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An income statement, also known as a profit and loss statement (or P&L), summarizes your company’s financial transactions. It shows you how much you earned and how much you spent for a specific reporting period, which may be one month, one quarter, or one year.

An income statement is an important tool for any business owner because it lets you know whether your business made a profit or took a loss during the period being reported. It also helps evaluate past performance, predict future performance, and determine if changes need to be made.

Read on to learn what goes on an income statement, how to read an income statement, and how they can help you grow your business.

What Is an Income Statement?

An income statement shows your company’s income and expenditures. It also indicates whether your company is making profit or taking a loss for a given period, which could be one month or one quarter.

An income statement is one of three key financial statements that help you understand the financial health of your business. The other two are the balance sheet and cash flow statement.

One way to think about a balance sheet vs. an income statement is that a balance sheet tells you where you are right now, whereas an income statement tells you how you got there.

A single-step income statement displays a company’s revenue, expenses, gains (income from other sources), and losses (one-time or unusual costs) to arrive at its net income. The equation is a simple one:

Net Income = (Total Revenue + Gains) – (Total Expenses + Losses)

Large corporations that have multiple business segments offering a mix of products and services will typically use a multi-step income statement. Multi-step statements, which separate operating and non-operating revenues and expenses, may also include gross profit, earnings before tax, taxes paid, and net profit.

How To Read an Income Statement

An income statement consists of different line items. Each line item is a category (such as “expenses”) that may be further broken down into smaller categories (such as “wages” or “rent”).

As you read through an income statement, you follow a linear path from the “top line” (the total money you’ve made before any expenses are taken into account) to the “bottom line” (the actual profit you earned). Along the way, you see how the top line amount gets whittled down as the money is used to pay for the cost of creating your products or services and keeping your company running.

Many business owners focus exclusively on the bottom line — their net profit — but it can also be important to look at your sales revenue. Often, there’s only so much you can do to improve your bottom line by cutting expenses. At a certain point, you may also need to increase your revenue in order to grow your business.

Key Components of an Income Statement

What goes on an income statement will depend on the type of business you own. However, the following categories are often included in an income statement.

Revenue

Sales revenue is how much money the company made from sales or services within a given time period. If your company has multiple revenue streams, each will be a line item under the “revenue” category of the income statement.

For some businesses, revenue needs to be further broken down into “operating” (revenue from the business’s core activity, such as selling a product) and “non-operating” (revenue generated from other activities, such as installing or maintaining the product it sells).

You may need to factor in gains as well. Gains are a specific type of non-operating income (aka “other income”). They generally result from an event that has nothing to do with the company’s primary source of income. Gains may include selling of assets, lawsuit settlements, or investments in financial instruments.

Expenses

One major expense is the cost of goods sold, or COGS. This figure is based on how much you pay to create your products, and includes only costs directly associated with those sales. For example, costs associated with goods may include labor, parts, and materials.

If the company is a service business, this line item may be called cost of sales, and includes the cost of paying wages and providing the supplies you need to perform those services.

In addition to the COGS, you also want to include expenses that are not directly associated with your core business, such as administrative costs (e.g., rent and utilities), marketing and advertising, interest paid on a loan, and research and development expenses.

Depreciation is another expense that may also be included if you spent a large amount on an essential piece of equipment and you’re depreciating part of its value every accounting period.

Tracking and categorizing expenses as you go will make compiling this part of your income statement much easier.

Recommended: 22 Small Business Tax Deductions to Know in 2025

Gross Profit

Gross profit is sometimes included in an income statement and is calculated by subtracting the COGS (or cost of sales) from total sales revenue during the statement period. Gross profit doesn’t take into account general business expenses, interest payments on loans, or income tax.

Operating Income

Once you calculate gross profit, you can subtract selling, general, and administrative expenses to calculate operating income. This amount represents the working capital available to the business after all expenses are paid. Operating income tells you how much your business made after subtracting all internal costs (which you can control) but before paying external expenses.

Net Income

A company’s net income (aka net profit) is the “bottom line” of an income sheet. It’s calculated by subtracting total expenses, including interest charges and taxes, from total revenue. Net income tells you what your company actually earned (or lost) during the accounting period.

What Are Income Statements Used For?

Income statements show a company’s sales, gains, losses, and overall profit or loss during a certain period. This information can be used to make financial projections. For example, if income statements show a 10% increase in sales year over year, it suggests the company can expect continued growth the following year. It’s not a guarantee, but a reasonable expectation.

This information can also be used to help business owners decide whether they can boost profits by increasing revenues, decreasing costs, or both. They can then refer to later income statements to see if the strategies have paid off.

Below are some other ways in which an income statement can be useful for a small business.

Frequent Reports

Unlike many other financial statements, which are done annually, income statements are typically generated quarterly or monthly. As a result, they can be more helpful in tracking business performance. Because of their frequency, income statements allow owners to pick up on small issues before they snowball into larger, and potentially more expensive, problems.

Pinpointing Expenses

When a company has a large number of expenses, it can be easy to lose track of where all of the money is going. An income statement analysis shows owners if expenses are on, over, or under budget and also highlights unexpected expenses. The statement could reveal ways for the company to upgrade or streamline operations, possibly with a small business loan. This could help decrease costs and, in turn, improve net income.

Analysis of the Business

A company seeking an infusion of funds, from either an outside investor or a lender, will need to show how it’s performing financially. For example, when applying for a business loan, you will typically need to provide your income statements.

Recommended: 15 Types of Business Loans to Consider

Limitations in Income Statements

Income statements are useful but they have their limitations. The biggest limitation in income statements is reliance on assumptions. Companies may assume an asset is going to depreciate less than it actually does, or they may predict how many products will be returned in a given quarter. More than likely, both of these projections will not be exact, which causes the income statement to be flawed.

Getting the assumptions wrong can be extra perilous for pro forma income statements, which rely on specific expectations or hypotheticals to project a company’s future income, expenses, and profitability.

On a smaller scale, inaccurate assumptions can also cause problems on budgeted income statements. A budgeted income statement, used to forecast business activity in the near term, relies more on current information than on assumptions. But it does call for projections of future expenses, revenues, and profit, any of which may be incorrect.

Other limitations in income statements include being time-consuming to prepare and inaccurately reflecting how well (or poorly) a company is performing. However, overall, income statements can provide a good summary of the company’s financial health.

Income Statement Example

Below is an example of a simple, single-step income statement for a small business.

It may be worthwhile tracking down income statement examples from companies similar to yours to see how all the sections fit together.

