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Many small businesses, at one point or another, need capital to grow. Often, that capital comes in the form of a small business loan. However, another option to consider is a small business grant. Unlike loans, grants do not need to be repaid.

In order to access what is essentially “free money” for your venture, however, you need to not only meet the qualifications of a grant but also write a compelling and detailed small business grant proposal.

Learn more about what a small business grant is and what to include in a grant proposal, plus tips on how to write a stand-out grant proposal.

What Is a Small Business Grant?

A small business grant is money that’s given to a business for a specific purpose or objective. Unlike small business loans, these funds do not have to be paid back.

There are a variety of government, nonprofit, and private entities that fund grants for a wide array of projects and programs. Businesses can qualify for grants for many reasons, whether it’s because the business supports a specific government initiative or because its owners meet certain qualifications (such as being women or minorities).

Unlike a lender, who wants you to demonstrate your ability to repay the loan, an agency that offers grants typically wants to see that your business aligns with its mission or a specific initiative.

In order to be considered for a grant, you’ll need to apply for the grant and provide any documentation requested in the application. This process is called “grant writing.”

What to Include in a Small Business Grant Proposal

The general goal of a grant proposal is to make it clear why you need the grant, how you plan to use it, and how the funder’s interests align with your goals.

While every grant proposal has different requirements, most include the following sections.

1. Cover Letter

Your cover letter is your business’s introduction to the grant committee, and it should entice them to want to learn more about your business by reading the rest of your small business grant proposal.

You’ll want to address your letter to a particular person, briefly state what your proposal asks for, and summarize your program. There’s no need to go into detail; you’ll cover that elsewhere.

Unlike the rest of your grant application, the letter can be less formal and address the reader more directly.

2. Table of Contents

If your grant proposal has many pages, it can be useful to create a Table of Contents to help readers flip right through to the section they want to see. This makes the grantor’s life easier and shows both courtesy and professionalism on your part.

3. Summary

The summary, also often called the “executive summary,” is a brief synopsis of the entire proposal and helps the grantor to understand at a glance what you are asking.

It should introduce your business, market segment, proposal, and project goals. It should get to the point quickly, but include sufficient detail and specifics.

4. Problem Statement

Grant programs provide money to businesses to solve a problem, not just to pay their bills. The Problem Statement is where you want to define and address the scope of the problem, and also explain what your business will do that another small business hasn’t already done.

You’ll also want to include why you are qualified to implement the project and that you need the grant to do so. Be sure to include research and data as it applies.

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5. Project Description

This is the main section of the grant proposal and where you’ll go into more in detail on how your project will function. Will you need to buy equipment? Hire staff? Invest in marketing? Is this project already up and running? If so, how will you use the funds?

It’s a good idea to set a business budget so readers see you’ve done your due diligence and plan to use the money effectively.

Recommended: Business Cash Management, Explained

6. Objectives/Goals

This section explains what you hope to accomplish with the project (goals) and how your success will be measured (objectives). Though they sound similar, goals and objectives should be separated.

Think of goals as general outcomes — you don’t need to list anything in intense detail, just give the reader an idea of what you are trying to achieve.

Objectives, on the other hand, are the particular steps you’ll take to get to those outcomes, such as obtaining a certain percentage of the market. You may want to break down objectives in a bulleted list so it’s easier to read.

7. Timelines

Every plan needs a timeline. How soon can you achieve your goals? Do you have mini milestones along the way? Visual timelines often work well to show the funder exactly where everything fits into the scheme of things as well as when.

This section shows you not only have goals and objectives but that you also know how to achieve them using a detailed and well-thought-out plan.

8. Team Members, Sponsors, Partners (if Any)

This is where you have a chance to explain why the funder can trust you to use its funds responsibly and efficiently. Who are you? Why is this project so important to you? What experience do you and your partners (if any) have in this area that makes success a likelihood?

Be sure to include a short history of your organization, including your mission and philosophy, the population you serve, and your business track record (success stories). You can also include a biography of key staff, client recommendations, and any industry certifications.

Recommended: Net Present Value: How to Calculate NPV

Tips for Writing a Great Small Business Grant Proposal

Competition tends to be fierce for small business grants, so you’ll want to do everything you can to stand out. Here are 10 ways to increase the odds of getting your grant approved.

1. Make Sure You Qualify

There are many grants available, from federal and local governments as well as private companies and nonprofits. By no means should you try to apply for all of them. Each grant has specific requirements, so you’ll want to carefully review them to make sure your mission and purpose aligns closely with those of the funder. Apply for only those grants that seem to be written for your business.

2. Read Samples

If you’re new to grant writing for small businesses, it can be extremely helpful to read grant proposal samples. You can ask if the grant you’re applying for can provide samples of past winners’ proposals. If not, there are examples of small business grant proposals available online.

You don’t want to copy these, but they can give you a general direction of where you can take yours to stand out.

3. Consider Hiring a Grant Writer

If writing isn’t your forte, it may be worth the expense to hire a professional grant writer, especially if you plan to apply for several grants. Grant writers or consultants have the experience needed to perfect a proposal, and may be able to help you secure the money you need.

Recommended: How Much Does It Cost to Start a Business?

4. Plan Around Deadlines

Applying for a grant isn’t something you sit down and knock out in an hour. Each proposal will require time, effort, and research.

As you pinpoint grants you qualify for, you may want to keep a spreadsheet with deadlines and requirements for each, then plan to spend ample time gathering what you need for each before that deadline comes around.

