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Organic growth occurs when a firm expands its operations using existing resources, rather than by merging with or acquiring another company. Achieving organic business growth generally means that a company has successfully been able to boost its size, output, or revenue by growing the business or developing a new one. This is in contrast to inorganic growth, which occurs through the acquisition of other companies.

There are pros and cons to both growth strategies. Here’s a closer look at organic growth, including how it works, how it compares to inorganic growth, plus strategies that can help you expand your small business through organic growth.

What Is Organic Growth in Business?

By definition, organic growth is growth that a firm achieves from within by harnessing internal resources. To attain this type of growth, a business typically needs to have a well-thought-out business plan and strong leadership.

Strategies business owners often use to foster business expansion through organic growth include optimizing processes to reduce costs, improving their existing product/service mix, enhancing their sales and marketing strategies, expanding into new markets, and developing new products and services.

Recommended: What Is a Silent Partner Agreement?

How Does Organic Growth Work?

Organic growth works by making the most of a firm’s existing assets and resources, including skills, knowledge, experience, relationships, and other tools. Often, it comes down to thinking creatively about how best to leverage what you own and how you do business. Some business owners prefer to grow their businesses via organic rather than inorganic growth because it allows them to maintain control of their company (which might not be the case with a merger or acquisition).

It can sometimes be challenging, however, to achieve rapid growth through internal growth strategies alone. For example, if your company needs to pivot quickly due to a sudden change in consumer preferences, it might take more time and money to launch a new product line yourself rather than acquire a company that already has that product.

Inorganic vs Organic Growth

Here are some of the key ways that organic growth differs from inorganic:

Organic growth happens when a firm uses inside opportunities to grow. Inorganic growth, on the other hand, involves using resources outside of the company, such as taking on debt and engaging in mergers and acquisitions.

While inorganic growth typically involves taking out small business loans, it can allow for faster expansion than organic growth. Organic growth, by contrast, tends to occur slowly and naturally. It relies on internal skills and resources, and may not require taking on any debt.

Investment Analysis

When investors and lenders analyze a company’s financial health, they generally like to see growth of any kind. However, how a company achieves growth may also come into play. If a business grows inorganically through a merger or acquisition, for example, analysts may want to make sure that the company they acquired made sense and is related to their core business and that they aren’t stretching themselves too thin.

Generally, analysts like to see a mix of organic and inorganic growth strategies. A company that is generating growth by maximizing their core business, while also boosting revenue through strategic acquisitions, may find it easier to attract investors or get approved for different types of financing.

Pros and Cons of Organic Growth

Here’s a closer look at the advantages and disadvantages of organic growth:

Pros and Cons of Inorganic Growth

Next, consider the upsides and downsides of inorganic growth:

Measuring Organic Growth

You can measure organic growth by looking at your company’s key financial statements — the income statement, balance sheet, and cash flow statement.

The income statement shows your company’s profit (or loss) for a specific time period. The balance sheet provides a snapshot of your business’s financial health, measuring how much you owe and own at a specific point in time. And, the cash flow statement sums up the amount of cash that enters and leaves your business.

Generally, if your profits are growing year over year, that’s a sign that you are experiencing organic growth.

Organic Growth Strategies

There are numerous strategies a small business can use to foster organic growth. Here are some to consider.

•  Investing into existing products or services

•  Developing new products or services through research and development (R&D)

•  Enhancing your sales and marketing strategies

•  Targeting customer profiles and pricing structure

•  Launching a rebranding initiative

•  Restructuring the organization and its processes

•  Cutting costs

Recommended: How Much Does It Cost to Start a Business

Inorganic Growth Examples

Here’s a look at some common ways that businesses can achieve inorganic growth.

•  Combining with a similar company to increase market share

•  Acquiring a company that has products, services, and/or a customer base that your company wants to have

•  Merging with a dissimilar company to create a conglomerate

•  Opening in a new location to bring in customers in a geographical area where you’re not currently represented

The Takeaway

Organic growth refers to the growth of a business through internal processes, utilizing its own resources. Businesses often grow organically by optimizing processes, reallocating resources, and adding new products or services. It contrasts from inorganic growth, which is often accomplished through dealmaking to acquire other companies and products. Either approach may involve outside financing. However, inorganic growth generally requires significantly more capital than organic growth.

