SoFi

Building a nonprofit organization from the ground up takes time, hard work, and dedication. It also typically takes money, which may be hard to come by if you don’t yet have a track record of successful programs under your belt.

The good news is there are nonprofit startup grants available that can help a newly formed organization get up and running. Finding — and getting — a nonprofit business startup grant isn’t always easy, though. Here’s what you need to know.

Why Are Grants Important for Nonprofit Startups?

For nonprofits at any stage, grants often serve as a significant and reliable source of income. If you’re launching a new nonprofit, a startup grant can give the funds you need to rent office space, hire employees, initiate programs, and spread the word about your organization and mission through marketing.

You can think of a nonprofit startup grant as akin to the seed funding a for-profit business startup might get from an angel investor or venture capitalist. In this case, however, the funding comes from grant-giving foundations, government agencies, and corporations.

💡 Recommended: Starting a Nonprofit

Common Challenges Nonprofits Face in Securing Grants

Directors seeking grant money for nonprofits face an array of obstacles. Uncertainty about government funding is a central issue. Due to cutbacks in government spending, many federal grants and contracts for nonprofits are likely to be paused or canceled; others remain uncertain amid legal challenges.

According to a recent Urban.org survey, roughly 20% of all nonprofits received more than half of their revenue from a government source in 2023.

A limited pool of major donors presents another difficulty. With 88% of nonprofits’ funds coming from just 12% of donors, applicants compete fiercely to build and sustain relationships with these sources.

Nonprofits also face the challenge of ensuring and maintaining compliance with grantmakers’ requirements. Falling short of funders’ terms and conditions could cause donors to withhold money or impose penalties.

4 Steps to Getting Grants for Startup Nonprofits

If you’re looking for a grant to help fund a new nonprofit, here are four steps to follow.

1. Get Your Documentation Together

Grantmakers want to be sure that their money is going to a good purpose. So you’ll want to offer as much evidence as you can that your organization can and will do what it says it will. It’s a good idea to gather (or prepare) documentation that shows:

•  Your legal status

•  Your mission, goals, and objectives

•  Your target population and their needs

•  Background information on your board members, staff, and volunteers

•  Major accomplishments to date (if any)

•  Fundraising plans

•  A budget showing how you plan to use the grant funds

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

2. Finding the Right Grants

You can find small business grant opportunities using online databases and government resources (for more on that, see below). Also, consider tapping your network — ask your board, staff, and volunteers if they have any connections with grantmakers who might consider funding your organization. It can also be helpful to research existing nonprofits that are similar to yours to see where they get their funding.

To come up with a list of viable sources for nonprofit business startup grants, you’ll want to consider:

•  Does this grantmaker generally fund nonprofits like yours?

•  Do you meet the grantmaker’s geographical restrictions?

•  Does the grantmaker typically fund startups or only well-established nonprofits?

•  Does the grantmaker typically offer funding for the kind of project or operational expenses you need funding for?

•  Do the grantmaker’s interests and mission mesh well with yours?

3. Follow Guidelines and Apply

Grant applications typically take a substantial amount of time and effort, so before you start an application, it’s a good idea to carefully review the qualification criteria. It won’t take much time to re-read the grant’s eligibility requirements, and it could potentially save you hours and hours of work if you discover a reason why your nonprofit might not qualify. Also, be sure to follow the application directions to the letter. Otherwise, your application might get automatically rejected.

4. Listen to Feedback

If your application is denied for any reason, and you receive feedback, it’s a good idea to carefully read through it. You may be able to glean useful information that you can use when applying for other grants or for a grant from that organization in the future. You may also consider soliciting the feedback of a grant specialist if you’re not sure why your application was denied.

Recommended: Foundation vs Charity vs Nonprofit: Key Differences

Nonprofit Grant Sources

Here are some potential sources of nonprofit startup grants.

Federal Grants

There are a number of agencies funded by the federal government that offer grants to nonprofits, from startups to small, fully established organizations. These grants might be targeted to certain programs or available to help cover operational expenses. A good place to start your search for federal grants is Grants.gov.

State and Local Grants

State and local governments also offer grant money for nonprofits. You can often find information about these grants through state, city, and town websites. To further suss out municipal and local grants, consider reaching out to local councils and commissions; they may be able to connect you with someone who has direct knowledge about grants in your area. This could help you find a small business grant that suits your needs.

Corporations

Many corporations offer financial support to nonprofits. Sometimes they readily advertise their grants for startup nonprofits, and sometimes they don’t. Therefore, even if a corporation doesn’t state that it partners with nonprofits, that doesn’t mean they don’t or wouldn’t be willing to. It might be worthwhile to set up meetings to pitch your nonprofit’s mission and needs to nearby corporations you think might be sympathetic to your cause.

Private Foundations

Many privately funded foundations offer grants to nonprofits. In fact, many are formed exactly for that purpose. To find a foundation that might be willing to offer startup funding to your organization, you might want to start local. With a little research, you may be able to find grant-giving foundations located in your area. To expand your search, consider using a database like Candid.org.

Community Foundations and Donor-Advised Funds

Funded largely by public donations, a community foundation typically supports area nonprofits via donor-advised funds (DAFs) and other types of grants. DAF donors need not designate the recipient of their funds right away; they may prefer to let the assets grow under management for a while or set up smaller, recurrent transfers to their recipients. The Council on Foundations’ community foundation locator can direct you to philanthropies near you for more details.

Other Ways for Nonprofits to Receive Funding

Grants are only one potential source of nonprofit funding. As a nonprofit founder, you’ll ideally want to have several funding strategies. The more diverse your revenue streams, generally, the more likely your nonprofit is to succeed. Here are some other options to consider.

Crowdfunding

There are many different types of crowdfunding, but the one most used by nonprofits is donation-based crowdfunding. This works by asking large amounts of people to donate small amounts of money, typically via an online crowdfunding platform. You can launch a crowdfunding campaign to raise startup funds for your nonprofit or to fund a specific program within your organization.