GAAP Income Statements

U.S. public companies report their earnings on income sheets based on GAAP, or generally accepted accounting principles. GAAP is a standardized set of rules, which allows investors to analyze and compare companies’ statements against one another objectively.

GAAP income statements consist of several different business financial statements, including the balance sheet, the statement of owner’s equity, and the cash flow statement. This provides a detailed look at a company’s revenue and expenses, and it standardizes how the information is presented to creditors and shareholders.

One type of income statement that’s not recognized under GAAP is the variable costing income statement. Although GAAP financial reports do not include variable costing, business owners often use this method to calculate how many units need to be sold before the company starts earning a profit.

The Takeaway

An income statement is a key source of information about many factors that affect a company’s profitability. It shows a company’s expenses, income, gains, and losses; that information goes into a mathematical equation to arrive at the net profit or loss for the given time period.

An income statement helps business owners decide whether they can boost profits by increasing revenues, decreasing costs, or both. Being able to see this information at short intervals can help business owners make timely decisions.

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

Is there a special format for income statements?

Income statements follow no universal format but typically include three sections: revenue, expenses, and net income. Businesses can use single-step or multi-step formats, with the latter providing detailed breakdowns like gross profit and operating income, offering greater insight into financial performance.

What is an income statement’s most important part?

The most important part of an income statement is the bottom line — net income. This tells you exactly how much your business is making, after expenses.

What is the difference between a balance sheet and an income statement?

A balance sheet is a record of your company’s current debts, assets, and equity. An income statement tracks a company’s income and expenditures over a certain period of time and shows overall profit or loss during that period.

What are some common errors in interpreting income statements?

Common mistakes include ignoring explanatory notes, overlooking the company’s cash flow, misinterpreting measures of profitability, neglecting accounting changes, and focusing too much on short-term results. Explanatory notes give context and additional details that clarify the numbers. Changes in accounting policies can distort year-over-year comparisons, as can random factors that may have impacted short-term results.

How often should income statements be reviewed for small businesses?

The U.S. Chamber of Commerce recommends business owners review their income statements monthly. Regularly monitoring expenses and revenue can reveal the impact of even small operational changes.

Photo credit: iStock/LaylaBird

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

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

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

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

SOSMB-Q225-029

Strong financial performance is key to a company’s long-term success, but it’s a subjective evaluation. There’s no single metric that defines a business’s financial health. Rather, a company’s performance is based on multiple factors, including its revenue, expenses, assets, liabilities, and profitability.

Because financial performance takes a broad view, there are lots of different levers companies can pull to improve it. Here’s a closer look at what financial performance means and strategies to enhance it.

What Is Financial Performance?

Financial performance is a broad view of a company’s overall health. It takes multiple dimensions into account, such as revenue, operating expenses, cash flow and debts, rather than looking at any one metric in isolation.

There are lots of stakeholders in a business, from creditors to investors to employees to management. All of these stakeholders have a vested interest in a company’s financial performance and long-term success.

The Securities and Exchange Commission (SEC) requires public companies to share information on their financial performance annually with Form 10-K. This form provides stakeholders with up-to-date data on a company’s finances. It’s accessible to the public in the SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) database.

Core Financial Performance Metrics

There are a variety of metrics you can use to evaluate a company’s financial performance, including profitability ratios, liquidity metrics, and others.

Profitability Ratios (Gross Margin, Net Profit Margin, ROI)

Whether or not a business is profitable is key to its financial performance. Here’s how to value a business in terms of its profitability:

•  Gross margin: The gross margin tracks how much revenue a business keeps after subtracting the cost of goods sold (COGS). It’s typically calculated as a percentage. A higher percentage points to profitability, while a low percentage means there’s room for improvement.

•  Net profit margin: Similar to the gross margin, the net profit margin measures the amount of revenue a company receives from its sales. However, it additionally subtracts business expenses and taxes to get a clearer picture of net profit.

•  Return on investment (ROI): ROI measures how much profit a business makes relative to the cost of an investment. A simple formula for ROI is net profit divided by the cost of the investment. When a business is measuring its financial performance, it might look at the ROI of specific initiatives, such as a marketing campaign, a new product line or the purchase of equipment or technology.

Liquidity Metrics (Current Ratio, Quick Ratio, Cash Flow)

Liquidity metrics measure a company’s ability to pay off short-term obligations with liquid assets. Here are some small business financial ratios to know.

•  Current ratio: This term refers to a company’s solvency. It divides assets by liabilities to determine whether a company can cover short-term obligations.

•  Quick ratio: This measurement divides a company’s liquid assets by its liabilities. Unlike the current ratio, it doesn’t take inventory into account, but instead focuses on “quick assets” like cash and accounts receivables.

•  Cash flow: As the name suggests, cash flow refers to how money moves in and out of a company. A positive cash flow means there’s more money coming in than going out, while a negative cash flow indicates the opposite.

Operational Efficiency (Inventory Turnover, Asset Utilization)

Another important metric when evaluating a company’s financial performance is the efficiency of its operations. Some factors to measure operational efficiency include:

•  Inventory turnover: This tracks how much inventory a company sells within a certain time period. Stakeholders may look at how often a company sells out of its entire stock of inventory.

•  Asset utilization: From equipment to technology, business assets can be expensive. Asset utilization looks at how efficiently a company is using its assets. It considers the value a company is getting out of its assets vs. the cost of acquiring and maintaining them.

Solvency and Leverage (Debt-to-Equity, Interest Coverage)

Solvency and leverage are key factors when assessing a business’s financial performance. They have to do with a company’s ability to meet debt obligations and how much it relies on debt to maintain operations. Some measures of solvency and leverage include:

•  Debt-to-equity ratio: This ratio compares a company’s debt to its equity. A higher ratio can be riskier, since it reveals that a company is financed more by small business loans than by capital.

•  Interest coverage ratio: This ratio compares a company’s earnings (before interest and taxes) to the interest charges it must pay on debt. It reveals how easily a business can afford interest expenses.

8 Strategies To Improve Financial Performance

Since financial performance depends on a variety of factors, there are lots of strategies you can use to improve it. Here are some financial performance tips.

1. Revenue Growth Optimization

Optimizing revenue may be an obvious way to boost financial performance, but it doesn’t happen by accident. A business can come up with a revenue growth strategy by analyzing various factors, including pricing, inventory, demand and market conditions. Revenue optimization may come through acquiring new customers, entering new markets, innovating products, diversifying income streams or pursuing other sources of growth.

