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Having a felony record doesn’t block you from starting your own small business. When getting a business off the ground, you’ll have to follow the same best-practice guidelines as any other budding owner, from developing a well-thought-out business plan to presenting a strong financial profile when seeking financing.

In fact, becoming an entrepreneur could prove a solution to the problem of finding work. On some job applications, there is an option to check a box indicating whether or not you have a criminal record or conviction. Or the existence of a past conviction could come out in an employee background check.

According to one survey, 40% of employers will not even consider a job applicant for employment once they are aware that the individual has a criminal record. This is why a movement is growing called “Ban the Box,” a campaign by advocates for ex-offenders aimed at removing the check box that asks if applicants have a criminal record from hiring applications.

Business ownership is a direction some people are taking so that they can make a living. According to the Rand Corporation, more than 3.8% of U.S. small business owners have a criminal record, and about 1.5% have a felony record.

Read on to learn about exploring business loans and grants to help finance your business startup.

5 Small Business Grants for People With Felony Convictions

Loans and grants are not the same thing. Grants are non-repayable. They’re like a gift. They may be awarded by government departments, trusts, or corporations.

Small business grants for individuals with prior justice system involvement are available. There are no grants specifically set aside for those with criminal records, but certain grants are available for women, minorities, veterans, and rural residents, if any of those targeted groupings help. It’s also important to find out if the location of your small business qualifies you for special state, city, or corporate grants.

These are some of the places to check out for opportunities.

1. Grants.gov

Grants.gov, a portal website that allows you to search and apply for federal funding opportunities, is an important source. It is a government agency that maintains information about federal government grants that are available to small businesses which qualify.

All applicants for federal grants, such as small businesses, nonprofit organizations, and educational institutions, start with Grants.gov.

2. National Association for the Self-Employed (NASE)

NASE Growth Grants are offered to members of the organization who are trying to take their business to the next level. These grants are worth up to $4,000 and can be used for all types of activities.

3. Minority Business Development Agency (MBDA)

The U.S. Department of Commerce Minority Business Development Agency offers targeted grants to aid minority-owned businesses. The grants can be for securing capital, competing for a contract, identifying a strategic partner, or becoming export-ready.

4. The FedEx Small Business Grant

The FedEx Small Business Grant Contest offers corporate small business grants for growth. FedEx awards $25,000 in grants to 12 qualified applicants as well as additional services each year through their grant contest.

5. Amber Grant for Women

The Amber Grant has been giving money to female entrepreneurs monthly since 1988. They’ve expanded their grant-giving to include “Marketing Grants” and “Business Category Grants,” as well as two “$25,000 Year End Grants.”

3 Small Business Loans for People With Felony Convictions

Having a felony conviction record doesn’t automatically disqualify you from getting approved for a business loan. What lenders look for when considering a small business loan is strong credit, a solid business plan, and usually a business track record of at least a year. However, it’s possible that as part of the approval process, a lender could decide not to approve a loan because the applicant has a criminal record.

The reality is that people who’ve been impacted by the criminal justice system may have challenged credit. That can make it difficult to qualify for lenders that require certain credit scores and extensive business experience. The time spent in prison may have limited credit history or prevented gaining real-world experience. For these reasons, small business loans for felons are not easy to get.

Here are three types of loans to learn more about:

1. Small Business Administration (SBA) Loans

SBA loans are guaranteed by the U.S. Small Business Administration. The government guarantee is designed to encourage banks and lending institutions to loan money to small business owners who might otherwise find it difficult to qualify for affordable financing. You can use SBA loans to pay for almost any type of business expense.

Historically, a criminal justice background has made it difficult to get an SBA loan under certain circumstances. However, the SBA is considering removing this barrier to loans. In September 2023, the SBA said it was considering “updating regulations that would remove barriers to capital for entrepreneurs with certain types of justice involvement.”

As SBA loans come with attractive interest rates, it is worth monitoring the SBA and its latest policies to see if a criminal record is still an impediment.

2. Online Business Loans

Online lenders may offer alternative business loans with less stringent requirements compared to traditional banks or through the SBA. While approval and funding times can be fast, you still need to provide proof showing that you’ll be able to repay the loan.

Be cautious when considering subprime online business loans. They usually come with a very high APR and a shorter repayment term. There also may be a requirement for a personal guarantee, which means your personal credit score can be impacted for any late payments or delinquency — and your personal assets may also be at risk to pay back the loan if your business isn’t able to.

3. Invoice Financing and Factoring Loans

Compared with other types of business loans, invoice financing and invoice factoring can be easier to qualify for, even if you have bad credit.

Invoicing financing is a type of short-term business loan based on the outstanding invoices you have from your customers. Also called accounts receivable financing., invoice financing is considered to be secured funding because your company invoices serve as collateral for the funds you receive.

