule, the loan will be completely paid off by a specific date.

Acquisition Loans

An acquisition loan is a loan for purchasing a hotel asset or an existing hotel. This type of financing often comes with favorable rates and terms because the asset/business being purchased has tangible value and can be used as collateral for the loan. Acquisition loans must be used within the allotted time period and only for the purpose specified at the time of application.

SBA Loans for Hotels

SBA hotel loans are loans backed by the U.S. Small Business Administration (SBA). The SBA itself does not provide the financing but, rather, works in partnership with approved lending partners — including local and national banks as well as non-bank lenders and nonprofits — to guarantee a large portion of the loan’s proceeds in the event that the borrower defaults.

Because this reduces the risk to the lender, SBA loans offer borrowers low rates and attractive terms. However, the application process is extensive and borrowers must meet fairly strict qualifications in order to get approved.

SBA 7(a)

The most common type of SBA loan, the SBA 7(a) loan, can be an excellent choice for hotel financing because it comes with low interest rates, long repayment terms, and loan amounts up to $5 million. An SBA 7(a) loan can be used for a variety of hotel financing needs, including purchasing real estate, working capital, buying hotel equipment, renovation, construction, and more.

SBA 504/CDC

The SBA 504/CDC loan combines a loan from a non-profit Community Development Corporation (CDC) with a loan from a bank lender to create a long-term, low-interest loan. Because this type of loan is connected with community development, it can be more easily accessible to hotel borrowers who may otherwise struggle to obtain an SBA hotel loan.

Pros and Cons of SBA Loans

Pros and Cons of Hotel Loans

Getting a Hotel Loan

Whatever type of hotel or motel financing you’re looking to get, there are several steps involved in applying for and getting a small business loan. Here’s what you need to know.

Finding Out How Much of a Loan and What Kind You Need

The first step in finding a loan is to determine exactly how much financing you need. If you’re purchasing property or an existing hotel, you’ll need to first determine its value. Private lenders may offer 60% to 75% of that value, while SBA lenders will often provide 90% of the value. Consider how much of a downpayment you will be able to come up with, as well as what size loan payments you will be able to make each month.

You also need to consider the type of loan you may be able to qualify for. For an SBA loan, you’ll need a strong business or personal credit profile. For a hotel acquisition or new construction, where you don’t have an existing business with credit and revenue history to share, your personal credit history will be a major factor in the SBA’s decision. If you have less-than-excellent credit, you may want to consider a hotel loan from a private or alternative lender.

Recommended: Liquor Store Loans Explained

Gathering Important Documents

The documents needed to apply for a hotel loan will depend on the lender and type of loan, but may include the following.

Borrower information:

•  Driver’s license

•  Three years of tax returns

•  Most recent mortgage statement for any real estate owned

•  Bank statements

•  Life insurance if there is a cash surrender value

•  IRA/401(k) information

Hotel information:

•  Hotel specifications

•  Number of rooms

•  Amount of floors

•  Number of buildings on property

•  Year built

•  Square footage

•  Building acreage

•  Last mortgage statement

•  Profit and loss balance sheet

•  Three years of tax returns

•  Most recent quality inspection report

•  Latest property improvement plan

•  Copy of all business contracts

•  Capital expenditure

•  Survey report

•  Most recent appraisal

•  Customer occupancy rate

Comparing Lenders and Rates

When comparing lenders and rates, make sure to pay attention to not only a company’s interest rates, but also its fees. The easiest way to compare loans is to look at the loans’ annual percentage rate (APR), which includes the loan interest rate, plus all fees associated with your loan, including origination fees and interest.

Recommended: Business Loan Uses

Applying

Before you jump in and make your dream of owning your own hotel a reality, make sure you have everything in place before you begin. Selecting a business structure, for example, should be done well in advance of applying for any business loan, particularly if your goal is to keep your personal assets protected.

In addition to gathering all the necessary documents, you will also likely need to create a business plan. You may also need to provide a hotel loan request letter in which you specify the loan amount you’re asking for and describe how you’ll use the funds. When filling out a loan application, be sure to follow the loan application directions to the letter to avoid delays.

The Takeaway

If you’re looking to buy or expand a hotel or other type of hospitality business, lack of funding shouldn’t stand in your way. Finding the right hotel or motel loan at the right price, however, can take a fair amount of time and legwork.

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

FAQ

Can you get a loan to open a hotel?

Yes, there are many loan options to help new business owners open a hotel, including acquisition loans and loans backed by the Small Business Association (SBA).

What is the down payment required for a hotel?

If you’re purchasing a hotel, you will typically need to put down at least 20% in order to secure financing.

What is a hospitality loan?

Hospitality loans are the same as hotel or motel loans, which means they are loans designed for businesses that can be described as either an inn, bed and breakfast, hostel, motel, or hotel.

Photo credit: iStock/Chadchai Krisadapong

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 .

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