Fundraising

Many nonprofits raise significant funds through donations, so if you don’t have one already, you’ll want to create an online donation page. Some ways to encourage donations include promoting your organization and cause on social media, asking for donations at community events, and hosting charity events (such as a walk-a-thon, gala dinner, concert, or auction).

Loans

While you might associate loans strictly with for-profit businesses, nonprofits can sometimes qualify for different small business loans. If you have strong personal credit and your startup nonprofit is already generating revenue, it may be worth applying for a loan through your local bank or credit union (if they lend to nonprofits).

You might also want to look into online business loans. Online (also known as alternative) lenders tend to have more relaxed requirements and are typically faster to fund. However, these types of loans often come with higher interest rates.

Partnerships and Sponsorships

Companies or affinity groups that have a connection to your nonprofit’s mission may be willing to join forces with your organization for fundraising. This might include sponsoring revenue-generating events such as walk-a-thons or silent auctions. In return, your nonprofit can include the companies’ logos or branding in event ads and souvenirs. With this type of arrangement, your nonprofit can raise funds while minimizing overhead and other expenses.

The Takeaway

If you’re looking to start or expand a nonprofit organization, you may be able to qualify for a small business grant or a nonprofit business loan. Once you’ve zeroed in on the likeliest sources for funding, gathered the necessary documentation, and submitted your grant application, you’ll probably have to wait weeks or months to hear back. In the meantime, it may be worth setting up other avenues for raising money, such as crowdfunding or corporate sponsorships.

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

FAQ

Can nonprofits be startups?

Yes. Just as in the business world, people often create nonprofits to offer a new solution to a problem. And just like for-profit startups, nonprofit startups typically need seed funding.

How do you start a nonprofit with no money?

You may be able to start a nonprofit with no money by:

•  Finding an attorney willing to donate their services to help you register your nonprofit

•  Finding an online fundraising tool that’s free to start

•  Gathering donations from friends, family, and board members

•  Planning free and low-cost fundraising events

How do nonprofits get seed funding?

Nonprofit startups often get funding through crowdfunding, grants, and donations from friends, family, and members of the community.

What is the easiest grant to get for a new nonprofit?

Many organizations, including smaller nonprofits, have easily accessed the Google Ad Grant. The grant pays for the nonprofit to have ads for its site listed among Google search results. To qualify, all the organization has to do is register with Google for Nonprofits, install Google Analytics on its website, and wait for Google to verify the site. Upon approval, the nonprofit is granted $10,000 worth of ad credits each month.

How long does it take to receive nonprofit grant funding?

The wait for grant money can vary widely, often based on the source of the funding. For foundation grants, approval and notification may take 30 days to 18 months. For grants from federal sources, you may wait six to nine months, because those applications often face stricter compliance reviews. The money typically arrives one to three months post-approval.

Photo credit: iStock/GaudiLab

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

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

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

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

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.

SOSMB-Q225-018

Business insolvency occurs when a company lacks the assets to settle its debt payments to lenders as they become due. This can happen in any number of ways and may be the first step towards bankruptcy for a business.

Below, we talk about what you need to know about insolvency, steps you can take to bring your small business out of insolvency, and how insolvency compares to illiquidity and bankruptcy.

Recommended: Line of Credit vs Credit Card: Which Is Right for You?

What Is Insolvency?

The meaning of insolvency isn’t always clear. People in business define insolvency as a state of financial distress in which an individual or company cannot repay the debts they owe. For example, a business may become insolvent if it’s unable to keep up with monthly payments due on their small business loans or money owed to vendors for goods and services they have already received.

Often being insolvent means bankruptcy is on the horizon, but insolvency by itself is not the same thing as bankruptcy. Before an insolvent company gets involved in any legal proceedings, they will likely engage in informal negotiations with creditors, such as setting up alternative payment arrangements.

Signs a Business May Be Approaching Insolvency

The best way to see if a business is on the way to insolvency is to examine the assets and liabilities on the balance sheet.

But other developments may also indicate a business is running into trouble. Those might include:

•   Issues with revenue and cash flow: If sales and revenue are declining (because customers pay late, for example), profit margins are likely to fall as well. The imposition of cost controls, such as freezing executive pay, may be another hint.

•   High staff turnover: Personnel issues sometimes indicate — or accelerate — future insolvency. A high rate of employee turnover, especially of key employees, may suggest they have doubts about the company’s future. Also, recruiting replacements or hiring temps to fill open roles is likely to be expensive.

•   Difficulty in borrowing money: If the company has reached its borrowing limits, with company overdrafts maxed out and lenders refusing to extend financing, insolvency may be looming ahead.

•   Paying creditors late: Consistent calls from angry creditors about overdue bills usually indicate that money is tight. Defaulting on loans and other bills may also lead to lawsuits, requiring expensive legal services that can themselves be a financial setback.

Recommended: Solvency vs Insolvency: Defined and Explained

How Does Insolvency Work?

Taking out small business loans is part of doing business and allows business owners to expedite growth. If a company takes on too much debt too quickly, however, it can lead to insolvency — a state in which it can no longer pay off its debts. If an insolvent company is not able to work out a way to repay the debts, it may face involuntary insolvency proceedings, in which legal action is taken against the business and its assets may be liquidated to pay off outstanding debts.

There are numerous factors that can contribute to insolvency. These include:

1.   Lawsuits: Any business involved in a lawsuit (or multiple lawsuits) may be forced to spend large amounts of money for legal protection, and, if it loses, suffer financial penalties.

2.   Increased production expenses: If a manufacturer increases its costs or it suddenly costs more to procure goods, these costs are directly passed down to the business. The business may pass down these costs to its customers, but it runs the risk of losing a percentage of its customer base. If it doesn’t pass down the costs, it is then forced to take a reduced profit margin. Both scenarios can lead to reduced cash flow, which in turn can lead to loan defaults.

3.   Inability to pivot and adapt to a changing market: If customers start going to a new company or business for their needs, and the original business doesn’t do anything to attract those customers back, it could lose a significant amount in revenue as a result.