2. Cost Reduction and Expense Management

Bringing down costs is another way to increase cash flow and improve solvency. As a business owner, you can review all your expenses closely to identify any areas of waste. You might also negotiate with vendors to bring down costs. Reducing expenses can improve profitability, as long as it doesn’t sacrifice product quality or customer experience.

3. Cash Flow Enhancement

Enhancing cash flow can help a business cover its financial obligations and operating costs. A business may analyze its cash flow on a monthly basis to see where cash is coming in and going out of the business. If cash flow is trending negative, consider ways to turn things around, such as cutting costs, boosting revenue or improving accounts receivable collection.

4. Working Capital Improvements

Working capital refers to the money a business has on hand to meet its short-term obligations. You can calculate it by subtracting your business’s current liabilities from its current assets. A negative result indicates financial problems, while a positive result means your business has the means to cover operating costs. At the same time, high working capital isn’t necessarily the goal, as it can suggest that a business isn’t investing its profits back into growth.

5. Strategic Debt Management

Taking on debt can improve a business’s financial performance if it fuels growth. A business might take out a startup business loan, SBA loan, or business line of credit, for example, to hire employees, invest in marketing, or expand to a bigger facility. Equipment financing can be used to purchase equipment. Before borrowing, though, a business should carefully consider a loan’s interest rate, fees, monthly payments, and other terms to make sure it’s affordable. Businesses may also consider debt management strategies like consolidation to simplify repayment or potentially save on interest.

6. Operational Process Improvement

Taking a magnifying glass to your business’s processes can help you make them more efficient and get better results. You may enhance your accounts receivable process by sending invoices more quickly or making it easier for customers to pay. Or you could streamline your supply chain to cut costs and receive products faster. Continuously monitoring your processes can help you improve them, cut out inefficiencies, and boost your business’s bottom line.

7. Data-Driven Financial Decision Making

Financial performance management shouldn’t happen in a vacuum. You can rely on financial analytics and other data to make informed decisions about business processes, growth, and investments. Collecting data before and after a decision can help you evaluate whether it’s working or if you need to change course.

8. Strategic Financial Planning

Strategic financial planning is how your business can achieve its long-term goals. It’s all about defining objectives and making sure they align with your current practices. This planning may be a continuous process that evolves as your business grows.

💡 Recommended: Improving Business Performance

Implementing Financial Performance Improvements

There are many ways that companies can improve their financial performance, but they must take action on these strategies and measure results as they go. Reducing expenses, managing debt, and making processes more efficient can all benefit a company’s financial well-being.

Before making changes, measure key metrics to see where things stand. Then, you can continue to collect data while you implement new strategies to measure how effective they are.

The Takeaway

There are various ways to enhance business performance, such as cutting waste and leveraging debt strategically. Non-financial metrics, such as customer satisfaction and employee happiness, can also contribute to a company’s bottom line. Taking a multifaceted approach — and measuring results as you go — can help you improve a business’s financial performance and realize its long-term vision.

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 often should a business evaluate its financial performance?

A business may evaluate its financial performance on a monthly and quarterly basis to stay on top of trends. Most businesses also perform a thorough review annually to compare their financial performance from one year to the next.

Which financial performance metrics are most important for small businesses?

Some of the most important performance metrics for small businesses include gross and net profit margins, operating cash flow, working capital, and debt-to-equity ratio.

How does cost control affect financial performance?

Cost control has the potential to improve financial performance, as it involves a thorough review of your business expenses to find areas to save. Reducing costs — and preventing them from spiraling out of control — can improve cash flow and increase profitability. At the same time, make sure that reducing costs doesn’t diminish the quality of your products or customer experience.

What’s the difference between financial performance and profitability?

Profitability is a specific metric that measures how much money a business makes after subtracting its expenses. Financial performance, on the other hand, is a broad measure of a company’s well-being and includes profitability, cash flow, liabilities and other metrics.

How do non-financial metrics impact overall financial performance?

Non-financial metrics, such as customer satisfaction, employee engagement and operational efficiency, can impact a business’s overall financial performance. Dissatisfied customers, for instance, could be an early signal of profit loss, while a lack of employee engagement could prevent the company from reaching its growth goals.

Photo Credit: iStock/Liubomyr Vorona

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

Small Business Loans
*Reference to “same day funding” or “funding within 24 hours” describes a general capability of many lenders you can reach through SoFi’s marketplace. Funding or funding timing is not guaranteed. Your experience with any lender will vary based on requirements of the lender and the loan you apply for. To determine the timing of funds availability, you must inquire directly with any lender. In addition, your access to any funds from a loan may be dependent on your bank's ability to clear a transfer and make funds available.

SoFi receives compensation in the event you obtain a loan, financial product, or service through SoFi’s marketplace. This webpage is owned and operated by SoFi Lending Corp., licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612; NMLS number 1121636. ((www.nmlsconsumeraccess.org)). This page is NOT operated by SoFi Bank. Loans, financial products, and services may not be available in all states. All loan terms, including interest rate, and Annual Percentage Rate (APR), and monthly payments shown through SoFi’s marketplace are from providers and are estimates based upon the limited information you provided and are for informational purposes only. All rates, fees, and terms are presented without guarantee and are subject to change pursuant to each provider’s discretion. The actual loan terms you receive, including APR, will depend on the provider you select, their underwriting criteria, and your personal financial factors. The loan terms and rates presented are provided by the providers and not by SoFi Lending Corp. Please review each provider’s Terms and Conditions for additional details.

*Small Business Loans: Reference to “same day funding” or “funding within 24 hours” describes a general capability of many lenders you can reach through SoFi’s marketplace. Funding or funding timing is not guaranteed. Your experience with any lender will vary based on requirements of the lender and the loan you apply for. To determine the timing of funds availability, you must inquire directly with any lender. In addition, your access to any funds from a loan may be dependent on your bank’s ability to clear a transfer and make funds available.

†Credit score impact: To check the options, terms, and/or rates you may qualify for, SoFi and/or its network providers will conduct a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the provider(s) you choose will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit. Rates may not be available from all providers.

©2025 SoFi Lending Corp. All rights reserved.
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.

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

SOSMB-Q225-013

Equity crowdfunding is a form of crowdfunding that helps you find people who are willing to fund your startup in return for a financial stake in the company. While this type of fundraising can help you raise capital without going through the traditional channels (like finding venture capital or taking on debt), it’s not the right solution for every startup.

Here’s what you need to know about equity crowdfunding, including how it works, potential platforms to consider, and the pros and cons of this funding approach.

Recommended: Set Your Small Business Up for Success

What Is Equity Crowdfunding?