5. Start With a Template (and Modify)

You can save time by reusing some of the information you’ve used for one grant proposal for others. Just make sure you carefully review and edit a new proposal to match what’s required for that one.

The last thing you want to do is send a generic cover letter that doesn’t address what’s been asked of you because you were in a hurry to apply for as many grants as possible.

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

6. Research the Grant

The more information you have about the grant and the organization behind it, the better your odds of winning. So, it can be well worth the effort to research who the funding agency or organization is, how long it’s been offering the grants, and what types of businesses have been awarded. Use this information as applicable in your proposal to show you did your homework.

7. Follow Instructions to the Letter

This is why you need to allow plenty of time to complete your proposal: rushing through it could mean you miss key requirements and then are disqualified. Read and read again what you are required to include in your proposal and make sure you do them exactly as requested.

8. Remove Your Ego

It’s tempting to talk about how great your business is, but a grant is more aimed at how you can help others. So it can be a good idea to focus on the community you’re trying to serve, rather than how this money will pad your pockets.

9. Provide Plenty of Detail

Grant committees typically want to see that you know your market and your audience and that you have a clearly-defined plan for how you’ll help them. So, be specific about your business plan and financials, provide statistics to back up your problem statement, and present research on the audience you want to serve.

10. Have Your Proposal Reviewed

When it comes to grant writing, it’s always a great idea to have one or more people review what you’ve written. They may catch things you missed or even grammatical errors. Spend plenty of time in the review process to make sure your proposal is as flawless as possible.

The Takeaway

There are numerous small business grants available, but in order to access this type of funding, you will need to write a small business grant proposal.

The goal of this document is to convince the person or organization awarding the grant to give it to your business. It should detail your business’s mission and activities, future goals, reasons for requesting the grant money, and plans for using the grant money.

The process of writing your small business grant can seem daunting, but with careful preparation – and by following the application directions precisely – it’s possible to write your own proposal, even if you’ve never written one before.

Because small business grants are competitive, however, it can be a good idea to explore other financing options while you’re waiting to hear back about your proposal.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

Photo credit: iStock/LumiNola

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

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

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A business loan broker connects business owners to lenders offering the type of loan they need. They do not work exclusively with one bank or lender. Instead, they have connections with many.

Using a broker who knows the ins and outs of business loans is supposed to help a small business owner compare business loan rates and loan terms without individually applying to a multitude of lenders.

But how exactly do business loan brokers work? Will it cost you more to use one? Is it better to do the legwork yourself?

Read on to learn the pros and cons of using a broker to get a small business loan.

What Is a Business Loan Broker?

A business loan broker (also called a commercial loan broker) is an agent who can help guide you through the sometimes intimidating aspect of applying for business loans. The broker does not approve the loan or provide the financing. They are simply servicers to connect the two parties.

Because they’re knowledgeable about all kinds of financing options and have relationships with different types of lending partners, a broker may be helpful for finding the right type of financing for your business.

Brokers are supposed to help you navigate the application process, acting as a middle person between you and your lender.

How Financing With a Business Loan Broker Works

Instead of applying directly to a lender, you provide your financial information to the broker, who then reviews your information and communicates with lenders on your behalf. Once they have received offers, they present you with your options and you can choose the one you like best.

Sometimes they act as a liaison between you and the lender until the loan is processed. Other times, you may complete the application directly through the lender.

How Much Business Loan Brokers Charge

Some business loan brokers may charge fees to the borrower, such as a “success fee” for closing the loan or a small percentage of the approved loan amount.

In many cases, however, they get paid by the lender. There are no standardized or regulated commission rates, but most brokers charge lenders 1% to 3% of the loan amount.

Before you start working with a broker, it is a good idea to discuss not only business loan terms for the funding, but also whether you will be required to pay the broker any fees.

6 Types of Business Loan Brokers

In many cases, small business loan brokers will focus on one type of financing or on a particular industry. Below are some of the different types of small business loan brokers that may be available to you.

1. SBA Loan Brokers

The Small Business Administration (SBA) backs certain loans you can get through traditional financial institutions like banks or credit unions. SBA loans have very specific requirements and, as a result, are known for being one of the more difficult types of loans to qualify for and apply for.

An SBA loan broker can help simplify the process of both applying for and getting approved for an SBA-backed loan. They’ll know what qualifications you need to be approved for the different types of small business loans offered by the SBA, and can walk you through the application process.

2. Startup Loan Brokers

When your business is new and doesn’t have an established credit history, it can be difficult to find small business loans you qualify for. This is where a startup loan broker can help.

This type of loan broker can help you identify short- and long-term loans for startups you’re likely to qualify for. Just be aware that as a new business, banks may require you to sign a personal guarantee and may even require collateral to secure the loan.

Recommended: Small Business Audits Explained

3. Commercial Loan Brokers

A commercial loan is another name for a business loan. Sometimes this type of loan is secured with collateral owned by the business, and sometimes it’s not — it all depends on the business and the loan product.

A commercial loan broker typically has extensive knowledge about a large variety of business loan types available to small business owners. If you have a few different financing needs and want to see a range of options, a commercial loan broker may help.

4. Equipment Financing Brokers

Whether you are looking to lease or finance business equipment, a broker who specializes in equipment financing can help guide you towards the best option.

Even if you don’t have great credit or much credit history, an equipment financing broker can likely present you with options, such as an equipment loan that requires you to pay the loan back faster or use the equipment as collateral, or a sale-and-leaseback option.