4.   Human error: Keeping up with a business’s revenue and expenses can be complicated — especially as a business grows. Business owners or personnel who lack the appropriate accounting experience can suddenly find themselves short on cash to cover their liabilities.

Types of Insolvency

There are two types of insolvency, which actually represent different degrees of insolvency.

Cash Flow Insolvency

Cash flow insolvency happens when a company doesn’t have enough in liquid assets to make its debt payments. It may have enough in total assets to cover its debts, but those assets cannot be easily liquidated (converted to cash).

It’s not a good financial situation to be in, but the company probably has a few options moving forward. For example, a cash flow insolvent company can reach out to their creditors, who may be willing to restructure their debt or delay payments (giving them time to liquidate assets). If this happens, penalties or additional interest may be applied.

Learning how to calculate cash flow may help prevent cash flow insolvency, but many factors can contribute to this type of insolvency.

Balance Sheet Insolvency

Balance sheet insolvency means that a company or individual borrower doesn’t have enough in total assets to cover their total liabilities. When balance sheet insolvency occurs, the likelihood of a company going through bankruptcy at some point in the future is high unless it is able to find an angel investor or other infusion of cash, or significantly restructure its debt by working with its creditors.

Technical Insolvency

Technical insolvency is another name for balance sheet insolvency. In both cases, if the value of a company’s liabilities exceeds the value of its assets, the business is technically insolvent and needs to increase its income, decrease its debt, or both.

What’s the Difference Between Insolvency and Illiquidity?

When defining insolvency vs illiquidity, there are a lot of similarities. Both are terms used to describe a business that is dealing with cash flow problems or operational inefficiencies. However, there are major differences, too.

Illiquidity is when a company does not have enough current assets to meet its current liability obligations. It’s the same as cash flow insolvency; however, illiquidity is not the same as balance sheet insolvency. Balance sheet insolvency means a company’s total liabilities exceed its total assets, and it would not be able to fully repay its debts, even if it liquidated all of its assets. Illiquidity is a short-term problem; insolvency is often a long-term problem.

Insolvency vs Bankruptcy

The line between insolvency vs bankruptcy is also sometimes thin. The two may seem synonymous from a dictionary perspective, but from a legal point of view, they are different. Insolvency means a business is in a state of financial distress. Business bankruptcy, on the other hand, is an actual court order that depicts how an insolvent business will pay off their creditors.

A business that is insolvent has not necessarily filed for bankruptcy. There may be other tactics it can use to pay down its debt. Insolvency can often be reversed by negotiating with creditors or if a large amount of cash or large business payment is coming down the pipeline.

Someone who has filed for business bankruptcy has determined that they have no other options to pay off their debt. The court will then determine if they have any assets that they can sell. Proceeds from the sale are given to creditors, and debts are discharged.

Bankruptcy can have a big effect on a debtor’s financial record, however — particularly their credit scores. Businesses that file for bankruptcy may have difficulty getting approved for many types of business loans during the period that the bankruptcy remains on their credit reports.

Legal Processes Involved in Bankruptcy vs Insolvency

A business that can’t remedy its insolvency may well have to file for bankruptcy. Individuals and businesses are eligible to file under Chapter 7 (liquidation of assets) or Chapter 11 (reorganization of debt) of the US Bankruptcy Code. Chapter 13 bankruptcy allows individuals and sole proprietors with regular income to pay their debts over several years.

Among the legal processes involved in Chapter 7 are:

•   A means test to ensure that the individual debtor’s income is low enough for Chapter 7

•   Administration by a trustee, who takes the remaining assets and turns most of them into cash (with a few exceptions, such as the debtor’s house and car)

•   The distribution of the proceeds to creditors by the trustee

•   The issuance of a discharge that releases the debtor from its debts

For Chapter 11, there are more steps, such as:

•   The debtor files a plan of reorganization for the first 120 days after it files the case.

•   A disclosure statement goes out to creditors with enough information that they can evaluate the plan.

•   A court ruling confirms or disapproves the reorganization plan.

•   Under the confirmed plan the debtor repays some of its obligations and discharges others.

Being insolvent does not in itself require any legal processes. As noted above, insolvency is simply a financial situation in which a business’s assets won’t cover its liabilities.

Recovering From Insolvency

The best tactics for recovering from insolvency will depend on the type of company, as well as the reason behind the insolvency. However, moving from insolvency to solvency typically entails dealing with your debt, improving your cash flow, and strengthening your cash management.

Often, a good first step is to list all of your company’s debts in order of priority, then focus on debts that need to be paid immediately (such as those that could interrupt operations or lead to legal trouble if not paid on time). At the same time, you may want to reach out to your creditors to see if you can negotiate better repayment terms.

Another option to look into is refinancing your debt, which involves comparing small business loan rates and then combining several different loans into one, more affordable, payment.

In addition to managing debt, insolvent companies also typically need to decrease spending.

You may be able to do this by cutting out all unnecessary costs and/or finding cheaper suppliers for materials, stocks, and/or insurance.

Negotiating with Creditors

You may be able to avoid garnishment, bank levies, foreclosure, and bankruptcy by negotiation with your creditors.

Some recommended negotiation guidelines and strategies are:

•   Consider filing for bankruptcy. This could also be a negotiation tactic, as your creditors know bankruptcy could leave them empty-handed.

•   Aim to settle unsecured debts for 50% or less.

•   Have money at hand to make payments promptly.

•   Be aware of the big picture and clear about your goals.

Your negotiation strategy may change based on the type of debt. Making changes to unsecured credit card debt, for example, can be tough. But revamping a secured loan from a mortgage lender might be easier.

Financial Restructuring Options

Financial restructuring to address insolvency may include debt restructuring, equity financing, and debt-for-equity swaps. Often, the retrenching process involves asset sales to generate cash and settle debts.

The Takeaway

Insolvency is a term for when an individual or company can no longer meet their financial obligations to lenders as debts become due. There are two types of insolvency — cash flow insolvency and balance sheet insolvency. Of the two, balance sheet insolvency is the one most likely to lead to bankruptcy.