In addition to this traditional secured loan structure, there are several other kinds of invoice financing. One of these is invoice factoring, in which you actually sell your unpaid invoices to a factoring company for a percentage of the invoices’ face value The factoring company then becomes responsible for collecting from your customers.

Debt-Free Financing Ideas for People With Felony Convictions

Steering clear of debt — not just small business loans but business credit cards and lines of credit — is clearly desirable. But if you aren’t independently wealthy, how do you start and grow a small business, particularly if you have a felony conviction?

The answer could be equity financing, otherwise known as getting investors.

“Prison prepared me for entrepreneurship even more than I could have prepared earning an MBA,” Andrew Medal, who served a prison sentence and is now a podcaster and angel entrepreneur, said in an article published by Entrepreneur, “An inmate is forced to operate at his or her most optimal efficiency, leveraging those already-scarce resources. How does this apply to entrepreneurship? Bootstrapping is a vital skill for any newly formed startup.”

When you get investors, you offer shares of your company to family, friends, and acquaintances in your networks in exchange for money. Depending on the planned size and scope of your startup, you could be pitching your dream to venture capitalists (employees of risk capital companies who invest money in companies) and angel investors (individuals who offer their own money in exchange for a piece of the business).

The forms of equity financing are:

•  Crowdfunding (such as CircleUp, EquityNet, WeFunder, and Fundable)

•  Angel investors, high net worth individuals who provide capital for startups

•  Venture capital firms, individuals, or companies that invest in young businesses

The chief advantage of equity financing is that there is no obligation to repay the money acquired. However, you are giving up some control of your business. In order to gain funding, you gave investors a percentage of your company. You’ll have to share your profits and consult with your partners any time you make big decisions.

Resources for Entrepreneurs With Criminal Justice Background

To learn how to brainstorm, launch, and grow a small business, you can get free advice from both the Small Business Development Center (SBDC) and SCORE, which is affiliated with the SBA. A mentor can make a huge difference in whether you succeed.

These two organizations offer advice targeted to people who have been impacted by the criminal justice system:

Inmates to Entrepreneurs

The mission of Inmates to Entrepreneurs is to assist people with criminal backgrounds in starting their own business by providing practical education through in-person and online courses taught by entrepreneurs.

Help for Felons

Help for Felons “provides support and direction to felons, inmates, and ex-offenders in every aspect of life.” On its site, the group provides sources and directories for jobs, reentry, housing, and financial help.

The Takeaway

If you have a felony conviction, finding work can be a challenge. Some people solve the problem by becoming an entrepreneur. Through applying for business grants and connecting with angel investors, investigating small business loans, and seeking advice from qualified mentors, you can find ways to get your business off the ground.

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/Olivier Le Moal

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.

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

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

SOSB0424036

Are you determined to do some good in the world for a cause you are passionate about? Forming a non-governmental organization, or NGO, may be a potential avenue for you to achieve those goals.

Here, you’ll learn about the role NGOs play in society and, if you decide you want to form an NGO, the typical steps that need to be taken.

What Is an NGO?

The term NGO was first used back in 1945 when the United Nations was formed. There is no formal definition, but generally NGOs are thought of as nonprofit entities that support humanitarianism and the public good. They are independent from any government but may receive government funding. NGOs can be local, national, or international in scope.

Recommended: What Are Nonprofit Business Loans?

How Do NGOs Work?

NGOs are usually set up to serve a social goal such as human rights advocacy, protecting the environment, health care, education, support of the poor, or reducing violence, to name just a few examples. Some household name NGOs include Salvation Army and American Red Cross.

NGOs run on many types of funding, including private donations, dues, and government grants. There are two types of NGOs. Operational NGOs focus on designing and executive development projects while Advocacy NGOs promote a specific cause or public policy. Many NGOs are considered part of both categories at the same time.

In the United States, NGOs are regulated and must file returns that detail funding, management and activities.

While no laws state that NGOs cannot receive loans, since the probability of repayment is low, securing business finance is challenging.

Are NGOs the Same as Nonprofits?

Yes and no. Most NGOs are nonprofits, but many nonprofit organizations are not considered NGOs. NGOs are usually focused on promoting social welfare or the public good. Many nonprofits may be focused on those goals as well. But many others may be involved in the arts, or science, commerce or research, with professional goals, and thus would not be considered an NGO.

7 Steps to Start an NGO

If you’re interested in making a change and positively impacting the world, starting an NGO may help you achieve your goal. These steps can help.

Step 1: Figuring Out Your Goal

The first step in starting a successful NGO is to clearly identify what cause you are passionate about and what goals you hope to achieve to promote that cause. From there you can determine how much need there is for your NGO. There may be dozens of NGOs already working in the area you are interested in that may need your support. Or you may find few organizations are addressing your cause directly. Ideally you want to be filling a gap in the current NGO market.