If you’re looking to finance business growth, you likely have an array of options.

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

FAQ

What are some examples of organic growth?

Examples of organic growth strategies include investing into existing products and services, developing new products and services, reallocating resources, making improvements to your business model, and adjusting pricing.

Is getting organic growth harder than inorganic?

It can be. Organic growth in business requires thinking about existing assets and resources in new ways, and it may be some time before you reap any rewards. Growing inorganically through a merger or acquisition, however, also comes with challenges. It requires a large amount of capital, can be time-consuming, and, by merging workforces, can lead to friction.

Is organic growth better than inorganic growth?

There’s no one answer since each growth strategy has pros and cons. Organic growth offers a steady and predictable path towards growth, and allows you to retain control of your business. However, it requires a lot of time and effort, and has the potential to stagnate. Also, it may not be the right choice if you need to pivot quickly to keep up with changing market demands.

Photo credit: iStock/oatawa

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

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

SOSB-Q224-1880426-V1

A merchant cash advance (MCA) is an option for small businesses to consider when seeking funding. While they are legal, they have their benefits and disadvantages, as do most forms of financing. As with all financial decisions, choosing whether to use one should involve considering both pros and cons.

How Do Merchant Cash Advances Work?

At a high level, here’s how merchant cash advances work. An MCA is a type of financing for small businesses (also known as “merchants”) that accept credit card/debit card payments from their customers. When a small business applies for and is approved for this type of financing arrangement, it can get funds advanced from merchant cash advance companies.

The small business then usually repays the advance in one of two ways.

•  The cash advance company could take an agreed-upon percent of the small business’s credit card and debit card sales revenue each day.

•  Alternatively, it could directly withdraw funds from the merchant’s bank account on an agreed-upon schedule through an ACH transfer.

MCA providers may also accept other repayment arrangements stemming from your credit card and debit card sales revenue.

Rather than charging an interest rate, this type of funding has a factor rate — often ranging from 1.1 to 1.5. Unlike interest rates, which are given as percentages, a factor rate is expressed as a decimal figure. The factor rate is then used to calculate the cost of financing for the small business borrowing the funds.

The rate a company is charged can depend upon how much of a risk it poses to the lender. Factors considered when setting a rate can include the industry the company is in, the company’s financial history, its credit and debit card sales, and its years in business. To calculate the amount owed, you multiply the advance by the rate. For example, consider a $10,000 advance at a 1.4 factor rate. That’s $10,000 x 1.4 = $14,000. This would not include any fees charged.

Next, consider the regulations that affect MCAs.

Merchant Cash Advance Regulation Overview

MCA regulation is generally not as stringent as small business loan regulation, but regulations do exist.

The Federal Trade Commission (FTC), for example, has the authority to sue merchant cash advance providers that engage in deceptive or predatory lending practices.

Here are some of the federal laws that merchant cash advance providers are expected to abide by:

•  Federal Trade Commission Act (FTCA)

•  Gramm-Leach-Bliley Act (GLBA)

•  Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act

The FTCA has provisions that prohibit unfair and deceptive trade practices. The GLBA, meanwhile, has provisions that prohibit creditors from making false statements to obtain a customer’s bank account information. These laws apply to MCA providers.

Section 1071 of the Dodd-Frank Act requires covered financial institutions — including merchant cash advance providers — to collect and report to the Consumer Financial Protection Bureau (CFPB) data on small business applications for credit.

State usury laws may not apply against merchant cash advance providers, but some states as of 2023 have implemented regulations affecting nonbank financial companies. New York and California, for example, have state laws requiring MCA providers and other nonbank lenders to provide disclosures similar to those required under the Truth in Lending Act.

Any merchant cash advance provider that engages in unfair or deceptive trade practices can be subjected to compensatory damages, civil penalties, and a permanent injunction from marketing, selling, or collecting merchant cash advances.

UCC Regulations

Companies offering merchant cash advances typically conduct business under the Uniform Commercial Code (UCC).