Becoming insolvent can happen for a variety of reasons, including poor business management and financial situations that are beyond a company’s control. Moving your company from insolvency to solvency may involve reaching out to lenders and creditors and restructuring your debt to make payments more manageable.

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 happens when you declare insolvency?

If the creditor is willing, you may be able to restructure your company’s debts so that you are able to pay them off. If they are not, you could potentially face insolvency proceedings, in which legal action is taken against your business and assets may need to be liquidated to pay off outstanding debts.

Is insolvency the same as liquidation?

Insolvency can lead to liquidation, but they are not the same thing. Insolvency is a state of financial distress in which a company is unable to pay its debts as they come due. Liquidation is the process of selling off a business’s assets and distributing any funds to creditors.

When is a business considered insolvent?

A business is considered insolvent when it is unable to pay off its debts with its assets. Cash flow insolvency is when a company doesn’t have enough liquid assets (cash or assets that can quickly be turned into cash) to pay its current debts. Balance sheet insolvency — sometimes referred to as technical insolvency — is when a company doesn’t have enough total assets (liquid or illiquid) to cover its debts.

Can a company recover after becoming insolvent?

Becoming insolvent need not be the end of a company. It may be able to pay down its debt and avoid bankruptcy. For example, negotiating with creditors or restructuring debt obligations may help a company emerge from insolvency.

How long does an insolvency process take?

The time it takes to recover from insolvency varies. It typically depends on the complexity of the business and its chosen turnaround plan. An insolvency attorney or administrator can help with the process. Some steps, such as securing alternative financing, may take only days or weeks. Identifying and fixing expensive inefficiencies, refinancing or restructuring loans, or negotiating with creditors could take months.

Photo credit: iStock/elenaleonova

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

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

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

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

SOSMB-Q225-027

Businesses borrow money in different ways. They might, for example, receive goods and services on credit and pay the invoice 30 or 60 days later. Or, they might take out a small business loan and repay the principal (plus interest) in monthly installments over several years.

Both types of debt are considered liabilities. In small business accounting, however, they are treated differently. The first example is considered an account payable, while the second is generally considered a note payable.

Read on for a closer look at accounts payable vs. notes payable, including how each accounting system works and how these accounts are both similar and different.

Recommended: How To Find an Accountant

Accounts Payable vs Notes Payable

Notes payable and accounts payable have some similarities, but also significant differences. Here’s a look at how they compare.

Similarities

Both accounts payable and notes payable deal with a business’s debts. They are listed as liabilities on the balance sheet. And as they are paid down or paid off, they are debited from the liabilities and credited toward cash or another asset.

Both types of accounts may also list payment terms, which helps you understand when payment is due.

Sometimes these two types of debt intersect. If a company faces a strong probability of running out of cash and being unable to make short-term payments to its accounts payable accounts, its creditors may request a promissory note for the leftover balance. The account payable is then converted into a note payable account as a new entry. This gives the company more time to pay off the debt, while the creditor can earn interest.

Differences

The main difference between accounts payable and notes payable is the degree of structured formality. Accounts payable tends to be informal and short-term, without a lot of detailed obligations outlined for the specific supplier. Notes payable, on the other hand, are always formal written contracts; they tend to be longer-term and to include more stipulations.

Another key difference in notes payable vs. accounts payable: Notes involve interest payments. The interest expense is usually thought of as separate from the loaned amount.

Also, while accounts payable can be converted into notes payable, notes payable are not typically converted into accounts payable.

What Are Accounts Payable?

Accounts payable refers to the money a company owes to its suppliers, contractors, and partners. These debts are short-term (often paid within 30, 60, or 90 days) and are typically recurring, since companies tend to use the same trusted suppliers on a regular basis.

Generally, accounts payable are informal agreements and are generated as part of the operating cycle of the business.

How Accounts Payable Works

Typically with accounts payable, you receive goods or services before paying for them. For example, you might order office supplies and receive them within a week, but you have a month or two to pay the invoice. Accounts payable are recorded as a current liability on the company’s balance sheet.

In terms of day-to-day accounting, an account payable is considered a liability account that typically has a credit balance. When your business pays an invoice to a creditor, cash is credited while the accounts payable account is debited.

While there is typically no interest charged on accounts payable, there may be a fee assessed if the invoice is not paid by the invoice due date.

Benefits of Accounts Payable

Buying goods and services as needed on credit gives businesses an advantage over competitors that may have to pay upfront.

Using trade credit also allows your business to be more flexible, adapting to market demands and seasonal variation so that you have a constant supply of goods even when your finances aren’t stable. Without needing to pay cash upfront, for example, a business can stock up in time for peak demand, even if cash flow is currently low.

However, these expenses can add up and need to be organized in a way that allows the process of making payments as efficient as possible.

A good accounts payable system helps you keep track of operating expenses and ensures invoices are paid on time. This can help your firm maintain good relationships with creditors and vendors, and also have a positive effect on your company’s credit rating.

Common Challenges in Managing Accounts Payable

If a company’s internal systems are inefficient, managing accounts payable can be troublesome in a number of ways, including:

•   Manual data entry errors may lead to late or inaccurate invoices.

•   Missed payment deadlines can strain relationships with suppliers.

•   Inconsistent workflows may cause bottlenecks, leading to delays that bump up processing costs.

•   Payment systems that don’t interface well with those of suppliers or creditors may also delay processing.

What Are Notes Payable?

Like accounts payable, notes payable refers to debt on the balance sheet. The main difference is that these debts are considered formal loans where you need to manage not only principal but interest. They also tend to be longer term than accounts payable, often longer than a year.

Notes payable generally include different types of small business loans. A note payable may also be issued when a company purchases a vehicle or acquires a building for the business.

Unlike accounts payable, notes payable arise from formal lending agreements, such as promissory notes, that typically spell out the terms of repayment, including the principal amount, interest rate, and payments schedule.

Notes payable are independent of the business cycle, so they don’t necessarily change with the company’s business volume. And since they have an interest expense associated with them, they are not cost-free.

Recommended: Guide To Funding a Small Business

How Does Notes Payable Work?