If you haven’t already, be sure to work or volunteer for an NGO in a related area to gain knowledge and experience before starting your own. This will also help you find potential team and board members for your organization. (More on that below.)

And, consider taking one of the many free NGO courses available online to better understand NGO structure, governance and other key concepts.

Step 2: Create a Plan

Creating a plan for your NGO helps you clarify your vision and goals so you’ll be successful. In your plan you’ll explain the purpose and goals of your organization. These need to be realistic and achievable.

Work for world peace isn’t something that one NGO can handle on its own.

Your plan should include a specific vision statement, a list of goals and the steps you’ll take to achieve them. This statement is key because it will likely be the backbone of your website and fundraising efforts.

Your vision statement and overall plan should reflect the research you’ve done on the challenges, history, politics and other factors that are related to and impact the cause you’re supporting and the actions you’ll be taking.

Step 3: Recruit Your Board of Directors

Surrounding yourself with experts on accounting, fundraising, management, marketing, technology, and other areas is key to running a successful NGO. That’s where your board of directors comes in. You want a team that shares your vision and will provide the expertise you’ll need to make that vision come true. Having a board is also a vital element for registering and running a nonprofit organization.

Step 4: Register Your NGO

To make your NGO legal, you’ll need to register. Applications usually require basic information such as name, purpose, board members and organizational structure. You also may find drafting Articles of Incorporation and Bylaws a necessary part of registration. And this may also be a good time to get any necessary permits and/or licenses you need to operate.

Step 5: File for Tax Exempt Status

Because NGOs are by definition nonprofit organizations, they almost always qualify for federal and state tax-exempt status. In addition, many NGOs qualify for 501(c)(3) status, which allows donors to take their contribution as a tax deduction.

Applying for tax-exempt and 501(c)(3) status via the IRS can involve some time and paperwork (your legal counsel can help). And in some states, you’ll need to be registered with a state charity official. For instructions and guidelines check out the IRS website.

If you’re not ready to file for tax-exempt status yet, consider asking an established NGO to sponsor you under its umbrella. Tax-deductible donations and grants go to your host, care of your NGO. You receive the funds and your donors are still able to get the tax write off.

Step 6: Develop a Great Website

A compelling, inviting website is one of the best ways to convey your mission and attract donors. Don’t skimp on a good designer and a seamless user experience. This will be the place you send anyone you and your staff encounter to learn more about your NGO and potentially contribute.

Step 7: Create a Budget

Your mission is solid, your paperwork is done. Now it’s time to figure out how much money you will need to fund your projects, operations, staff salaries and other overhead costs.

NGOs are often fueled by volunteer workers, but that doesn’t mean you won’t need a solid operating budget to manage those volunteers. In fact, many NGOs have budgets in the millions, even billions of dollars. Understanding exactly how much money you’ll need to keep the doors open, manage volunteers and continue to fundraise is vital to making your NGO successful.

Recommended: Nonprofit vs. Foundations

Getting Funds for Your NGO

Once you’ve got that budget settled, it’s time to raise the money you need so you can execute your plan.

NGOs are funded in a variety of ways, from crowdfunding for donations to sales of goods and services. Which method or combination of methods you use will depend on your vision, structure, and reach. Here’s a look at the various funding options. You may find you use one, several, or even all of these methods to fund your NGO.

Grants

You can explore foundations that award grants to help fund your NGO.

Private donations

Whether it’s from individuals or other charitable organizations, donations can be large gifts from an established foundation or a large collection of small private donations.

Government funding

Many NGOs receive government funding but are still able to retain their independent status.

The Takeaway

NGOs come in basically two flavors. Operational NGOS focus on development projects and Advocacy NGOS promote causes. They are funded by a variety of sources including government funding, even though they are independent of governments. Starting an NGO can be one of the best ways to help society as long as you’ve done plenty of research and developed a solid plan.

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

How can you create an NGO?

Starting an NGO entails having a vision and plan for an organization that helps promote community development or social good. NGOs are not affiliated with any government but may receive government funding. You’ll likely need to register your NGO, choose a board of directors and engage in fundraising.

What are the differences between NGOs and nonprofits?

An NGO is always a nonprofit but a nonprofit is not always an NGO. The main difference is that NGOs usually focus on social welfare and the public good. Nonprofits do that too but many are also focused on the arts, science, commerce, research, professions, etc.

How are NGOs funded?

NGOs are funded in a variety of ways. They may rely on large donors, small private contributions, member contributions, grants, sales of goods and services, or a combination of some or all of these sources. Some NGOs also receive government funding, although they are independent from any government.

Photo credit: iStock/SDI Productions

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.

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.

SOSB0424038

If your nonprofit is looking to start or expand its fundraising efforts, you’ve got options. While it can be easier for larger organizations to secure grants and corporate sponsorships, there are many other funding sources for nonprofits that are smaller or just starting out. Here’s a look at funding options for nonprofits of all sizes.