5. Factoring Brokers

A factoring loan (also called invoice factoring or accounts receivable financing) is a type of short-term financing where you sell your outstanding invoices to a lender at a discount.

The lender that purchases the invoices is then responsible for collecting on the bills. A factoring broker steers businesses to the best factoring options on the market.

6. Merchant Cash Advance Broker

Merchant cash advances allow businesses that don’t have good credit to borrow money against future revenue. They allow you to get cash up front in return for a portion of your business’s future sales.

While merchant cash advances are not technically loans, they often come with short repayment periods and high interest rates. Therefore, it can be difficult to find one with terms that suit your budget and needs.

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Pros and Cons of Business Loan Brokers

There are both pros and cons to business loan brokers.

Pros of Business Loan Brokers

One of the key advantages of using a business loan broker is that it can be quicker and easier than applying to multiple lenders individually.

A broker may also be able to find you long-term business loans with better terms or introduce you to potential lenders you might not find on your own. And, you often won’t pay anything extra for their services, since many brokers earn a commission from the company that gives you the financing.

Cons of Business Loan Brokers

There are also some potential downsides. One is that if a broker receives a commission on the loan from the lender, then the broker’s interest and lender’s interests are the same; they both benefit from getting clients to take out the largest amount possible for a loan. This could incentivize a broker to persuade a business to apply for a loan that is larger than the amount that they need.

A broker could also potentially favor certain lenders over others, perhaps because they earn a higher commission from those lenders.

And finally, if the broker charges the borrower for their services, it can end up being more costly to use a broker than doing the legwork yourself.

Here’s a snapshot look at the pros and cons.

Business loan brokers don’t actually lend you money; they find you the best lender and help coordinate the business loan application process.

Business lenders, on the other hand, are institutions that loan out money directly from their own accounts to business owners.

Here’s a closer look at the differences between the two.

Who Can Benefit From Using a Broker?

While you can find and apply for business loans on your own without the help of a broker, small business loan brokers offer a number of benefits that are worth considering. They can be especially helpful if you:

Are too busy to research financing options. A broker already has relationships established with lenders and can help you identify the best deal and apply for a loan in less time than it would take on your own.

Need the money right away. A broker will likely know how to push your application through faster, enabling you to get access to cash sooner.

Are a new business owner or have never applied for a loan before. The expert guidance of a broker can assist you not only in understanding your funding options, but also in finding lenders (or funding solutions) you couldn’t have found on your own.

Have a poor credit score. A broker can often help you find lenders who are willing to work with someone of your credit profile.

Questions to Ask Small Business Loan Brokers

Here are some key questions to ask when interviewing loan brokers.

Do They Have Experience in Your Industry?

It can be a good idea to choose a broker who understands your business and knows why you are seeking outside capital. A broker with experience in your industry will likely be better able to explain why certain loan products are better for your business than others.

What Is the Total Cost of Their Service?

Most brokers receive payment through lenders, but some directly charge the borrower. While both have their own pros and cons, it’s important to know what you’re getting into before you hire anyone.

Is There a Cooling Off Period?

Do you have a few days to withdraw from a contract? This can be helpful if the reason you are seeking financial assistance is due to a temporary problem (such as unpaid invoices) that may get resolved. It can also be beneficial if you are also applying for financing on your own and might receive a better offer elsewhere.

How Many Lenders Will They Find for You?

Generally, the more the better. Brokers who only work with a small handful of lenders aren’t really saving you much time, nor are they giving you a good snapshot of the market in terms of interest rates.

Where Did They Get Their Training?

A broker who has an extensive education and years of professional experience is obviously the better choice when compared to someone who simply became a broker by happenstance.

Do They Do In-House Underwriting?

Sometimes lenders allow brokers to decide if you are financially worthy enough to receive a loan. If this is the case, it can expedite the loan application process.

How Quickly Do They Work?

If you needed a loan yesterday, how quickly can they present you with options? Sometimes brokers don’t operate on the same schedule as you and can be a waste of your time.

Alternatives to Business Loan Brokers

There are alternatives to working with a loan broker and even for seeking a traditional loan altogether, including:

Crowdfunding

Crowdfunding allows you to collect money for your business venture through an online platform. People can donate any amount, and the money you receive does not have to be paid back. If you are interested in crowdfunding, you would need to create a crowdfunding campaign, market your campaign, and set a deadline to meet your goals. The biggest con of crowdfunding is it takes a large amount of time to create your campaign, and may not receive the amount of money you need.

Peer-to-Peer Lending

Like crowdfunding, peer-to-peer lending is also done through an online platform. However, this type of loan does need to be paid back. Peer-to-peer lending involves getting a loan from an individual investor or company as opposed to a bank or credit union. Funding times are typically quicker than with banks, and those with bad credit may be more likely to qualify. The downside is interest rates and fees may be higher than using a traditional lender.

Small Business Grants

Small business grants are awarded to business owners by governments, corporations, nonprofit organizations, and foundations. A huge advantage of small business grants is they do not have to be paid back. However, because of this, there are often a large number of applicants and strict qualification requirements that must be met. To find small business grants you may be eligible for, do a search in the industry you’re in followed by “grants.”

Find a Lender Yourself

There are many comparison websites online that make it easy to compare loan products, so finding information isn’t difficult.

To get an accurate picture, you will likely need to know your credit score, as well as your business’s credit score, revenue, and debt-to-income (DTI) ratio.