Equity crowdfunding is when a private company allows individual investors (both accredited and unaccredited) to purchase equity in their company through a crowdfunding site. Should the company do well, the investor would make a profit. However, if it were to fail and go out of business, the investor would lose all of their investment.

Equity crowdfunding differs from other forms of small business crowdfunding because with it you are actually selling a percentage of your business. With rewards-based crowdfunding, you don’t give up any equity, but instead offer rewards for capital received. With loan crowdfunding, you borrow from the “crowd” instead of a traditional lender. You must repay the debt plus interest.

Equity crowdfunding is also called regulation crowdfunding because it is regulated by the U.S. Security and Exchange Commission (SEC). Because the SEC governs equity crowdfunding, you must use an SEC-registered funding platform if you want to solicit funds from the public in exchange for equity in your company.

Types of Equity Crowdfunding

There are two types of equity crowdfunding: accredited crowdfunding and open-access regulated crowdfunding.

Accredited Crowdfunding

Accredited crowdfunding is when a company raises money from accredited investors. To be an accredited investor, you must have a net worth exceeding $1 million, make at least $200,000 a year ($300,000 if filing jointly), or hold (in good standing) a Series 7, 65, or 82 license.

Open-Access Regulated Crowdfunding

Open-access crowdfunding allows anyone to invest in a company in exchange for equity. Both accredited and nonaccredited investors alike may invest in a company running a campaign through an open-access regulated crowdfunding site.

Recommended: The Reward-Based Crowdfunding Guide

What Are the Pros and Cons of Equity Crowdfunding?

All major financial decisions require you to weigh the pros and cons, and equity crowdfunding is no different. Here are some things to consider before jumping in.

Pros

Equity crowdfunding can provide a funding avenue for a startup that can’t qualify for small business financing due to revenue and credit requirements set by lenders. Also, with equity crowdfunding, there’s no debt to repay.

In addition, these platforms give you access to a large number of potential investors (including nontraditional investors). And, you can typically structure the crowdfunding campaign so that you retain the majority of ownership in your business, and only offer a small portion to investors.

Another perk of equity crowdfunding is that it allows you to gain visibility and build excitement before you even launch your new business. Many successful crowdfunding campaigns end up getting promoted by the investors themselves, creating a snowball effect of buzz and interest.

Cons

Unlike using a small business loan to raise capital for your company, equity crowdfunding requires giving up a portion of your company’s future profits, which could potentially be more costly than debt financing in the long run.

Also keep in mind that per SEC guidelines, you must disclose your company’s financial details to potential investors. As a result, virtually anyone will be able to access this information.

Crowdfunding campaigns can also be time-consuming, and there’s no guarantee you’ll generate enough funding to make the time commitment worthwhile. Not every company that takes this crowdfunding route is successful.

Recommended: Your 2025 Guide to Funding a Small Business

Who Can Invest In Your Business?

Before the advent of crowdfunding, only accredited investors could participate in early-stage, speculative ventures that had the potential for high reward but came with high risk. That’s not the case with equity crowdfunding. While some sites limit investors to only accredited investors, others allow anyone to take part. Individuals can often make an investment of just $100 in a promising startup.

Where Can You Find Potential Investors?

Online crowdfunding sites are often the best choice for finding potential investors. Here are 10 options to consider:

•  Fundable

•  Kickstarter

•  MicroVentures

•  Netcapital

•  Republic

•  StartEngine

•  Wefunder

•  CircleUp

•  EquityNet

•  NextSeed

Recommended: Angel Investors: What They Are and How to Find Them

Alternative Funding Options for Startups

Equity crowdfunding is just one option for startup business funding. There are many different types of small business loans (including equipment financing, merchant cash advances, and business lines of credit) that you may be able to take advantage of to grow your business.

While banks tend to require at least two years of business history and a certain minimum amount of annual revenue, online lenders generally have more flexible qualification criteria and will often work with newer businesses. They are also faster to fund. However, rates tend to be higher.

With debt financing, you need to repay the funds you receive, plus interest. However, you won’t have to give up any ownership in (or control over) your business or share future profits. Once you repay the funds, your relationship with the lender ends.

Recommended: Guide to Alternative Small Business Loan Options

The Takeaway

Equity crowdfunding empowers startups to raise capital while building a community of loyal investors, but it requires careful planning and compliance with regulations. For businesses seeking more traditional funding, small business loans can provide an alternative, offering structured repayment terms and preserving equity while supporting growth and operations.

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

FAQ

What is equity crowdfunding and how does it work?

Equity crowdfunding is a fundraising method where startups raise capital from multiple investors via online platforms by offering equity stakes in the business. Investors contribute funds in exchange for ownership shares, benefiting from potential future growth.

What are the benefits of equity crowdfunding for startups?

Equity crowdfunding provides access to diverse funding sources, increases public visibility, and often creates a community of loyal investors who can act as brand advocates.

What are the risks of equity crowdfunding for startups?

Risks of equity crowdfunding include ownership dilution, regulatory compliance requirements, and managing communication with numerous investors. Additionally, startups face the challenge of meeting fundraising targets within platform-specific deadlines.

What are the legal requirements for equity crowdfunding?

Equity crowdfunding legal requirements include registering with the SEC, providing detailed disclosures about the business and investment terms, limiting investment amounts based on investor income, and using approved funding portals. Compliance with state securities laws and ongoing reporting obligations are also essential.

How much equity should you give up in equity crowdfunding?

The amount of equity to give up in equity crowdfunding depends on your business valuation and the funding goals. Typically, startups offer between 10% to 30% equity. It’s crucial to balance the need for capital with maintaining control and future growth potential. Consult with advisors to determine the optimal equity percentage.

Photo credit: iStock/jacoblund

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

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

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

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

SOSMB-Q225-036

If you’re starting a small business, you may be interested in bringing on employees to help take your company to the next level. Whether that means one or two freelancers or a large full-time staff, it will be your job as an employer to determine how much, as well as how, your employees will be paid.

While the process of setting up payroll for a small business may sound tricky, it’s actually not as complicated as many entrepreneurs think. Below, learn the process of paying your employees, from collecting forms to taking out taxes to issuing paychecks.

7 Step Guide to Paying Employees

In order to start paying your employees, you’ll need to set up a small business payroll. You may decide to do payroll yourself or simplify the process by hiring a bookkeeper or purchasing payroll software.

Below, we outline what’s involved in how to pay employees in a small business so you can determine the best payroll system for your small business.