The UCC isn’t a federal law. Rather, it’s a collection of proposed model laws covering the conduct of business and commercial contracts. All 50 U.S. states have adopted the entire UCC, with the exception of Louisiana, which only adopted parts of it, according to the Louisiana Department of State.

When you sign your merchant cash advance funding agreement, the MCA provider may file a UCC lien in your state. This lien becomes a public record documenting how the MCA provider has a security interest in your business assets as collateral on the debt.

If you default, the MCA provider may take action to seize the assets. Alternatively, if you pay off your MCA and the provider does not remove the lien, you generally have the right to get it removed under UCC regulations.

Recommended: Merchant Cash Advance Consolidation

Self-Regulation

Some merchant cash advance companies may agree to abide by the Small Business Borrowers’ Bill of Rights. The Responsible Business Lending Coalition pioneered the creation of the Small Business Borrowers’ Bill of Rights, and elements of it include:

•  The right to transparent pricing and terms

•  The right to nonabusive products

•  The right to responsible underwriting

•  The right to fair treatment from brokers

•  The right to inclusive credit access

•  The right to fair collection practices

If you decide to obtain funding through an MCA, it may make sense to find out whether the MCA company you’re considering will honor these rights.

What Are Merchant Cash Advance Brokers?

The fourth bullet in the bill of rights described above focuses on brokers. A merchant cash advance broker is someone who connects companies that need financing with funding companies that can provide them with the money they need.

These brokers typically get paid on a commission basis. These commissions and the ways in which MCA brokers treat customers can vary, as implied by the bullet point in the bill of rights. If you decide to use a broker, you may want to choose one recommended by a trusted friend or colleague.

Using Merchant Cash Advance Companies

There are a number of reasons why a small business might want to use an MCA. Small businesses may decide to use an MCA to fill in gaps in cash flow and to cover unexpected expenses. Some might use one to tide over seasonal fluctuations or to buy inventory.

This type of funding may be right for you if you aren’t able to get more traditional forms of funding and need to get a merchant cash advance with bad credit.

In general, merchant cash advance requirements are not complicated. But it’s important to talk to specific MCA providers to find out what’s needed for your small business to begin to receive advances. Not all merchant cash advance companies are alike. Some offer higher limits than others; some are more open to companies with bad credit than others; and so forth.

Private merchant cash advance companies generally have less regulatory requirements than SBA loan lenders. It’s typically a good idea to check out an MCA company you’re considering with your local Better Business Bureau® to see how it rates and whether there are any complaints against it.

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

Pros and Cons of Merchant Cash Advances

As with just about any kind of small business funding, there are pros and cons to this option. Here are some of the most significant:

Pros of MCAs

•  Advantages of this kind of funding may include:

•  Speedy process from approval to the receipt of funds

•  Uncomplicated paperwork (perhaps just a basic application and a record of recent credit card/debit card transactions)

•  Payment amounts may drop if the amount of sales transactions dips

•  Lack of credit history isn’t typically an obstacle

•  Freedom to use the funds as desired

Cons of MCAs

Disadvantages of this type of funding can include:

•  High cost, with factor rates typically translating into 20% to 50% of the cash advance amount

•  Fees, which can be significant

•  No early repayment benefits

•  Could create debt cycles that can be difficult to escape

•  Automatic payments can complicate cash flow

The Takeaway

A merchant cash advance is a form of business financing for businesses that accept credit cards. Instead of being charged an interest rate, this type of financing involves a factor rate. Some regulations govern this type of cash advance.

Merchant cash advances aren’t the right solution (or even possible) for every business in every given situation. When your small business needs funding, it may help to prepare by knowing how to apply for 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.

Photo credit: iStock/Natee Meepian

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.

This article is not intended to be legal advice. Please consult an attorney for 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.

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

SOSB-Q224-1863299-V1

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

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

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

What Is a Trial Balance Sheet?

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

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

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

Recommended: How to Read Financial Statements: The Basics

How Trial Balance Sheets Work

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

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

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

What Trial Balances Include

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

General ledger accounts typically include:

•  Assets

•  Equity

•  Income

•  Gains

•  Liabilities

•  Expenses

•  Losses

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

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

Recommended: Net Present Value: How to Calculate NPV

Undetectable Errors in a Trial Balance

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

•  Reversal

•  Omission

•  Original entry

•  Commission

•  Principle

Errors of Reversal

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

Errors of Omission

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

Errors of Original Entry

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

Commission Errors

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

Principle Errors

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

Recommended: What Is Invoice Financing?