Recommended: How Much Does It Cost to Start a Business?

The Takeaway

A business loan broker connects new and established companies with lenders who may want to work with them. If you don’t have the time to shop around or you’ve been turned down by multiple lenders, using a broker can be help.

If you use a broker who earns a commission from the lender, it won’t cost you anything for their services. The downside to this payment setup is that it can give brokers an incentive to sell you larger loans or favor lenders who pay them a higher rate.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

Where do you find small business loan brokers?

You can find small business loan brokers by performing an online search for loan brokers in your area. You can choose a few and talk to them about what they have to offer and how they can help your small business. You can also ask other small business owners if they have a loan broker they recommend.

Are there any up-front fees for a small business loan broker?

Upfront fees should not be charged by small business loan brokers. If they do charge a fee, that could be a red flag. Normally, brokers are paid by the lender when the loan closes. Some brokers may charge you a fee directly once the loan is closed, but most will not charge fees upfront.

Can small business loan brokers help if you have bad credit?

Yes, a small business loan broker can help you find a loan, even if you have bad credit. They are probably connected to a few lenders who work with borrowers with poor credit, and they can connect you to those lenders. They don’t have the power to eliminate higher interest rates you may face if you have challenged credit.

What is a business loan broker’s purpose?

A business loan broker’s purpose is to connect you, the borrower, to a lender that’s going to get you the best loan for your needs. Business loan brokers guide you throughout the entire process, from finding the right lender to filling out your application to receiving your funds.

How secure are business loan brokers?

Business loan brokers act as secure middlemen between borrowers and lenders. You can also do the research yourself and choose a reputable lender on your own. However, a broker can make this process much simpler and smoother, especially if you’ve never applied for a small business loan before.

Photo credit: iStock/AmnajKhetsamtip

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

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

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

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.

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Accounts payable are the bills and other short-term debts that a business needs to pay. It includes all of a company’s current liabilities (due within one year), making it a key component of small business accounting.

Understanding accounts payable and having a dependable accounts payable system is essential to running a successful small business. Here’s what you need to know.

What Is Accounts Payable?

When a business buys goods or services from a vendor or supplier on credit that needs to be paid back in the near term, the accounting entry is known as “accounts payable.” On a balance sheet, accounts payable appears under current liabilities.

Accounts payable differs from a loan payable in that accounts payable do not charge interest (unless payment is late) and are typically based on goods or services acquired. Loan payables, such as balances on various kinds of business loans, generally charge interest and are based on the prior receipt of a sum of cash from a lender.

In a company, the term “accounts payable” is also used as the name of the department responsible for handling vendor invoices and bills, from recording them in the general ledger to making payments to suppliers and other third parties.

Is Accounts Payable an Asset or Liability?

In small business accounting, accounts payable is a liability since it is money owed to vendors and creditors. The account grows larger when more money is owed to vendors. When accounts payable increases, a business will typically have more cash on hand because of the delay in paying amounts owed. This typically results in a temporary increase in liquidity.

The short-term debt in accounts payable can help keep cash on hand to pay for other items, but eventually creditors will require payment.

Accounts payable differs from business expenses. Accounts payable is shown on a business’s balance sheet, whereas business expenses are shown on the income statement.

How Accounts Payable Works

When a business purchases goods or services from a supplier on credit, also known as trade credit, payment isn’t made immediately. Typically, it will be due within 30 or 60 days, or sometimes longer.

How it works: A business will send the supplier a purchase order. The supplier will then provide the goods or services the business purchased, along with an invoice requesting payment by a certain date. The person or department responsible for accounts payable will verify the invoice against the purchase order and ensure the goods or services were received before issuing payment to their vendors.

If amounts owed to suppliers and other third parties are not paid within the agreed terms, late payments or defaults can result.

The sum of all outstanding payments owed by a business to third parties is recorded as the balance of accounts payable on the company’s balance sheet. Any increase or decrease in accounts payable from one accounting period to another will appear on the cash flow statement.

Recommended: How to Calculate Cash Flow

4 Steps of the Accounts Payable Process

Managing business finances is one of the most important aspects of running a small business. The accounts payable process has four key steps. Going through this defined process helps avoid errors and missing a payment deadline to a vendor.

1. Invoice Capture

The accounts payable process generally begins when a supplier or third party submits an invoice to the accounts payable department. After receiving the invoice, the accounts payable clerk will verify the invoice is valid and not a duplicate, code the invoice to the general ledger, and depending on the company’s process, conduct a two-way match (in which invoices are matched to purchase orders) or a three-way match (in which invoices are matched to purchase orders and receiving information).

2. Invoice Approval

Once all the data is entered, an invoice must be approved. This involves an individual from the accounts payable department routing the invoice to the appropriate person (or people) in the company to get the necessary approval(s).

3. Payment Authorization

After an invoice is approved, the accounts payable clerk may need to get authorization to make a payment. The authorization will typically include the payment amount, method of payment, and date the payment will be made.

4. Payment Execution

Once payment is authorized, the invoice can be paid. Payment should be processed before or on the bill’s due date and may be done by check, electronic bank-to-bank payment, or credit card. Once the invoice is paid, it can be closed out in the accounting system.

Recommended: Tax Deductions for Small Businesses

Internal Controls and Audits

Internal controls are standardized operating procedures used by companies in their accounts payable process to reduce the risk that a business will pay a fraudulent or inaccurate invoice, pay a vendor invoice twice, and/or fail to pay an invoice on time.