Why Do Nonprofits Need Funding?

While having a tax-exempt status can certainly help an organization save money, nonprofits still have a variety of costs they need to cover. Not-for-profit organizations typically need reliable revenue streams to fund their missions, develop education programs, and cover their day-to-day expenses (including rent, utilities, salaries, and supplies).

At the same time, nonprofits need to be careful about how they “earn” money. In order to maintain a 501(C)(3) status, any earned income needs to be directly related to the organization’s mission. Many nonprofits meet their budgets through a combination of external funding (e.g., donations and fundraising initiatives) and self-generated funds (e.g, sales of merchandise, fees charged for services, and membership fees).

11 Nonprofit Funding Sources

There’s no one-size-fits-all approach to nonprofit funding sources. Some methods might work for you that wouldn’t be a good fit for others, or something that hasn’t worked in the past could be a good option for your organization at this point in its growth. Here are 11 different nonprofit funding sources to consider.

Recommended: Nonprofit Financial Statements

1. Membership Fees

Membership fees can create a reliable, recurring source of revenue for your nonprofit. The structure can vary depending on your organization’s mission and target audience, but many nonprofits offer some sort of incentive to encourage potential members to join, such as online name recognition, a free subscription to your organization’s magazine or newsletter, or discounted tickets to events.

Membership also creates a sense of community and ownership among your supporters, which might encourage them to promote your nonprofit on your behalf.

2. Individual Donations

Individual donations are often one of largest sources of funding for nonprofits, so it can be smart to make individual donors a key focus of your fundraising efforts.

If you don’t have one already, you’ll want to create an online donation page that enables recurring donations.

Some ways to increase the support you get from individuals include:

•   Promoting your cause on social media

•   Leveraging text-to-give campaigns

•   Asking for donations at community events

•   Mailing out fundraising materials

•   Hosting charity events

•   Organizing peer-to-peer (P2P) fundraisers

3. Grants

Grants for nonprofits are often available from the government at the local, state, and federal levels, as well as from business associations, corporations, and foundations. While grants are essentially free money, they sometimes come with specific conditions as to how exactly you can use the money. Also, competition for these awards can be stiff.

When searching for grants, you can check Grants.gov, which is the largest database of federal grant opportunities. You may also want to look locally, as many grants targeted for nonprofits are offered at the state and local level.

Recommended: Business Loans vs. Personal Loans: What’s the Difference?

4. Earned Income

Unlike other forms of fundraising, earned income comes from the sale of products or services. Nonprofits can generate revenue by selling merchandise (such as t-shirts), offering instructional classes, selling tickets to events, creating and selling publications, or renting out their spaces for events. Just keep in mind that earned income must be related to the mission of the organization or it can be taxed as unrelated business income.

If you’re thinking about selling products or services to raise money for your nonprofit, it can be a good idea to consult a tax specialist who routinely works with nonprofits for guidance.

5. Volunteers

Recruiting volunteers won’t generate revenue for your organization, but it can still have a meaningful impact on your budget. When volunteers actively participate in fundraising, marketing, and program delivery, it can save your organization significant sums of money, making it equivalent to a major revenue stream. Volunteers can also bring valuable expertise to your organization.

6. Legacy Giving

Also known as planned giving, legacy giving is when an individual leaves a sum of money to a nonprofit in their will. This type of funding is typically associated with large, well-known nonprofit organizations. However, once you have a healthy list of donors and achievements, you might consider pitching legacy giving to your members. It will likely take time to establish, but once this strategy is in motion, it could potentially provide a significant portion of your nonprofit’s funding.

7. Business Loans

While you might think of a loan as a nonprofit funding option, nonprofits can sometimes qualify for different small business loans. If you have a strong credit history and your nonprofit is generating revenue, it may be worth applying for a loan through your local bank or credit union. Just make sure that the bank or credit union lends 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 much faster to fund than banks. However, these loans often come with higher interest rates.

When applying for small business loans as a nonprofit, you will likely need to provide financial documentation that proves your organization has sufficient revenue to pay back the loan. Because nonprofits are limited in how they can raise money, you may need to secure your loan with assets your nonprofit owns.

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

8. Sponsorships

Some corporations look for nonprofits to partner with and support. They may wish to fund specific initiatives, events, or fundraisers. For example, a business might offer matching donations as part of your fundraiser, or make in-kind donations in lieu of monetary donations.

While you may be reluctant to partner with a for-profit business, these days there are many socially responsible corporations. If you can find a business partner that is aligned with your nonprofit’s mission and values, this could be a valuable funding source. Corporate sponsorship can also provide free publicity to your nonprofit when the company announces and promotes your partnership, which can further boost awareness and revenue.