Trial Balance Sheets vs Balance Sheets

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

Recommended: Business Cash Management, Explained

Examples of Trial Balances

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

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

Recommended: How Does Trade Credit Work?

Preparing a Trial Balance

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

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

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

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

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

Recommended: How Business Banks Accounts Work

The Takeaway

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

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

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

FAQ

What goes on to a trial balance sheet?

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

How are trial balance sheets and balance sheets different?

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

What is the point of a trial balance?

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

​​Photo credit: iStock/deepblue4you

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

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

SOSB-Q224-1880366-V1

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

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

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

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

What Is a Farm Loan?

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

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

How Do Agricultural Loans Work?

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

What Can Farm Loans Be Used For?

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

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

Does It Differ From Business Loans for Other Industries?

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

Types of Loans for Agricultural Businesses

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

USDA Farm Loans

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

Operating loans

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

Microloans

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

Guaranteed farm loans

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

Long-Term Farm Loans

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

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

Business Lines of Credit for Farms

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

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

Short-Term Loans for Agricultural Business

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

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

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

Equipment Loans

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

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

SBA Loans

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

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

Invoice Factoring

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

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

Business Credit Cards

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

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

Recommended: Small Business Payroll Loans

Pros and Cons of Loans for Agricultural Business

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

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

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

Finding Farm Loans

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

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

Applying for Farm Loans

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

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

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

•  Business and personal bank statements

•  Income statements

•  Business and personal tax returns

•  Balance sheets

•  Profit and loss statements

•  Business and personal credit scores

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

Recommended: A Guide to Hotel Loans

Alternative Financing Options

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

Farm Grants

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

Value-added

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

Research and education

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

Help for Agricultural Entrepreneurs

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

The Takeaway

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

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

FAQ

What are agribusiness loans?

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

Can you start a farm with no money?

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

Can you get an agricultural business loan with bad credit?

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

What are typical interest rates on farm loans?

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

Are there startup loans for farms?

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

Photo credit: iStock/artiemedvedev

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

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

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOSB-Q224-1880411-V1

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

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

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

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

What Is NOPAT?

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

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

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

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

NOPAT Formula

NOPAT = Operating Income X (1 – Tax Rate)

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

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

Operating Income = Gross profits – Operating Expenses

The formula to calculate gross profit is:

Gross Profit = Revenue- Cost of Goods Sold

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

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

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

◦  Factory labor

◦  Freight

◦  Parts used during manufacturing/ production

◦  Raw materials

◦  Storage

◦  Wholesale price of goods

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

◦  Advertising

◦  Equipment

◦  Depreciation

◦  Insurance

◦  Inventory

◦  Maintenance

◦  Marketing

◦  Office supplies

◦  Payroll

◦  Property taxes

◦  Rent

◦  Repairs

◦  R&D

Recommended: Net Operating Income vs EBITDA

How Does NOPAT Work?

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

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

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

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

Calculating NOPAT

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

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

What NOPAT Tells You

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

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

What Is EBITDA?

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

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

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

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

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

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

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

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

Recommended: Typical Small Business Loan Fees

NOPAT vs EBITDA Compared

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

Similarities

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

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

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

Differences

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

•  EBITDA also includes other non-operating income.

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

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

Pros and Cons of Using NOPAT

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

NOPAT vs Unlevered Free Cash Flow

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

The formula for UFCF actually can use NOPAT or EBITDA:

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

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

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

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

Example of NOPAT

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

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

To calculate its NOPAT:

Operating income X (1- tax rate)

$400,000 X (1- 0.3)

$400,000 X (0.7)

NOPAT= $280,000

The Takeaway

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

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

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

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

FAQ

How can you convert EBITDA to NOPAT?

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

Is NOPAT the same thing as net income?

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

What makes NOPAT a better performance measure than net income?

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

Photo credit: iStock/tdub303

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

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

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

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