These controls often include:

•  Purchase order approval

•  Invoice approval

•  Two-way matching (in which invoices are matched to purchase orders) or three-way matching (in which invoices are matched to purchase orders and receiving information)

•  Auditing for duplicates (which involves checking files manually or with an accounts payable automation platform to make sure duplicate payments aren’t made)

Accounts Payable Examples

Generally, any items bought on short-term credit fall under the accounts payable umbrella. This includes:

•  Licensing costs

•  Leasing costs

•  Subcontractor bills

•  Amounts owed for raw materials and fuel

•  Products and equipment received but not paid for

•  Subscription services

•  Installment payment plans

Recommended: Debt to EBITDA Ratio Explaining

Accounts Payable vs Accounts Receivable

Accounts receivable is basically the opposite of accounts payable. While accounts payable is the money a company owes to suppliers and vendors, accounts receivable is the money that is owed to the company, generally by its customers. If two companies make a transaction on credit, one records it to account payable, while the other records it to accounts receivable.

Here’s a side-by-side comparison of accounts payable vs accounts receivable:

When a business owner needs an influx of cash, accounts receivable financing is a type of financing that enables them to receive early payment on outstanding invoices. The owner must then repay the money (plus a fee) to the financing company when they receive payment from their customers.

Recommended: GAAP Explained

Trade Payables and Accounts Payables

Though they sound similar, trade payables are actually slightly different from accounts payables.

Trade payables are amounts a company owes its vendors for inventory-related goods, such as business supplies or materials that are part of the company’s inventory. Accounts payables, on the other hand, includes trade payables, as well as all other short-term debts.

The Takeaway

Accounts payable is a current liability on a company’s balance sheet. Accounts payable includes all of the short-term credits extended to a business by vendors and creditors for goods or services rendered but not yet paid for. Accounts payable also refers to the department or person in a firm that records and handles purchases and payments.

Lenders and potential investors will often look at a company’s accounts payable, as well as their accounts receivable, to gauge the financial health of a business. Mismanagement on either side of the equation can have a negative impact on your business’s ability to get credit or get approved for a small business loan, and could also put your business at risk.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

What are examples of accounts payables?

Any good or service that is purchased by the company on short-term credit should be listed as accounts payable on the balance sheet. Some examples include:

•  Leased vehicles

•  Subcontractor services

•  Equipment

•  Materials

•  Business supplies

•  Subscription services

What is the purpose of accounts payable?

The purpose of accounts payable is to accurately track what’s owed to vendors and suppliers and to ensure that payments are properly approved and processed. Having accurate accounts payable information is essential to producing an accurate balance sheet.

What is accounts payable reconciliation?

Accounts payable reconciliation is a process in which the accounts payable department verifies that the detailed total of all accounts payable outstanding matches the payables account balance stated in the general ledger. This is done to ensure that the amount of accounts payable reported in the balance sheet is accurate.

Photo credit: iStock/Panuwat Dangsungnoen

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

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

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

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

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With a revenue-based business loan, a financing company gives your business a lump sum of cash and, in return, you give them a certain percentage of your business’s future monthly revenues. Unlike traditional business loans, your monthly payments don’t stay the same, but instead rise and fall as your revenue rises and falls.

Business loans based on revenue can be a good option for companies that have strong sales but aren’t able to qualify for other small business loan options. You’ll want to keep in mind, however, this type of financing generally comes with higher costs than traditional business loans.

Read on to learn the pros and cons of business revenue financing, how revenue-based financing works, how to find revenue-based business loans, and more.

What Is a Revenue-Based Business Loan?

A revenue-based small business loan is a type of cash flow loan that allows you to borrow against future revenue.

With this type of financing, you receive a lump sum amount that is based on your monthly and annual revenue. Then, instead of making fixed monthly payments to pay the money back (as you would with a typical small business loan), the financing company takes a defined percentage of your total sales within each repayment period, which is typically one week or one month.

When reviewing your loan application, a revenue-based lender focuses primarily on your revenue stream and your business plan. Lenders look for the potential to increase your revenue, since the faster your business grows, the lower the risk to the lender.

A revenue-based loan is similar to a merchant cash advance. Like a merchant cash advance, your payments fluctuate with sales volume. With a merchant advance, however, payments come from debit and credit card sales. With a revenue-based loan, payments come from your total sales.

Your borrowing amount is also based on total monthly receipts, which might allow you to access larger funding amounts than you could with a merchant cash advance (where the advance amount is only based on debit and credit card sales).

How Does Revenue-Based Financing Work?

With revenue-based business loans, the lender determines how much you can borrow based on your sales, as well as the payment frequency that would work best with your business. You may pay weekly or monthly depending on what the lender thinks you can handle.

Unlike other types of small business loans, revenue-based funding does not involve interest payments. Instead, the repayments are calculated using a particular multiple that results in returns that are higher than the initial investment. Typically, these loans come with a repayment amount of 1.5 to 2.5 times the principal loan.

Revenue-based loans are not bound by the same regulations as bank loans. As a result, approvals and funding can be obtained in a relatively short period — generally much shorter than the months it may take a bank to reach a decision.

Once you agree to the loan terms, the lender will provide you with a lump sum of capital, and soon after will begin deducting a percentage of your revenue. The percentage that is deducted in each payment period is known as the capture rate. It typically falls somewhere between 2% and 8% of your monthly revenue. Using this model, you should ideally never pay more than your business can handle.