1. Have Employees Complete the Relevant Tax Forms

All current and new employees must complete and turn in the following tax forms so you can correctly calculate payroll:

•  USCIS 1-9 form: This is used to verify work eligibility.

•  IRS W-4 form: This common tax form. tells you each employee’s filing status so you can withhold the correct amount of federal tax from their pay.

•  State and local forms for withholding: This includes any relevant local forms required by your county, city, or state.

2. Calculate Pre-Tax Wages

To calculate pre-tax wages, you need to first determine how often you will pay your employees, such as weekly, bi-weekly, semi-monthly, or monthly. You can then figure out your employees’ gross pay for the pay period:

•  For hourly employees, take the amount of hours they worked and multiply that number by their hourly rate.

•  For employees on commission, first calculate their hourly rate or salaried base pay, then add in any commission they received during the pay period.

•  For salaried employees, divide their annual salary by the amount of pay periods they receive in a single year.

3. Determine How Much to Withhold for Taxes

The paperwork you received in step one will help you determine how much of each employee’s earnings you need to earmark for tax withholding for all of the following:

•  Federal income taxes

•  State income taxes

•  Local taxes

•  FICA (which consists of Social Security taxes and Medicare taxes, often referred to as payroll taxes)

•  Deductions for benefits (such as health insurance, retirement savings, and flexible spending)

4. Calculate the Net Pay

To calculate net pay, you take an employee’s gross pay and subtract all withholdings. The difference is net pay. For example, if an employee makes a gross pay of $3,000 in a pay period, but has $500 in withholdings, they would receive a net pay of $2,500.

5. Pay Your Employees

Two popular ways to pay employees are issuing physical checks and doing direct deposits. Direct deposit requires the employee to grant you permission to run a direct deposit, but eliminates the hassle of printing checks. If both are too time consuming, many payroll services will do either for employers on their behalf.

Recommended: 10 Benefits of Direct Deposit

6. Submit a Tax Filing

It’s your responsibility to pay taxes on behalf of any employees for whom you’ve withheld income tax. Taxes must be filed and paid to:

•  The Internal Revenue Service (IRS)

•  Your state’s tax collection department

•  Your local government

Additionally, employers must pay two additional types of taxes:

•  FICA tax: This is split between the employer and employee. The employer covers a 1.45% Medicare tax and 6.2% Social Security tax.

•  FUTA tax: You must also pay 6% for unemployment insurance for each employee. Check to see if your state offers a credit, often up to 5.4%.

Keep in mind that taxes you are responsible for paying for your employees are typically a deductible business expense.

7. Contribute to Employee Benefits Programs

When figuring out how to pay employees when starting a business, it’s vital to set up benefits. Some of the money you withhold might be for employee benefits. This might include contributions towards:

•  Health insurance

•  Health savings accounts

•  Retirement

•  Commuter benefits

•  Flexible spending accounts

If you offer any employee benefits, you must make the appropriate payment on behalf of your employees into the relevant accounts each pay period.

Recommended: A Guide to Trade Credit in Business

Choosing a Payroll Schedule for Your Small Business

Choosing a payroll schedule for your business will affect how often employees are paid, how you budget for payroll expenses, and the complexity of your payroll processes. When selecting a schedule, consider your industry norms, your team’s financial needs, and any state or local regulations governing pay frequency.

Weekly vs. Biweekly vs. Semimonthly vs. Monthly Pay

Options for how often to pay employees include:

•  Weekly: Employees receive pay every week (52 pay periods), which can boost morale, but increases processing costs and administrative workload.

•  Biweekly: Pay every other week (26 pay periods), offering regular cash flow for employees and moderate administrative demands.

•  Semimonthly: Pay twice a month (24 pay periods), aligning well with monthly expense cycles but requiring careful date alignment when months vary in length.

•  Monthly: One paycheck per month (12 pay periods), minimizing payroll processing costs but potentially straining employees’ budgets between paydays.

Types of Payment for Employees in a Small Business

When trying to figure out how to pay employees in a small business, you’ll need to first determine how much you want to pay them. If your business doesn’t currently have much cash on hand, keep in mind that you can often use a small business loan for paying employees.

Once you’ve decided on the amount, the next step is to determine a payment structure that makes sense for your business. Here are some options to consider.

1. Hourly Wages

Hourly wages vs. a salary are based on an hourly rate, and an employee’s pay will depend on how much time they work during a pay period. You must pay employees the federal or state minimum wage, whichever is higher. Typically, hourly workers qualify for overtime pay.

Compensating employees by the hour can be a good choice for a part-time employee or someone who doesn’t work a consistent schedule. It can also be a smart move if you’re just getting your business up and running and you’re not sure how much help you will need.

2. Fixed Annual Salary

Salaried employees are paid a fixed amount each year. Each payday they receive the same amount, and that amount is calculated by dividing their annual salary by the number of pay periods.

Offering a fixed annual salary can help you attract (and retain) employees since it means a reliable, predictable paycheck. Another benefit is that you are generally not required to pay salaried employees overtime.

Recommended: How to Get a Small Business Loan in 6 Steps

3. Commission

With commission payment, how much you pay an employee is based on the completion of work. It can be given in addition to a base salary or instead of a salary.

Commission-based compensation can be ideal for sales roles, since it helps incentivize employees to meet specific goals.

4. Bonuses

A bonus is extra money awarded to an employee for whatever reason the employer decides. Some employers give bonuses at certain times of year (such as the end of the year), while others offer bonuses for meeting certain performance goals (e.g., securing 10 new clients).

If you plan to offer bonuses, it can be a good idea to tell your employees ahead of time so you put an extra spark in their step. Before making any announcements, however, you may want to speak to your bookkeeper to ensure you have enough working capital to issue bonuses when you plan to.

Sometimes, without an infusion of cash from a small business loan or small business grant, it can be challenging to come up with funds for bonuses, though they can help reflect your good feelings towards employees and secure their loyalty.

5. Stock Options

If you can’t offer large salaries to employees, you may still be able to attract the best and brightest by offering equity in your small business. This can also act as a great motivator, since employees with stock options know that if they work hard, they could be substantially compensated in due time.

However, offering shares in your startup typically only makes sense only if there is a realistic pathway to cashing out. That means your company is (or will be) backed by outside investors and is likely to go public or be bought by another company.

6. Insurance

If you’re unable to pay your employee’s top notch salaries, you may want to entice them by offering them help with paying for healthcare. You can do this in one of two ways: by offering a tax-free reimbursement or issuing a tax stipend.