Recommended: How to Start an NGO

9. Donation Crowdfunding

There are many different types of crowdfunding, but the one most used by nonprofits is donation-based crowdfunding, which works by asking large amounts of people to donate small amounts of money. You can launch a crowdfunding campaign to raise money for a specific program within your organization or as a general donation to the cause. Crowdfunding can also dovetail with your social media campaigns and simplify online giving for your donors.

While donation crowdfunding can be a low-cost and effective way to reach potential supporters all over the world, keep in mind that crowdfunding platforms typically charge fees and it can take a fair amount of time and effort to create a compelling and successful crowdfunding campaign.

10. Resource Donations

As with volunteers, resource donations won’t provide your nonprofit with an influx of cash, but it may help you save some. Resource donations are when a business donates products to your nonprofit. Whether it’s chairs and tables for a fundraising event, or food for a food bank, these donations can take many forms.

To orchestrate resource donations, you’ll want to communicate with businesses well before important dates and events. There may be extra paperwork involved, and not every business you contact will be able to help, but you may create long-term relationships with businesses that support your mission.

Recommended: 11 Small Business Grants in Ohio

11. Events

Fundraising through events, either online or in-person, is a tried-and-true way to raise money for a nonprofit. Whether you host a walk-a-thon, hike-a-thon, gala dinner, concert, or online auction, a charity event can engage current donors and also attract new ones. Live events can also help raise your organization’s visibility and brand, as well as help build up your mailing list.

Which Funding Sources Are the Right Fit for Your Nonprofit?

The right fundraising model for your nonprofit will depend on its size and mission. Here are some steps that can help you home in the best sources of funding for your cause.

1.    Analyze your current approach to funding. Do your current nonprofit funding sources deliver a good return on investment? Are they all aligned with your mission, vision, and values? Is there room to add other funding sources? Are there some you may want to move away from?

2.    Explore your options. You may want to look at the funding approaches of other similar nonprofits. Are they doing something that could work for you? Also consider having a brainstorming session with your team, inviting them to get creative and think outside the box.

3.    Make a short list of feasible options. Once you have a list of possible new funding streams, you’ll want to narrow it down to options that are sustainable and replicable. Once you have a short list, you can evaluate how much each nonprofit funding source will cost, and how much money your organization could feasibly garner from each one.

4.    Select funding model(s) to implement. Based on the information you’ve gathered in the above steps, you’ll next want to decide on one or two funding models to implement and develop a plan to put these models into action.

Recommended: NC Small Business Grants

The Takeaway

Nonprofit funding can come from a variety of sources, and many organizations rely on multiple revenue streams to pay their bills and keep their programs funded. For example, one nonprofit might be funded 40% through grants, 40% through events, and 20% through a membership program. Another might be 70% funded through donations, 20% through grants, and 10% through events.

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 is the biggest source of funding for reporting nonprofits?

For many nonprofits, the majority of their funding comes from individual donations.

What are the 4 types of nonprofits?

A nonprofit organization can structure itself in one of four ways: an unincorporated association, a trust, a corporation, or a limited liability company (LLC).

How do you start a nonprofit without any money?

To start a nonprofit with no money, you’ll need to write a business plan, build a board of directors, find an online fundraising tool that’s free to start, gather donations (from friends, family, and board members), find an attorney willing donate their services to help you register your nonprofit, and plan free and low-cost of fundraising events.

Photo credit: iStock/South_agency

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.

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.

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.

SOSB0424040

Do businesses get tax refunds? Sometimes. Generally, taxpayers, whether individuals or businesses, will only get a refund if they pay more in taxes during the year than they end up owing. Tax refunds for small businesses tend to be less common than refunds for individuals simply because they often do not pay taxes directly.

Whether or not your business can get a tax refund will depend on how it is structured and how much you paid in estimated taxes during the course of the year. Here’s a closer look at how a business can get a tax refund.

How Do Tax Refunds Work?

Taxpayers can generally receive a tax refund if too much money was withheld from their paychecks throughout the year. Because business owners typically don’t have any taxes withheld on their business income, they will often pay their federal and state taxes on a quarterly basis. These payments, called estimated taxes, are based on how much the owner thinks the business will owe in taxes. If the estimate is too high, they will get a refund.

However, whether that refund goes to the business owner or to the business itself will depend on the way the business is structured. Generally, C-corporations are the only type of business entity eligible for a direct tax refund.

Recommended: What Is a Small Business Audit?

Are Businesses Eligible for Tax Refunds?

In some cases, yes. A small business that is registered as a corporation may be eligible for a tax refund if it overpaid on its quarterly estimated taxes. Any amount of overpayment would be refunded to the business after its tax filing.

Most small businesses, including sole proprietors, LLCs, partnerships, and S-corporations, however, pay their business income tax through the owners’ personal tax return. These are called pass-through businesses because their profits “pass-through” to the owners’ personal tax return, and the business owner or owners pay taxes rather than the business.