Because your payment amount fluctuates with your total sales, payments can, theoretically, go on for a long time, potentially several years.

What Can Revenue-Based Business Loans Be Used for?

Lenders typically expect these loans to be used to develop new products, expand your sales force, or venture into new markets.

However, you can generally use the funds you receive through a revenue-based loan in any way you see fit. Often borrowers use the funds from a revenue loan in a way that will increase their sales and profit margins or to prepare for a busy season that is on the horizon. Higher revenues mean you will pay off the loan faster and, ultimately, pay less in interest.

How Can You Pay Off a Revenue-Based Business Loan?

Revenue-based loans are paid off over time, and the amount you pay each month depends on your total sales. Therefore, if you have a stellar few months in sales, it’s feasible you could pay off the loan during a busy season. However, if you have a slow month, your payment won’t be that much and it will take longer to pay off the loan.

Recommended: No Money Down Business Loans

Pros and Cons of Business Loans Based on Revenue

Like all loan products, revenue-based loans have their share of pros and cons. When comparing it to other small business loans, consider the following benefits and drawbacks.

Advantages

A key advantage of revenue-based business loans is that your lender looks at your revenue — not how old your business is, not your collateral, and not your personal or business credit score.

Even if you can’t qualify for a traditional business loan, you may be able to get a revenue-based loan.

For many business owners, it’s the repayment terms that make revenue-based loans particularly appealing. Term loans with fixed payments can work well if your business has consistent, reliable sales. But if your business goes through swings throughout the year, then a fixed monthly payment may not be ideal. With revenue-based loans, your payments should reflect what you can actually afford to pay.

Unlike merchant cash advances, which only work if your customer base pays with either credit or debit cards, revenue-based loans can work for any business, regardless of how its customers choose to pay. All that matters with revenue-based loans is your total monthly revenue.

Revenue-based financing also tends to carry longer terms than merchant cash advances. This is because the latter often requires a daily payment, while the former can be paid monthly or weekly.

Recommended: Small Business Tax Deductions

Disadvantages

Revenue-based loans are often pursued by businesses that can’t qualify for traditional loans due to poor credit. From a lender’s perspective, poor credit increases the likelihood that you won’t be able to pay off the loan on time. To mitigate this risk, revenue-based financing often comes with high rates and fees. This type of loan can even be more expensive than a merchant cash advance because of the higher borrowing amounts and longer terms.

Since your payment is tied to monthly revenue, your loan term fluctuates. While the faster you grow, the faster you pay off the loan, the opposite is also true — if your growth is slower than expected, the number of months needed to pay off the loan will grow. This results in paying more interest over the term of the loan because the interest accumulates over a longer period of time. Sometimes lower growth is outside of your control, but you need to be aware of how this affects the cost of your debt.

Finally, you’re giving up a portion of your revenue each month. That means you’ll have less cash available for other things — like taking advantage of new opportunities that come up, or addressing the unexpected.

Is a Revenue Based-Loan Right for You?

If you don’t have the credit scores to get a traditional business loan, but have solid revenue — and a plan to make it grow even higher — a revenue-based business loan may be a good option for you. These lenders generally care more about where your business is going than where you came from.

And, If you use the loan proceeds to develop new products, increase your sales force, or develop new sales initiatives, the result will likely be increased revenue, which will allow you to pay off the loan sooner and could make the high cost of the loan worth it.

This might also be an appealing type of financing if you operate a seasonal business, since your payment will fluctuate along with your revenue and/or you need capital quickly, since it can be faster to get than a traditional loan.

However, you might not be the best candidate for this type of loan if you aren’t certain that your business will be experiencing a solid amount of growth. Also, if your business is struggling, the higher costs that come with this type of loan could become problematic. In that case, you might want to look into other business loans for bad credit.

Recommended: Credit Score Needed for Business Loans

5 Steps to Finding and Applying for Revenue-Based Business Loans

Here are the steps that are typically involved in getting revenue-based financing.

1. Figure Out How Much You Want to Borrow

Before you start looking for a lender, you’ll want to take some time to determine how much you want to borrow and exactly how you will use the funds. As part of the application process, you typically need to submit your desired loan amount, along with a plan for how the loan proceeds will be spent and how these investments will help your business.

2. Prepare the Necessary Documents

Applying for a revenue-based loan is similar to applying for any small business loan. You’ll likely need to gather appropriate paperwork that proves you are who you say you are and that your reported revenue is accurate. You may need to have:

•  Personal and business income tax returns

•  Balance sheet and income statement

•  Personal and business bank statements

•  A photo of your driver’s license

•  Business licenses and permits

•  Articles of incorporation

•  Details on any other loans (if applicable)

•  Documented plan to increase your existing business revenue

3. Compare Lenders

Banks and other conventional lenders generally don’t offer revenue-based financing. However, you may be able to find this type of loan through investment companies, financing institutions, revenue-based financing firms, and venture capital firms. Loan brokers may also be able to point you towards lenders offering revenue-based loans.

If you end up with multiple options, it can be a good idea to compare not just costs but also any other benefits the financing company offers. Some revenue-based lenders will act as mentors to your business since they have a vested interest in seeing your company succeed, which could be a valuable add-on.

4. Apply

You can typically apply online and, once you submit your application, your chosen lender will review and verify your monthly and annual revenue statements as well as other submitted documents.