Notes payable involve the payment of money owed to a financial institution or other creditors. They are recorded as long-term liabilities on the balance sheet, since they generally have repayment periods that are one year or longer.

The way a note payable works in the accounting process is that you debit your cash account for the loan amount received and credit your notes payable account to reflect the liability. When you repay the loan, you would then debit your notes payable account and credit your cash account for the payment amount. For the interest that accrues, you will need to record the expense in your interest expense and interest payable accounts.

Benefits of Notes Payable

Notes payable allow your business to access larger amounts of capital that it can with accounts payable. Long-term notes payable can provide the capital to invest in future growth, product development, and innovation, while freeing up current assets for current operations.

And unlike taking on investors, a note payable allows you to maintain ownership and full control over your company.

Notes payable accounting also has benefits. Maintaining proper accounting of notes payable ensures you make timely payments of principal and interest on your debt. This helps your business maintain good relationships with lenders, while also helping you build business credit.

Risks Associated with Notes Payable

Notes payable typically involve specific repayment schedules and set interest rates. These required payments may affect the issuing company’s cash flow management. Too much debt can hinder a company’s overall financial growth.

If a business takes on so much debt that it can’t issue payments on time, its relationships with suppliers and lenders may be at risk. Serious delinquency or default usually have negative consequences. These may include monetary penalties, damage to the company’s credit rating, and potential legal action from creditors.

When Businesses Use Notes Payable vs Accounts Payable

In many everyday situations, the business norm is to manage trade credit through accounts payable. Businesses may prefer this method over notes payable for many reasons, such as:

•   Simple, interest-free financing over a period of a few months, typically involving less paperwork and no loan collateral

•   Flexible scheduling, sometimes with discounts for cash or early payment

•   Steady revolving credit relationships with suppliers

•   Generally far fewer business constraints imposed by creditors

As for notes payable, companies may find them helpful to reduce costs, increase flexibility, and align their cash flow with their long-term growth plans. Although notes do entail interest payments, they also offer some advantages over accounts payable, including:

•   Longer time frames for payment, which can preserve working capital for immediate needs

•   Larger funding amounts due to structured agreements

•   Clearer internal budgeting owing to fixed costs and schedules

•   Tax planning benefits, as interest on notes payable is often tax-deductible

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

The Takeaway

The terms “notes payable” and “accounts payable” are commonly used to describe how finances are recorded in business. While they sound similar and are sometimes used interchangeably, they are not the same thing.

Notes payable are used as a liability account to record a debt payback, while accounts payable is used when a company buys goods or services on credit.

Both types of accounts help ensure that a business keeps track of all of its liabilities and pays all its debt obligations on time. This is important for maintaining a good reputation in your industry, as well as building your business credit, which can help you qualify for loans and credit with attractive rates and terms in the future.

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 are notes payable and accounts payable different?

Notes payable are written promissory notes that a company receives when it borrows money from a lender, generally financial institutions and financing or credit companies.

Accounts payable, on the other hand, are debts due to vendors, suppliers, or business partners, typically due in 30, 60, or 90 days.

What is an example of a note payable?

A note payable occurs when a company borrows money under a formal agreement. For example, let’s say a business takes out a $50,000 loan from a bank and agrees to repay it over five years. The loan terms, repayment schedule, and interest rate are documented in a promissory note. The company records the amount borrowed as a note payable on its balance sheet, reflecting its obligation to repay the debt under the agreed terms.

How do notes payable and accounts receivable differ?

Notes payable are debts your company owes; they represent loans from a credit company or financial institution. Accounts receivable is the term for sums that customers owe to your company; also, they usually don’t involve formal agreements or interest payments.

What happens if a note payable is not paid?

A note payable is a form of debt, usually owed to a bank or other lender. Not paying the note is similar to defaulting on any other loan. Any assets used to guarantee the loan may be forfeited. Also, the failure to pay will damage the company’s credit rating, making future loans harder to get and more expensive.

Are accounts payable considered debt?

Accounts payable are short-term debt obligations and are treated as liabilities on a balance sheet. However, there is typically no interest charged on accounts payable as long as payment is made promptly.

Photo credit: iStock/fstop123

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

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

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

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

SOSMB-Q225-023

If you’re considering a small business loan, it’s important to familiarize yourself with the different types of small business loan fees. In addition to interest rates, fees can impact how much a small business loan ultimately costs.

Lenders charge fees on small business loans to cover a variety of costs, like loan application and origination, check processing, and underwriting, and you could also face fees for late payment or prepayment. Which types of fees apply will vary depending on which lender you use and the type of loan you get.

Keep reading to learn more on the different types of small business loan fees and additional funding options available for small businesses.

Why Choose a Small Business Loan?

No matter how fantastic an idea may be, in most cases, it can’t become an actual business without the working capital to get it off the ground. If you’re not yet ready to pitch investors and don’t have the personal funds to bootstrap your business, you may want to learn about how a small business loan can help you turn your business idea into a reality.

Of course, small business loans are for more than just startups. Whether you’re looking to hire more employees, purchase more equipment or inventory, or just scale your idea from your bedroom to a co-working space, small business loans can provide the capital to make it happen.

Some reasons a small business loan may be right for you include:

•   You want to build business credit, potentially allowing you to qualify for larger loans in the future.

•   You want to scale your business.

•   You want to make your business more efficient with new equipment.

•   You want to purchase more inventory.

•   You want to hire and train more employees.

Before taking out a small business loan, though, it’s important to ensure you have the financial foundation to manage your loan debt.

Recommended: 10 Things Business Loans Can Be Used For

Small Business Loan Rates and Fees

Here are some common fees associated with small business loans.

💡 Recommended: Business Loans for Bars

Application Fee

Lenders incur certain fees when processing your application (e.g., credit checks and property appraisals). This fee covers those costs, and it will apply regardless of whether your application is approved.

Origination Fee

Lenders charge origination fees to cover their administrative costs, such as phone calls, emails, and interviews necessary to finalize a small business loan. The amount of this fee varies from lender to lender.