With a tax-free reimbursement, you give your employees a fixed amount of money each month to reimburse themselves for paying for health insurance or medical expenses they have incurred. Once they have incurred an expense, they are given the money.

With a tax stipend, you give employees additional money each month regardless of whether they choose to purchase health insurance. At the end of the year, this money counts as income and must be reported on tax returns.

Recommended: What Are the Common Types of Payroll Deductions?

Paying Employees With 1099s

According to the IRS, if you pay independent contractors, you may have to file Form 1099-NEC, Nonemployee Compensation, to report payments for services performed for your trade or business.

File Form 1099-NEC for each person in the course of your business to whom you have paid the following during the year at least $600 in:

•  Services performed by someone who is not your employee; (including parts and materials)

•  Payments to an attorney

You must also file Form 1099-NEC for each person from whom you have withheld any federal income tax under the backup withholding rules regardless of the amount of the payment.

Recommended: 1099 vs W-2 Employee: What’s the Difference?

Using Payroll Software to Streamline Payments

Payroll software can significantly simplify the process of managing employee payments for small business owners. These tools automate the calculation of wages, tax withholdings, and benefits, reducing the risk of errors and saving time.

With direct deposit capabilities, payroll software ensures that employees receive their pay on time, without the need for physical checks. This not only enhances efficiency but also improves employee satisfaction and trust in the company’s financial processes.

Payroll software often includes features for compliance with federal and state tax laws, making it easier to stay up-to-date with changing regulations. It can generate necessary tax forms, such as W-2s and 1099s, and even file and remit taxes on behalf of the business.

Benefits of Automating Payroll

Automating payroll transforms a time-consuming, error-prone process into a streamlined, reliable system that benefits your entire organization. Key advantages include:

•  Time savings: Automates repetitive tasks, freeing up time for more strategic business activities.

•  Accuracy: Reduces the risk of errors in wage calculations, tax withholdings, and benefit allocations.

•  Compliance: Ensures adherence to federal, state, and local payroll regulations, minimizing the risk of penalties.

•  Employee satisfaction: Timely and accurate payments improve employee morale and trust in the company.

•  Cost efficiency: Reduces the need for manual labor and can lower the overall cost of payroll management.

By leveraging technology, you can reduce manual labor, ensure compliance, and enhance employee satisfaction.

The Takeaway

When it comes to how to pay employees, you’ll need to collect the relevant tax forms from each new hire, calculate how much to withhold for taxes and employee benefits, issue payment (via check or direct deposit), and pay taxes on their behalf.

Once your payroll system is in place, you may want to look for other ways to improve and expand your company. One way to do this is with a small business loan.

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

FAQ

How do I set up pay for my employees?

To get started, provide federal and local authorities with information about your business and your employees. Decide what benefits to offer, purchase workers’ compensation insurance, and open a bank account dedicated to payroll. Finally, set a payroll schedule for your employees.

How do I pay my employees without payroll?

Paying employees via cash without payroll is an option, but it is not an efficient method and can be challenging to ensure it’s 100% legal. Since there are no records of cash payments, it’s important to ensure that your payroll reporting is accurate and concise. Paying workers “under the table” is illegal.

How do you pay an employee with a check?

The check will need to include the company name, check number, check date, net pay amount, the employee’s name and possibly address, and the bank that the check is drawn on. Often, checks for paying employees come with a paystub detailing taxes withheld and other important financial information.

What payroll taxes do small business owners need to pay?

Small business owners need to pay several payroll taxes, including Social Security and Medicare taxes (FICA), federal and state unemployment taxes, and federal and state income taxes. These taxes are typically withheld from employees’ wages and matched by the employer for FICA. Business owners must also file and remit these taxes according to specific schedules set by the IRS and state tax authorities.

Can I pay employees with direct deposit as a new business?

Yes, you can pay employees with direct deposit even as a new business. To set this up, you need to choose a payroll service or bank that supports direct deposit, obtain employees’ bank account information and routing numbers, and ensure you comply with federal and state payroll regulations.

Photo credit: iStock/smolaw11

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

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

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.

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

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

SOSMB-Q225-032

While a recession can be a challenging time for many businesses, some of them are able to thrive and even grow when the economy slows. These businesses are considered recession-proof, and now may be a good time for aspiring entrepreneurs to take a closer look.

Not only do they provide goods and services that can prosper during tough times, recession-resistant businesses also offer ideas and strategies that may help existing companies weather an economic downturn.

Read on to discover the qualities of recession-proof businesses, plus the 10 types of businesses best suited to withstand economic dips.

Characteristics of Businesses That Survive Downturns

We hear the word “recession” a lot these days, but what is a recession exactly? In short, it’s a prolonged period of declining economic activity during which employment may go up, inflation often rises, and consumer spending goes down. Businesses that survive this kind of economic slowdown typically have specific qualities that allow them to navigate uncertain conditions. Those characteristics include:

•  Flexibility: The ability to pivot and adjust to current market and business conditions is a key feature of companies that survive challenging times. Rather than continuing to do business as usual, they focus on the economic realities and listen to what their customers are telling them.

For instance, if consumers are cutting back on discretionary items, like home decor, and doubling down on the things they really need, like groceries, recession-proof businesses will make it a point to give them what they need at a reasonable price.

•  Financial preparation: As a business owner, being prepared financially for whatever might come your way is always a good strategy, no matter what shape the economy is in. And it’s vital when a recession hits. If you have a solid budget in place, low overhead costs, a plan for repaying your startup business loan, and an emergency fund you can tap if necessary, you’ll generally be better able to maintain a positive cash flow during times of economic crisis.

•  Consumer demand: In a recession, inflation may cause prices to rise and unemployment to go up. At that point, consumers typically cut back on spending because they’re worried about money. Businesses that are inflation-proof sell goods and services that people always need, even when finances are tight. That’s an area to explore when you’re starting a business.

Why Certain Industries Thrive During Economic Hardship

Businesses that grow during economic downturns have seemingly cracked the code on making money even when the outlook is bleak. So, how do they do it? They deal in goods and services that are necessities, and they are strategic about the price point.

For example, recession-resistant businesses may offer more affordable prices on sought-after goods and services than their competitors do. Or they might sell staples that are always in demand like groceries, soap, or paper towels. They may also provide a service consumers can’t do without, such as home or auto repairs.

Settling on a good business idea when you’re starting out, including picking an industry that is always needed, despite what the economy is doing, can be a key factor in your success.

Recommended: The History of U.S. Recessions

Top 10 Recession-Proof Business Ideas

The businesses that thrive during a recession have several characteristics in common: they make consumers’ lives easier, they satisfy a need, and they help customers make the most of their money. Here are 10 standout ideas to explore.