5. Waiting Period

If you are approved for the loan, a representative will reach out and likely present a mix of offers with varied repayment terms. You’ll have a chance to go over each offer and ask any questions you may have. In some cases, you can get approved and have the cash in hand within several days to a few weeks.

Alternatives to Revenue-Based Business Loans

If you’ve been denied more traditional loan products, and are on the fence about going with a revenue-based loan, you may want to consider the following alternatives.

Business Credit Card

If you don’t need that much additional capital, you could consider a business credit card. You might be able to find a business credit card that offers a 0% introductory annual percentage rate (APR), which could help you get through any cash flow issues you may be experiencing. The 0% intro APR period could last as long as 21 months, which could help you pay off any business expenses without racking up any interest.

Microloan

Microloans are small amounts of funding intended to help start or grow a business. These loans commonly target specific groups, such as women, minorities, veterans, or others who may face barriers to accessing bank loans and other traditional means of funding.

Peer-to-Peer Loan

Peer-to-peer (P2P) lending (also known as crowdlending) is when a borrower receives funding directly from other individuals, cutting out the financial institution as the middleman. Borrowers and investors connect on P2P lending websites. Each site sets the rates and the terms and enables the transaction. This may be a viable option if you’ve been repeatedly denied capital using the more traditional route.

Crowdfunding

With business crowdfunding, your company collects small monetary contributions from a large group of people through an online crowdfunding platform. In some cases, you don’t have to pay the money back (just give each investor a “reward” or gift). However, developing a successful crowdfunding campaign can take a lot of time and effort.

Angel Investor

If you’re willing to part with a little bit of equity, an angel investor may be able to help. Angel investors are usually high-net-worth individuals who are able to provide needed capital to start-ups and young businesses in exchange for an ownership stake in the company.

The Takeaway

Revenue-based financing is a way to get capital by pledging a percentage of future ongoing revenues. However, there are other small business financing options to consider, as well.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

Can you get a revenue-based loan with bad credit?

Yes. The main deciding factor is your business’s total sales. If you have strong sales, then you may be a good candidate for revenue-based loans.

How do revenue-based business loans even work?

Revenue-based financing is a form of financing that allows small businesses to get capital up front and pay it back from future revenues. Payments are based on a weekly or monthly percentage of revenues and continue until the financing is repaid along with the fee, which is usually around 1.5 to 2.5 times the principal loan.

Is revenue-based financing good?

It can be a good option if you have been turned down for other types of business loans because of lack of a collateral or a low credit score.

Do you have to have revenue to get a business loan?

Not necessarily. While many business lenders require prospective borrowers to meet minimum annual revenue requirements to qualify for a loan, some loans are designed for new businesses that don’t have any sales.

Is revenue-based financing a loan?

Yes, it is a type of loan and it must be paid back.

Photo credit: iStock/Hispanolistic

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

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

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

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

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EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s financial performance and is sometimes used as an alternative to net income.

Some analysts believe that EBITDA provides a more accurate measure of a company’s profits and operational efficiency than net income. Others, however, think that EBITDA can be misleading, since it ignores company expenses like debt and depreciation.

Here’s what you need to know about EBITDA, how this metric is calculated, and what it can — and can’t — tell you about your business.

Recommended: How to Grow a Business

What Is EBITDA?

EBITDA is actually an acronym that stands for earnings before interest, taxes, depreciation, and amortization. In other words, it tells you the earnings that a business has generated prior to any debt interest expenses, tax payments, and depreciation/amortization costs of the business.

EBITDA doesn’t factor these values in because they are outside of management’s operational control. By adding these values back to net income (gross business income minus all business expenses), many analysts believe that EBITA is a better measure of company performance since it is able to show earnings before the influence of accounting and financial deductions.

EBITDA may be calculated by investors or when you’re applying for a small business loan (or a large one) to estimate how well your company will be able to pay its bills and maintain or increase net income.

Here’s a closer look at each letter of this acronym.

Earnings

Earnings are the profit a business makes off of its core operations. With EBITDA, earnings are calculated by subtracting expenses from total revenue. However, unlike net earnings, EBITDA doesn’t subtract all business expenses. It factors in the cost of goods sold, general and administrative expenses, and other operating expenses. However, it doesn’t subtract costs that are not directly related to the company’s operations, namely interest paid on debt, amortization and depreciation expenses, and income taxes.

Interest

Interest paid on debt is an expense that is excluded from EBITDA, since it depends on the financing structure of a company. Businesses take on different amounts of debt for different reasons. As a result, it can be easier to look at earnings without considering the company’s capital structure.

Recommended: Fixed vs. Variable Rate Business Loans

Taxes

Each locality has different tax laws which can impact which kinds of taxes you pay and how much. Depending on where a business is located, it may have a dramatically different tax burden than another company with the same amount in sales. To better compare companies, EBITDA removes the effect of taxes on net income by adding those expenses back into net income. Doing so makes it easier to compare the performance of two or more companies operating in different states, cities, or counties.

Depreciation

Depreciation is the process of spreading out the cost of a tangible asset over the course of its useful life. While depreciation does cost a business money (as machinery and vehicles do wear out), it’s a non-cash expense that depends on past investments the company has made and not on the current operating performance of the business. Therefore, EBITDA doesn’t factor it in.

Amortization

The difference between amortization vs depreciation is that amortization is the depreciation of intangible items, such as patents or licenses, which also have a limited useful life due to expiration. Amortization is an expense that is reported on a company’s financial statements, but, since it isn’t directly related to a business’s core operations, EBITDA doesn’t factor it in.