Check Processing Fee

If you make your loan payments via check, you may be charged a fee to cover the time and labor it takes to process a check. You may want to keep this in mind when deciding how you’ll make your loan payments.

Guaranty Fee

If you’re taking out a loan through the Small Business Administration (SBA), you’ll likely have to pay a guaranty fee. While the SBA guarantees loans, it doesn’t make loans, and thus generally assesses this SBA loan fee for its involvement.

Late Payment Fee

Like many loans, small business loans typically charge a fee when you make a late payment. You’ll want to ensure you set up a plan to make your loan payments on time to avoid this fee.

Underwriting Fee

The process of underwriting can be tedious — your lender needs to comb through your business’ finances and review market research and historical trends. The underwriting fee covers the cost of performing this task. It could either be charged as a percentage of the loan amount or a flat fee.

Prepayment Fee

Some lenders charge you for paying your loan off too early. They may do this for a variety of reasons, but one might be because they lose money in interest charges when you pay your loan principal before it’s due. This is an important fee to be aware of when mapping out your payment plan.

Recommended: Guide to Typical Small Business Loan Requirements

Additional Funding Options

If these fees don’t sit well with you, there are other options to consider that may make funding your business more accessible to you.

Family and Friends

Many people start their business with family loans, which is essentially money borrowed from family and friends. Using these individuals as initial investors can help you stay out of commercial debt, meaning that you can wait to apply for a small business loan when you might need to borrow a larger sum.

However, going into business with loved ones could be a risk. It might sour the relationship if things go south.

Crowdfunding

A number of small businesses have successfully been funded through sites like Kickstarter, GoFundMe, and Indiegogo. A great idea with a strong marketing plan could generate enough excitement and financial support to get things going.

Keep in mind that crowdfunding sites generally require a percentage of the funding received. Additionally, there could be a risk of idea theft or plagiarism by putting your idea out there early.

Credit Card

You could turn to credit cards as a quick route to getting capital for your business without a lengthy application process. However, interest rates may be high. Further, carrying significant credit card debt could potentially impact your credit score, affecting your future chances of qualifying for loans.

Recommended: Comparing Personal Loans vs. Business Loans

The Takeaway

Small business loans can charge a variety of fees, including application fees, origination fees, underwriting fees, guaranty fees, and others. Some fees are unavoidable, including bypassing check processing fees by opting for another payment method and steering clear of late fees through consistent on-time payments. Which fees will apply will ultimately depend on the lender and loan type, but fees can play a role in how much a small business loan ultimately costs.

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 the most common fees associated with small business loans?

Common fees include application fees, origination fees, underwriting fees, guaranty fees, and administrative fees. These charges can vary depending on the lender and loan type. It’s important to review the fee structure before committing to a loan.

How do origination fees impact the total cost of a loan?

Origination fees are typically charged as a percentage of the loan amount and are deducted from the loan proceeds. This means you’ll receive less than the total loan amount, effectively increasing the cost of borrowing.

What is a guaranty fee, and when is it applicable?

A guaranty fee is commonly associated with SBA loans and is charged to cover the government’s guarantee of a portion of the loan. This fee is usually a percentage of the guaranteed portion and can add to the overall loan cost.

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

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

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

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

SOSMB-Q225-029

Inventory financing is a small business financing option that allows you to purchase much-needed inventory for your business, with the inventory acting as collateral. Because of this, you may be able to secure a better interest rate and better loan terms, even if your credit profile isn’t as strong as you’d like.

Let’s examine how inventory financing works, its costs, pros and cons, and alternatives to this funding option.

What Is Inventory Financing?

Inventory financing is an asset-based loan or inventory line of credit that a business can use to purchase more inventory, maintain consistent cash flow, or support working capital. The inventory your business purchases is collateral, and lenders offer financing based on a percentage of that inventory’s value (typically 20% to 65%). If you default on the inventory loan or line of credit, the lender can seize the inventory you’ve used as collateral.

Inventory Financing Example

Let’s say you own a wholesale clothing business that serves various retailers. You expect sales to increase dramatically during the holidays and must purchase twice as much inventory as usual to cover demand. But how can you afford to buy that much inventory while still maintaining a healthy cash flow in your business?

Inventory financing may be helpful in a situation like the one described above. Let’s say it will cost you $500,000 to purchase the inventory you need to prepare for the seasonal spike in sales. You find an inventory financing lender who approves you for a loan at 50% of the inventory’s value. The lender advances $250,000 for you to use towards the inventory purchases and other business expenses. You then use the revenue from your holiday sales to pay back the lender.

Because of the flexibility and cash availability inventory financing offers, it’s a popular option for seasonal businesses and/or ones with large amounts of physical assets. Since lenders place a lot of weight on the value of the inventory when evaluating loan applications, you may also find that inventory loans are easier to qualify for compared to other types of small business loans.

However, when choosing whether or not to pursue inventory financing, there are a few essential things to keep in mind:

•  Lenders may be less willing to offer financing if your inventory has low turnover.

•  Since the lender would need to resell the inventory to recoup any losses, certain types of more risk-averse lenders (e.g., banks) may be less likely to offer inventory financing — if they offer it at all.

•  Because inventory financing is often considered riskier to lenders, you may encounter higher interest rates than you might see with business loans or lines of credit.

•  Inventory’s value can depreciate over time, creating a more significant loss for lenders (if they need to sell it). Therefore, lenders may calculate inventory loan or line of credit amounts using your inventory’s liquidation value, which is likely lower than its current purchase price.

It’s essential to weigh all your financing options carefully so you can make a solid financial decision for your business.

Recommended: 10 Business Growth Strategies for 2025

What Is an Inventory Loan vs. Inventory Line of Credit?

In addition to inventory loans, businesses can obtain financing with an inventory line of credit (LOC). Like an inventory loan, enterprises use the value of their inventory as collateral, but instead of a one-time loan, a line of credit is revolving.

With an inventory line of credit, a business can use the funds up to a certain credit limit, pay them back, and use them again.