Business owners who report income from pass-through companies include the income (along with income from other sources, like wages, interest and dividends, gains on the sale of property or rental income) on their individual 1040s. These individual owners would receive a refund only if their total payments and withholding exceed their total tax liability on the return.

Recommended: Comparing Personal Loans vs. Business Loans

Pros and Cons of Overpaying Taxes to Get a Refund

The key to getting a tax refund on your business’s income is to pay more in taxes throughout the year than you end up owing at the end of the year. This is the case whether you own a pass-through business (and report your business’s earnings on your personal tax return) or a corporation. Here’s a look at the advantages and disadvantages of overpaying taxes to get a refund.

Pros

•   Avoid fines from the Internal Revenue Service (IRS) from paying too little

•   Reduced cash flow prevents the business from overspending

•   Refund can be put into a savings account for next year’s quarterly taxes or used to pay off debt

Cons

•   Can take time to receive a refund

•   Reduces your business’s cash flow and spending potential

•   Can make a company’s financials seem worse than they are, which might make receiving a business loan more difficult.

Types of Businesses

Whether your business can get a tax refund or not will depend on how it is structured. There are five types of business structures, each with its own tax requirements.

Sole Proprietorship

A sole proprietor is a person who runs an unincorporated business by themselves.

Because a sole proprietorship is not a distinct legal entity from the sole proprietor, the business does not file a business tax return. Any money earned or lost is reported on the business owner’s personal tax return using Form Schedule C.

Limited Liability Company (LLC)

A limited liability company (or LLC), is essentially a legal hybrid between a sole proprietorship and a corporation. The benefit of an LLC is that the business owner is protected from any personal responsibility associated with the business’s debts (such as different types of small business loans).

LLC owners typically report income from their business (along with income from other sources) on their individual 1040s. These individual owners would receive a refund only if their total payments and withholding exceed their total tax liability on the return.

Recommended: Sole Proprietorship vs. LLC: How to Choose

S-corporation

S-corporations pass their income through to their owners (called shareholders), so the business itself doesn’t pay any corporate tax. Each owner reports this income on a Schedule K-1 when they file their personal tax returns and pays taxes on their share of the business’s profits.

Partnership

Partnerships file Form 1065 to report the company’s revenues and expenses. However, the partnership doesn’t pay taxes to the government directly. Each partner receives a Schedule K-1 that reports their share of the business’s profits. They then use this K-1 to fill out their personal tax returns and pay any tax due on that income.

C-corporation

A business structured as a C-corporation is taxed separately from the business owners. C-corporations use Form 1120 when filing their taxes. A C-corporation is a type of business that could get a tax refund in the event that it pays more estimated tax during the year that is due on the final tax return.

Types of Business Taxes

Whether your business or you as the owner can get a tax refund also depends on the type of taxes you pay. Here’s a closer look at how and when you might get a refund.

Income Tax

Businesses or business owners typically have to pay federal, and often state, income tax on any profits earned in a given year. They typically do so by paying quarterly estimated tax payments. If the owner or business overestimated and overpaid, it may receive a refund.

Payroll Tax

If your business has employees, you must report and deposit both federal and state payroll taxes, which include unemployment taxes, FICA taxes, and income tax withholding. Regardless of your business structure, it might be possible to receive a refund on payroll taxes if you overpay your account.

Self-Employment Taxes

Self-employment taxes go towards both Medicare and Social Security. All LLC members, sole proprietors, and partners in a partnership must pay self-employment taxes. An overpayment of these taxes could result in a refund to the business owner.

Sales Tax

Many states and cities levy a sales tax on transactions of goods and services. The federal government also taxes certain goods and services, such as tobacco or fuel. An overpayment of sales or excise taxes could result in a refund to the business or owner.

Recommended: What Is a Debt Covenant?

5 Tips to Maximize Business Tax Refunds

One way to maximize business tax refunds is to deliberately overpay estimated taxes, which, as mentioned above, has both pros and cons. Here are some other ideas to keep in mind when planning your business’s finances.

1. 401(k) Matching

If you offer your employees a 401(k), you may want to consider also offering matching funds. The amount your company offers in a 401(k) match is typically considered a qualified business expense up to certain limits.

2. Tax Credits

As a business owner, there are a number of tax credits you may be able to take advantage of at both the federal and state level. Speak with your account or take a look at the IRS’s business tax credits to see what credits you may be eligible for.

3. Tracking Mileage

If you drive for business, it can be a good idea to track the amount of business miles you’re logging throughout the year. The IRS allows you to deduct a certain amount for every mile driven for business purposes (for the 2023 tax year, it will be 65.5 cents per mile).

4. Home Office Deductions

If you have an office in your home dedicated solely to your business, you may be eligible for a home office deduction. Generally, your home office must be either the principal location of your business or a place where you regularly meet with customers or clients.

Home office business deductions are based on either the percentage of your home used for the business or a simplified square footage calculation.