1. Mobile Auto Repair Service

For most people, cars are critical for getting to work, going to the store, and getting around in general. And when our vehicle breaks down, we need to get it repaired as soon as possible, even during a recession. A mobile auto repair service does that — and also delivers the repair person right to the motorist, wherever they are. If a driver breaks down on the side of the highway, a mobile repair service can give them emergency help to get their vehicle up and running again.

Business bonus points: During a recession, people are more likely to hang onto their current car rather than buy a new one. Older cars are more likely to need repairs, which increases the need for mobile auto repair services.

In addition, overhead costs for mobile auto repair services tend to be low, since no building (or rent or mortgage) is required.

2. Healthcare Staffing Agency

The healthcare field is projected to be one of the fastest-growing industries in the country through at least 2033, according to the Bureau of Labor Statistics. This growth is driven by an aging U.S. population and an increase in chronic disease. Plus, people of all ages get sick or become injured no matter what the economy is doing. Healthcare is a must for most of us.

You don’t have to be a doctor to launch a healthcare staffing agency. Supplying medical professionals is a way to fill an ongoing need and a shortage in the market. Good healthcare workers, such as nurses, are always in demand. That makes a healthcare staffing agency that supplies qualified professionals to those who need it, a business that can flourish in tough economic times.

Business bonus points: As more older people are living at home longer, they may require at-home care, including healthcare, which a staffing agency can help supply.

3. Budget Grocery Delivery Service

Groceries are the ultimate necessities — everyone has to eat. And when the economy is in a downturn, people tend to cut back on dining out and cook at home more. That means grocery items may be in even greater demand during a recession.

Food delivery services are a thriving business. In 2025, the grocery delivery business is projected to generate $327.72 billion with an annual growth rate of 8.29%, according to the global data platform Statista.

During a recession, budget-conscious shoppers will be looking for grocery items on sale. Yet because they may need more groceries than usual for all the cooking they’re doing, they may not have time to go to the store themselves on a regular basis. That’s why a budget grocery delivery service can be a good recession-proof business. It saves people time and money by doing the shopping for them and delivering the groceries to their door.

Business bonus points: The ability to compare grocery prices online can help consumers find bargains during a recession, which could make budget grocery delivery with its online platforms even more popular.

4. Debt Consolidation and Credit Counseling

Individuals with a bachelor’s degree in business or finance might want to consider becoming a credit and debt counselor. This type of business often sees a surge in demand when the economy dips, as money becomes tighter and people struggle to pay their bills.

More people are dealing with debt. In early 2025, Americans’ household debt, which includes mortgages, credit cards, car loans and student loans, reached a record high of $18.04 trillion, according to the Federal Reserve Bank of New York. Delinquencies for credit cards, car loans, and student loans are on the rise.

A debt and credit counseling company is not only recession-proof, it might see a boom in business as the economy weakens. And no office is required: You can work from home counseling people to manage their finances, set up a budget, and repay their debt through consolidation or other strategies. Although certification is not required, you can take classes to become a certified debt and credit counselor.

Business bonus points: In a recession, the need for debt consolidation and credit counseling is likely to grow.

5. IT Support for Remote Workers

Approximately 35.5 million people work remotely at least some of the time, according to the latest data from the Bureau of Labor Statistics. Remote workers rely on technology to get their jobs done, which means they will likely need IT support services. That’s in addition to the many businesses without their own in-house IT department that require IT support to keep their operations running smoothly.

If you have a degree in computer science or information technology, or previously worked for a corporate IT department, starting an IT support business could be a move to consider. You can offer a broad-based IT support business that covers everything, or you can provide specialized support in certain areas such as cyber security, software installations and updates, or computer repair.

Business bonus points: IT services are always in demand, even during a recession. Additionally, if the recession leads to layoffs, more people may go freelance and work from home, which could result in an increased demand for IT support.

6. Consignment and Thrift Store

When people have less money to spend, they typically cut back on buying luxuries, but they still need things like staples, work clothing, certain household items, and even beauty products. Consignment shops and thrift stores tend to thrive during recessions since consumers are looking to pay less for their purchases. In fact, some experts project that the thrift store industry will grow to $74 billion by 2029.

Secondhand shopping is already on the rise. A 2025 report by Capital One Shopping Research found that 33% of all clothing and apparel purchased in the U.S. over the past year was secondhand. And according to a new report from ThredUp, an online consignment and thrift store, 59% of consumers said they would choose more affordable options, such as shopping secondhand, if new government policies like tariffs and trade made apparel more expensive. For those interested in starting a retail business, a consignment or thrift store might be a smart recession-resistant choice.

Business bonus points: During a recession, some people may be especially motivated to donate or sell their clothing through consignment and thrift shops, which can give store owners a steady supply of inventory to help drive traffic and sales.

7. Property Management Services

There’s often an increase in the number of renters during a recession, as buying a house becomes financially out of reach for more and more people. As a result, more property management services may be needed. These businesses deal directly with tenants and real estate agents, collect rent, handle maintenance and repairs, and do property upkeep, among other things.

Just be sure to check into the rules regarding property management in your state. Many states require property management companies to be licensed by the local real estate board.

Business bonus points: Besides potentially thriving in a recession, property management services also tend to do well in a good economy, since more apartments are typically built when the market is flourishing.

8. Career Training and Resume Services

When the economy is in a downturn, helping people train for and apply for a new job can be a rewarding line of work. Unemployment often goes up, along with layoffs, as a recession takes hold, and more people are usually looking for work. For example, in the Great Recession, approximately 8.7 million jobs were lost in the U.S. between December 2007 and February 2010.

People hunting for jobs during a down market may need help updating and fine-tuning their resumes to make themselves stronger candidates for employment. Or they might be switching their career path to move into a field that’s growing and hiring, and need training in that area.

Entrepreneurs who are good writers or have a background in human resources may be well positioned to start a career training and resume services business.

Business bonus points: You can work out of your home without having to rent office space and incur related expenses.

9. Home and Small Business Security Systems

Keeping homes and offices secure is always important, and in a recession, some homeowners and businesses may feel an increased desire to protect and secure their property.

Entrepreneurs launching a security systems service can specialize in home or business security. They may perform such jobs as installing alarm systems and cameras, providing security guards, and for some businesses, safeguarding confidential or proprietary information and cybersecurity.

Business bonus points: Starting a security business during a downturn can be a way to build a trusting relationship with clients that could last long after a recession is over.