For example, let’s consider the clothing wholesaler described above. To keep up with the latest fashion trends, she needs to be able to purchase new batches of trendy clothing quarterly. She works with an inventory financing lender to calculate the value of her current and planned inventory purchases, which they decide is $100,000. The lender approves her for an inventory LOC at 50% of her inventory’s value, earning her a credit limit of $50,000.

In Month 1, she spent $30,000 on an order of popular pants she was sure would sell. She still has $20,000 available for additional inventory or other business expenses but makes no other purchases. In the following months, the wholesaler repays her inventory financing lender $30,000 plus interest, using the revenue generated by the pants she could sell. Once the $30,000 is repaid, she can access the full line of credit ($50,000) again.

An LOC can be of help to certain qualifying businesses, especially if you:

•  Have high turnover on inventory and need to withdraw just the amount you need.

•  Need financing to pay repeat expenses or cover seasonal cash-flow shortages.

•  Need regular access to cash over a longer period.

Remember that interest rates may be relatively high because an inventory line of credit can pose a greater risk to the lender.

An inventory loan is a better business loan option for one-time, larger purchases. Lenders may offer certain qualifying businesses longer business loan terms — with set installments, which you can factor into your business budget. Notably, lenders may have different eligibility requirements for inventory loans vs. lines of credit, so be sure to compare lenders that align with your business and its needs.

Business owners may also want to determine if they’re eligible for short-term business loan and long-term business loan options.

Secured vs. Unsecured Inventory Financing

The main difference between a secured and an unsecured loan is the way a lender mitigates that risk. While a secured business loan requires a specific piece of collateral, unsecured loans are not attached to any collateral.

Understanding Costs Associated with Inventory Financing

As with any small business financing, the rates, terms, fees, and conditions vary depending on the lender and your business’s financial situation. Before you choose an inventory financing lender, check what fees may be included so you can choose the lender that best meets your needs.

The following is a list of common fees that may be included with a business inventory loan or line of credit:

•  Application and/or origination fees: Coverage of the cost of reviewing the application and setting up the loan.

•  Appraisal/inspection fees: These are the costs of sending someone to inspect and appraise the value of inventory and a business’s inventory management system.

•  Prepayment fees: Fees incurred if a borrower repays the loan early (i.e., ahead of the terms set by your lending agreement).

•  Late fees: Fees incurred if required payments are made late.

Recommended: 10 Steps for Starting a Small Business

Interest Rates

Interest rates on inventory financing can range drastically. But, generally, banks will offer favorable rates to eligible borrowers, while other lenders may offer much higher interest rates. Typically, borrowers can expect the following interest ranges for specific types lenders:

•  Banks: 8% and up

•  Online lenders: 8% to 99%

•  Inventory financing company: 8% to 20%

How to Calculate the Cost of Inventory Financing

Inventory financing costs will vary depending on if you have a loan or line of credit. With a loan, you’ll receive your rate and terms after applying. If your rate is 10%, for example, you would multiply your loan amount by 10% to give you the loan cost, including interest.

With an inventory line of credit, you only pay interest on what you use and don’t pay off by the end of the billing cycle (typically one month). Rates for lines of credit generally are higher than with loans, but if you pay your bill in full each month, you’ll avoid any interest charges.

Both loans and lines of credit may have other fees, so you’ll need to factor those into the total cost of borrowing.

Pros and Cons of Inventory Financing

To decide if inventory financing is right for you, it’s best to weigh the pros and cons.

Pros of Inventory Financing

The most significant advantage of inventory financing is it allows your small business to access the inventory it needs to continue operating or to bring in more sales. And because the inventory acts as collateral for the loan or line of credit, interest rates may be competitive for qualified borrowers.

Another pro of inventory financing is its fast approval and funding times. Startups and businesses with less-than-perfect credit may have an easier time qualifying for inventory financing than for other forms of small business loans.

Cons of Inventory Financing

Like most types of small business financing, the most significant disadvantage to inventory financing is fees and rates may be high, especially for startups or businesses with poor credit.

Another con is if you are unable to repay the loan, the lender can seize your inventory since it was used as collateral for the loan.

And finally, you may not be able to get the full amount of inventory financed. Most lenders will lend up to 80% of the value of the inventory to qualified borrowers. This is because inventory tends to depreciate as the months and years go on, so only lending a percentage of the total value helps protect the lender from additional losses.

Who May Apply for Inventory Financing?

Well-established businesses with a proven revenue history and high inventory turnover could be good candidates for inventory financing. Startup small businesses likely have different inventory needs and a shorter business history, which may make them better suited for alternate types of small business financing, like personal small business loans or angel funding.

The following industries commonly rely on inventory loans or lines of credit to keep up with demand, while also maintaining regular cash flow:

•  Car dealerships: Often have high turnover and need to replenish inventory on a regular basis.

•  Retail stores: Sell products daily and often have seasonal needs that require them to stock up on extra inventory.

•  Wholesalers/distributors: Small- to medium-sized wholesalers that want to keep inventory fresh for their customers and stay on top of seasonal demands.

•  Seasonal businesses: Those that earn a majority of revenue during specific times of year with a high level of predictability, making it easier for them to rely on inventory financing.

Applying for Inventory Financing in 5 Steps

So, you’re thinking about inventory financing, but where do you go to get it? Several lenders offer inventory loans and lines of credit, including traditional banks, online lenders, and inventory finance companies. The following steps could help you prepare and apply for inventory financing.

1. Determining Amount and Type of Inventory Needed

Inventory loans for small businesses are typically dependent on the amount of inventory needed. The more inventory a business needs, the more it may want to borrow. In addition, the underlying inventory value of different businesses can affect the terms, rates, or approval odds of an inventory loan.

To determine your inventory needs, closely examine sales volume and seasonality patterns and consider economic factors that may affect customer activity. Overestimating your needs can leave business owners with hefty payments and unsold inventory, while underestimating these needs can leave businesses scrambling for sellable inventory or additional financing.

Lenders may be more willing to finance inventory that you have a solid track record of selling successfully. If you choose inventory that is difficult to sell or you don’t have experience with it, some lenders may decide not to lend or may add additional interest or fees to cover potential risk.