5. Employee Bonuses

Bonuses can be a win-win. They not only help incentive and reward employees, they may also qualify as a small business tax deduction. There are rules and regulations around how much of a tax deduction you can take from employee bonuses. To learn more, refer to the IRS’s Guide to Fringe Benefits.

The Takeaway

A business can get a tax refund if it overpays its estimated taxes. However, whether that refund goes to the business itself or to you, as the business owner. will depend on how your business is structured. Generally, the only way the business itself will get a tax refund is if it’s structured as a C-corporation.

Whatever your business structure, however, there are actions you can take throughout the year that could potentially reduce your tax burden and, subsequently, increase your tax refund. A tax professional can offer guidance.

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 small businesses get money back on their taxes?

It’s possible. However, in order for a small business to get a tax refund, it would need to pay more than is actually owed to the internal revenue service (IRS) in estimated taxes. And, unless the business is structured as a C-corporation, any refund would go to the business owners, not to the business itself.

How much can small businesses get back in taxes?

It all depends on how much the business paid in estimated taxes. If the business (in the case of a C-corporation) or the business owners (in the case of a pass-through business) overpaid estimated taxes during the year, that business or owner would get a refund.

Are LLCs able to get tax refunds?

Not typically. LLCs are generally treated as pass-through entities for federal income tax purposes. This means the LLC doesn’t pay taxes or get refunds of its own. Instead, each member pays taxes on the business’s income in proportion to their ownership stake in the LLC. If the LLC members overpay their estimated taxes, they would receive a tax refund.

Photo credit: iStock/Jirapong Manustrong

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

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

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

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

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When you’re starting a business, it can be tempting to lease rather than buy any expensive office or warehouse equipment you need in order to conserve cash flow. However, this may or may not be your best option.

Whether it’s better to buy or lease equipment for your business will depend on a number of factors, including your cash reserves, the type of equipment you need, whether that equipment will hold its value over time, and how long you plan to have the item in service.

Learn the pros and cons of leasing vs buying equipment, tools, computers, and vehicles for your company.

Leasing vs Buying Equipment

Leasing business equipment can help preserve capital and provide flexibility, which can be important when you are starting a small business. However, leasing could end up costing you more in the long run. Let’s break it down and compare.

Pros and Cons of Leasing Equipment

Leasing equipment has a number of advantages over purchasing. Here are some to consider.

•  Down payments are usually lower than financing (and sometimes no down payment is required)

•  Terms are often flexible (e.g., can buy out lease)

•  Allows you to test out equipment before you commit to it

•  Maintenance and repair costs are usually free

•  Monthly lease payments may be tax deductible

•  Can be easier to get than a loan if you don’t have good credit

•  Easier to upgrade after your lease expires

But there are also a number of downsides to leasing vs buying equipment. These include:

•  You don’t own the item while leasing it

•  Will likely have a higher overall cost

•  Depreciation is not tax-deductible

•  You’re obligated to stick with the lease even if you no longer need/use the equipment

•  Termination fees for breaking the lease contract

Pros and Cons of Purchasing Equipment

There are also advantages and disadvantages of buying equipment. Here’s a look at some of the benefits of purchasing business equipment:

•  You own the equipment

•  Lifetime cost is usually less than leasing

•  Counts as an asset on your balance sheet

•  Can likely claim depreciation on your taxes

•  Free to use equipment however you choose

•  Can sell the equipment after using it

Purchasing equipment also has some disadvantages. Here are some to consider:

•  Need more cash or credit up front

•  Can’t always test out the equipment before purchasing

•  You are liable for maintenance and replacements

•  May get stuck with old and outdated equipment

•  If you finance it, will increase liabilities on the balance sheet, which could prevent you from borrowing more money

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

What Types of Business Equipment Can You Lease?

Just about any type of equipment that is pivotal to a business’s operation can be leased. This includes but is not limited to:

•  Audio equipment

•  Communication equipment

•  Company vehicles

•  Computer hardware

•  Computer software

•  Construction equipment

•  Digital signage

•  Fitness equipment

•  HVAC systems

•  Lighting systems

•  Manufacturing equipment

•  Medical equipment

•  Office furniture

•  Office equipment

•  Copiers and printers

•  Fax machines/scanners

•  Point-of-sale systems

•  Security systems

•  Call center systems

•  Wireless point-to-point systems

•  Video surveillance

•  Warehouse equipment

Pros and Cons of Leasing Computers

Whether business owners should lease vs. buy computers is a decision that ultimately comes down to the following pros and cons:

The biggest argument in favor of computer leasing for small business owners may be that the hardware is always up-to-date. A lease may allow you to stay current on the latest technology without having to repurchase every couple of years. This can help small businesses keep up with the technological curve.

If your tech needs are modest, however, and you can comfortably use the same gear for longer than five years, it may make more sense to simply buy the equipment you need.