10. Virtual Bookkeeping Services

The need for bookkeeping services is constant, even during a recession. Companies need to make payroll, meet their budgets, and comply with financial regulations all the time — which is why virtual bookkeepers that provide these services can thrive.

In fact, it may be more cost-efficient for businesses to hire a virtual bookkeeper than to have a full-time bookkeeper on staff, especially during a recession, which could create a greater demand for these services.

Business bonus points: When a recession hits, businesses tend to pay even greater attention to their finances. They may be looking for ways to save money, maximize tax refunds, and ensure they don’t go over budget. Virtual bookkeeping services can do all that and more.

Getting Started During Economic Uncertainty

Starting a business in a time of economic uncertainty can be challenging, but it is possible. In order to be successful, a business owner needs to choose the right kind of business — one that supplies goods and services people need in any economy.

Do some research to make sure there’s a market for your business, and then come up with a solid business plan. Think about who your target customer is and how you’ll reach them, and also how you’ll price what you’re selling. Estimate your startup business costs to figure out how much money you’ll need to launch your company. In addition, determine how you’ll structure the business, how it will be run, and what you want to achieve.

Finally, have a trusted professional such as an accountant review your business plan to make sure your projections are on target and that you haven’t forgotten something important, or overestimated or underestimated certain costs. You could also sign up for mentoring sessions with the Small Business Administration’s SCORE program of retired professionals.

Funding Options During Tight Credit Markets

Then comes one of the most critical aspects of starting a business — securing financing for it. Credit markets typically tighten up during a recession, but there are still ways to get the funding you need. In addition to tapping into your personal savings, consider these options.

Business loans. Securing a small business loan through a bank, an online small business lender, or a credit union is one method to explore. There are different kinds of small business loans, and each one has different interest rates and repayment terms, so you’ll likely want to shop around to find the best fit.

Business lines of credit. A business line of credit is another way to get funding. It works similar to a credit card — an individual gets revolving credit up to an approved limit rather than a lump sum. They make payments based on the amount they borrow and interest is charged on what they owe.

Loans for equipment. If you need to buy equipment or tools for your business — if you’re starting a mobile auto repair shop, say — equipment financing can help you procure what you need. Depending on the type of loan you get, the equipment you purchase could act as collateral for the loan.

Friends and family. Ask your relatives and friends if they can chip in to help with startup funding. For example, they could loan you money through a family loan that you repay over time. Or, they might opt to invest in the business.

Crowdfunding. Some startups use crowdfunding platforms like Kickstarter and Indiegogo to get their financing off the ground. Through these platforms, individual investors typically each contribute small amounts. Having a solid business plan and an innovative idea can help attract investments.

The Takeaway

Certain types of businesses are able to thrive and grow, even in a shrinking economy. What makes them recession-proof includes such factors as the ability to be flexible and adapt to changing market conditions, responding to and pivoting to meet customer demands, and keeping their business costs and operating expenses low.

While securing funding for a startup business can be especially challenging in times of economic uncertainty, there are numerous options small business owners can explore to get the funds they need. This includes small business loans, business lines of credit, loans from family and friends, and using their personal savings.

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

FAQ

What makes a business truly recession-proof?

Recession-proof businesses have several distinct qualities. They are generally flexible and adjust their pricing and practices to different market conditions; they keep their overhead costs low and stick to a budget; and they are responsive to customer demand, changing products, tactics, or pricing as needed.

Why are some businesses more recession-resistant than others?

Some businesses are more recession-proof than others because they provide essential goods or services consumers need, even in a down economy, at affordable prices. In addition, certain types of businesses may find a greater demand for their services in a recession, such as consignment and thrift shops, and credit counseling.

Which recession-proof businesses can be started from home?

Recession-proof businesses that can be started from home include credit counseling, virtual bookkeeping, and IT support service businesses for remote workers.

Are franchise opportunities good recession-proof investments?

Whether a franchise opportunity is a good recession-proof business depends on the industry the franchise is in. Industries that provide something people need and offer good value for the price they charge tend to weather recessions well. Examples include franchises in health care, childcare, and budget groceries.

Are service-based businesses more recession-proof than product-based ones?

Businesses that provide essential services may be more recession-proof than product-based businesses. One reason for this is that the services they provide to consumers are often essential, such as childcare or health care or IT support. No matter the state of the economy, the need for these services remains.

In addition, the startup costs for service-based businesses are typically lower than for product-based businesses, which means they don’t require as much capital to launch. Service-based businesses can start small and generally don’t require a lot of equipment or products. They can often be run from the business owner’s home without the need for office space.

Photo Credit: iStock/Ivan Pantic

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

Small Business Loans
*Reference to “same day funding” or “funding within 24 hours” describes a general capability of many lenders you can reach through SoFi’s marketplace. Funding or funding timing is not guaranteed. Your experience with any lender will vary based on requirements of the lender and the loan you apply for. To determine the timing of funds availability, you must inquire directly with any lender. In addition, your access to any funds from a loan may be dependent on your bank's ability to clear a transfer and make funds available.

SoFi receives compensation in the event you obtain a loan, financial product, or service through SoFi’s marketplace. This webpage is owned and operated by SoFi Lending Corp., licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612; NMLS number 1121636. ((www.nmlsconsumeraccess.org)). This page is NOT operated by SoFi Bank. Loans, financial products, and services may not be available in all states. All loan terms, including interest rate, and Annual Percentage Rate (APR), and monthly payments shown through SoFi’s marketplace are from providers and are estimates based upon the limited information you provided and are for informational purposes only. All rates, fees, and terms are presented without guarantee and are subject to change pursuant to each provider’s discretion. The actual loan terms you receive, including APR, will depend on the provider you select, their underwriting criteria, and your personal financial factors. The loan terms and rates presented are provided by the providers and not by SoFi Lending Corp. Please review each provider’s Terms and Conditions for additional details.

*Small Business Loans: Reference to “same day funding” or “funding within 24 hours” describes a general capability of many lenders you can reach through SoFi’s marketplace. Funding or funding timing is not guaranteed. Your experience with any lender will vary based on requirements of the lender and the loan you apply for. To determine the timing of funds availability, you must inquire directly with any lender. In addition, your access to any funds from a loan may be dependent on your bank’s ability to clear a transfer and make funds available.

†Credit score impact: To check the options, terms, and/or rates you may qualify for, SoFi and/or its network providers will conduct a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the provider(s) you choose will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit. Rates may not be available from all providers.

©2025 SoFi Lending Corp. All rights reserved.
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.

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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