2. Determining Eligibility

Once you’ve evaluated your inventory and deemed it a potential candidate for financing, you can take a closer look at your business to assess further the likelihood of eligibility for obtaining an inventory loan or line of credit.

As with other types of funding, traditional banks are typically the most difficult to borrow from. However, they may offer more competitive interest rates and terms for well-qualified borrowers. Regardless of where you choose to apply for inventory financing, you’ll likely need to meet the following familiar qualifications to be considered eligible:

•  Be in business for at least six months to one year

•  Sell products or raw materials, not just offer services

•  Meet inventory minimums set by lenders

•  Maintain a well-organized inventory management system

•  Be willing to have inventory audited if the lender requires it (this may involve surprise site visits)

Additionally, lenders may evaluate your industry and customer base to determine how likely they are to receive repayment on an inventory loan. For example, lenders may be less likely to extend funding if your industry is in-flux or your customer base is spending less due to a current event.

3. Choosing an Inventory Finance Lender

If you meet the initial loan qualifications stated in the previous step, you may want to compare lenders that align with your business needs. Here are some questions to think over when evaluating different lenders:

1) How soon do you need the funds?

Bank loans typically take longer to process than online business loans or other forms of alternative financing. So, it can be helpful to research how quickly different lenders take to evaluate applications and disburse approved funds.

2) How much financing do you need?

Some lenders offer more financing than others, so apply for those that meet your specific inventory needs.

Recommended: Mompreneurs: Generational Wealth and Real Time Struggles

3) Does the lender specialize in your industry?

Partnering with a lender who knows your industry may offer a more fair and accurate evaluation of your current inventory.

4) Do you want revolving credit?

If you know that you’d like ongoing access to cash, choosing a lender who offers options like an inventory line of credit may be of interest.

It’s important to carefully choose a lender and only apply for the financing you truly need. When a lender runs your credit for the final approval of financing, it’s considered a hard credit pull. If you have numerous hard pulls in a short amount of time, it could appear suspicious to lenders.

4. Gathering Documents to Apply for Inventory Financing

Now that you’ve chosen a qualified lender, it’s time to fill out the loan application. In addition to the application, lenders may ask for a number of documents to prove your business’ eligibility. It may help streamline the application process if you gather the following documents in advance:

•  Recent balance sheet

•  Profit and loss statement

•  Organized and up-to-date cash flow statements

•  Current inventory list and projected inventory needs

•  Detailed inventory records, which could include:

◦  Inventory turnover

◦  Inventory gross profits

◦  Loss or damage to past inventory

•  Sales forecast statement

•  Personal and business tax returns

•  Business bank account statements

5. Preparing for Inspection

After you’ve chosen a lender, gathered required documentation, and applied for a business inventory loan or line of credit, it can be useful to prepare for the possibility of an inventory inspection — also called a “field audit.”

Typically, lenders will have examiners inspect the inventory and storage facilities to assess its value, ensuring the lender is taking on a manageable risk. Even after a business receives an inventory loan, lenders may make periodic (sometimes surprise) visits to inspect the inventory.

Be prepared by keeping workspaces clean and well-organized, inventory stocked and visible, and employees trained and aware of potential inspections. Even if inspectors never show, your business will benefit from preparedness moving forward. Lenders will frequently require regular audited financial statements from the business they loan to.

Alternatives to Inventory Financing

Inventory financing is an option to help fast-paced business stay on top of inventory and customer needs while maintaining cash flow, but it can come with significant downsides. If you’re curious about other short- and long-term financing solutions, check out the following alternatives:

•  Equipment Financing: Used for the purchase of machinery, vehicles, or other business-related equipment.

•  SBA loans: Backed by the U.S. Small Business Administration and offered by banks and approved SBA lenders. SBA loans typically take longer to process, but interest rates may be more competitive.

•  Personal loans: Unsecured personal loans are based on your personal credit history (not business credit) and can usually be used for business expenses.

•  Commercial real estate loans: For the purchase of a building for business use, such as office space, a retail shop, or any other commercial function.

•  Business line of credit: Gives access to a maximum amount of funding with interest only charged on unpaid balances.

•  Business credit cards: Similar to a business line of credit, these are designed for short-term business needs on a revolving line of credit with interest charged on unpaid balances from previous billing cycles.

•  Online business loans: Online lenders offer loan options similar to those of traditional banks, but they typically have a faster approval process and may provide more options for people with lower credit scores.

•  Merchant cash advance: Allows small businesses (“merchants”) to get a cash advance for business expenses in return for a portion of their future sales or receivables.

•  Invoice factoring: Sell your invoices to a factoring company that is then responsible for collecting payment from your customers.

The Takeaway

As an established small business, you have options to choose from when it comes to financing. Inventory Financing is a short-term loan or revolving line of credit made to a company to purchase products for sale. This type of small business loan is typically secured by existing inventory and does not require pledging personal collateral.

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

FAQ

How does an inventory loan work?

An inventory loan is a type of small business funding in which the inventory acts as collateral for the loan. Because of this, you may be able to secure a lower interest rate than with traditional small business loans.

How do you calculate inventory financing costs?

To calculate inventory financing costs, you’ll first need to add up all fees associated with the loan, which may include application fees, inventory inspection fees, processing fees, and more. From there, you’ll need to see what interest rate you think you’d qualify for and multiply that by the amount you hope to borrow.

What are the disadvantages of inventory financing?

Disadvantages of inventory financing may include not receiving the entire amount you need for inventory, potentially paying high rates and fees (especially if you have poor credit), and the lender seizing your inventory if you cannot repay the loan.

What is the interest rate for inventory financing?

Rates for inventory financing can vary from 8% to 99% depending on the lender and the financial credentials of your business.

Can startups qualify for inventory financing?

Most lenders prefer established businesses for inventory financing. However, some lenders specialize in working with new companies, making it key to explore options.

Photo credit: iStock/alvarez

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

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

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

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

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

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

SOSMB-Q125-035