How Does EBITDA Work?

The core premise of EBITDA is that some expenses are considered extraneous by investors when comparing the operational performance of multiple companies. Those factors include:

•   Interest

•   Taxes

•   Depreciation

•   Amortization

By eliminating these items (or adding them back to a company’s net income), EBITDA makes it easier to compare the financial health of companies with different capital structures, tax rates, amortization expenses, and depreciation policies.

How Is EBITDA Calculated?

To calculate EBITDA, there are two commonly used EBITDA formulas.

Option 1:

Start with net income (the bottom line of the income statement), and then add back the entries for taxes, interest, depreciation, and amortization.

Net income + Taxes Owed + Interest + Depreciation + Amortization = EBITDA

Option 2:

Alternatively, you can start with operating income (also referred to as operating profit or EBIT — earnings before interest and taxes). Operating income is the amount of revenue left after deducting the direct and indirect operating costs from sales revenue. If you add depreciation and amortization to operating income, you get EBITDA.

Operating Income + Depreciation + Amortization = EBITDA

Pros and Cons of EBITDA

Here, see how the potential advantages and disadvantages of EBITDA compare.

EBITDA can be a valuable measure of a company’s financial performance and operational efficiency. Because EBITDA adds back interest, taxes, depreciation, and amortization (expenses that don’t directly reflect a company’s decisions) to a company’s net income, it shines a light on a business’s ability to generate cash flow from its operations.

When calculating EBITDA, the only costs subtracted from revenue are ones that are directly linked to the company’s operations (such as rent, salaries, marketing, and research). Capital structure decisions, which are reflected in depreciation, amortization, and debt expenses, aren’t included. As a result, it gives analysts a way to more accurately compare performance between companies with different capital structures. In addition, business owners use it to compare their performance against their competitors.

However, EBITDA doesn’t reflect a business’s actual net earnings. And, some analysts are skeptical of EBITDA because it presents the company as if it has never paid any interest or taxes. It also excludes depreciation and amortization expenses. However, machines, tools, and other assets lose their value over time, and copyrights and patents expire. EBITDA fails to account for these costs.

EBITDA can also cover up or shift attention away from high debt levels. Indeed, it’s possible to report a strong EBITDA while stating negative profits at the bottom line.

Recommended: Small Business Ideas

EBITDA Example

Coca-Cola Company, 2021 EBITDA example:

Notice how EBITDA is more than net income. Sometimes less honest companies try to persuade investors that they are more profitable than they are by emphasizing their EBITDA number more than their net income number.

History of EBITDA

EBITDA came into prominence in the 1980s when many investors were doing leveraged buyouts of distressed companies that needed financial restructuring. They used EBITDA to calculate quickly whether these companies could pay back the interest on these financed deals.

The use of EBITDA increased during the dot-com boom, when analysts and managers used it to show that expensive assets and debt loads were obscuring a company’s actual growth numbers.

EBITDA is now commonly used to compare the financial health of companies and to evaluate businesses with different tax rates and depreciation policies.

Alternatives to EBITDA

Here are some other ways to track information instead of EBITDA.

EBT

Earnings before tax (EBT) measures how profitable a company is before you consider its tax burden. EBT is useful when comparing two companies in the same industry but that exist in different states. By removing tax liabilities, investors can use EBT to evaluate a firm’s operating performance after eliminating a variable outside of its control.

Operating Cash Flow

Operating cash flow measures how much cash is generated by a company’s normal business operations. Operating cash flow indicates whether a company can generate sufficient positive cash flow to maintain and grow its operations. If not, it may require external financing.

EBIT

The difference between EBIT vs EBITDA is that EBIT (earnings before interest and taxes) doesn’t add depreciation and amortization back to net income. EBIT considers these costs as necessary expenses to consider when analyzing a company.

Revenue

Revenue (also referred to as sales or income) consists of all income generated by a business’s core activities before expenses are taken out. It includes both paid and unpaid invoices.

When thinking about EBITDA vs revenue, revenue measures sales activity, while EBITDA measures how profitable the business is. Revenue is calculated by adding up income from all business operations, whereas EBITDA takes that revenue and then subtracts expenses in order to measure profit.

Net Income

Net income (also called net earnings) is how much a company makes after subtracting all expenses, including cost of goods sold, general and administrative expenses, operating expenses, depreciation and amortization, interest on debt, taxes, and other expenses. It is a useful number for investors to assess how much revenue exceeds the expenses of an organization.

The Takeaway

EBITDA is a way to quickly gauge how a business is performing with its core operations, but it excludes interest, taxes, and depreciation/amortization. EBITDA can be helpful for seeing how your business performs from year to year and how it compares to the industry averages, but it does not reflect its real income. That’s why if you’re exploring business loans or looking to attract an investor, EBITDA will likely be one of several metrics to consider.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

What makes EBITDA important?

EBITDA is a useful metric for understanding a business’s ability to generate cash flow for its owners and for judging a company’s operating performance.

How is EBITDA calculated?

The most common way to find EBITDA is to add net income, taxes owed, interest, depreciation, and amortization. .

What is a typical EBITDA?

There is no typical EBITDA because companies of different sizes in different industries vary widely in their financial performance. The best way to determine if your company’s EBITDA is typical is to compare it with the EBITDA of your peers — companies of similar size in the same industry and sector.

Photo credit: iStock/Anchiy

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.

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

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