Pros and Cons of Leasing Business Vehicles

To lease vs. purchase a business vehicle is also a debate for many business owners. When making that decision, it can help to consider the following:

Leasing a car can have many advantages for business owners, including a potentially higher write-off on your taxes and lower monthly costs.

In terms of the long-term financial impact, however, leases can be less attractive. Since you don’t build equity and typically have to pay fees that don’t come with a loan (such as an acquisition, or lease initiation, fee), it could be cheaper overall to buy a car and hold onto it for as long as possible. Vehicle refinancing can provide relief down the road.

Buying can also make sense if you plan to do any customization to the car, since altering the car is not typically allowed with a lease.

If you think buying might be the way to go but want to conserve capital, you may want to look into getting a small business auto loan, which is a type of financing tailored specifically for business owners.

Pros and Cons of Leasing Warehouse Equipment

Unlike computers, warehouse equipment tends to age pretty well, so there’s a lot to consider when deciding whether to purchase vs lease your warehouse equipment.

To make a decision about whether to lease or buy warehouse equipment, you may want to consider how long you are going to need it. If the asset is something you know you’re going to need for the next decade or so, paying cash or financing the purchase could make more sense than leasing.

What to Consider When Choosing Whether to Lease or Buy

If you’re unsure whether it’s better to lease or buy business equipment, asking yourself the following questions may help sway your decision.

How Much Cash Do You Have?

If you have extra capital sitting around and a strong cash flow, buying may be a better option than leasing. Paying for the item outright avoids having to get financing or enter into a lease agreement.

If, on the other hand, cash is somewhat tight, it could be better to lease the equipment, since this will allow you to keep what cash you have free for any unexpected expenses.

What Will the Equipment Be Used For?

Think about how you plan to use the equipment, and whether it will be for the short or long term. Certain assets wear out as you use them, while others can become outdated over time.

If the equipment is likely to be useful and functional for many years, you might be better off purchasing it. If, on the other hand, it’s likely to wear out or become outdated quickly, it could be wiser to lease.

Is Handling Equipment Maintenance Doable?

When you lease equipment, you typically don’t have to worry about maintenance and repairs, since this is usually covered by the leasing company. When you buy equipment, this becomes your responsibility.

When weighing whether to lease or buy, it can be a good idea to research the potential cost of maintaining the equipment and then consider whether or not you would be able to handle those expenses.

Is Your Business Structured for Growth?

Part of the decision over leasing vs. buying comes down to whether you’re primarily focused on business growth or on profits. If your focus is growth, you may want to hold off on this kind of capital expenditure and lease. You can then put this cash toward other assets that can help you grow your business.

If you’re looking to quickly increase profits, purchasing equipment may be the better route. Owning assets can lower your operating costs and increase the overall value of your company.

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Leasing vs Financing Business Equipment

Equipment leasing and equipment financing are two ways to acquire business equipment without paying for it in full at the outset. However, these two options are structured differently.

Equipment leasing is a long-term rental agreement. You pay the leasing company a monthly fee for the duration of the lease agreement, and have full use of the asset during that time. At the end of the lease, you return the equipment. You may also have the option to renew the lease or purchase the equipment at that time. A monthly lease payment may be lower than a monthly loan payment for the same asset.

Equipment financing or an equipment loan, on the other hand, involves borrowing money to purchase a piece of equipment. The lender offers up to 100% of the purchase price. The business then pays the lender a portion of the purchase price (plus interest) each month until it is fully paid off.

Once the loan is paid in full, the business owns the equipment. While monthly payments may be slightly higher for an equipment loan than for an equipment lease, at the end of the loan term, the business fully owns the equipment.

Here’s a quick look at the differences between an equipment lease vs. an equipment loan.

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

4 Ways of Financing Business Equipment Purchases

If you’re thinking about financing your equipment purchase, you have a few different options to consider.

1. Small Business Loan

With a traditional term business loan, you borrow a lump sum and repay it (plus interest) in monthly installments over the term of the loan. You can use the funds from the loan for virtually any business expense, including purchasing equipment. Terms loans are available from banks, credit unions, and online lenders.

When applying for a small business loan, you will likely need to present information about your business, financial statements for you and your business (such as profit and loss statements, tax returns, and bank account statements), and also explain how you plan to use the loan.

2. Equipment Loan

Business equipment loans are specifically for equipment purchases. You can get an equipment loan from a traditional bank, an online lender, or an equipment financing and leasing company.

In some cases, you must make a down payment, typically of 10% to 20% of the purchase price. The lender then covers the rest of the cost of the equipment. Each month, you pay the lender a portion of the purchase price (plus interest) until you’ve paid for the item in full.

Because equipment loans are secured with the equipment you are purchasing (which lowers risk for the lender), approval and funding take place relatively quickly. Even startups are often able to qualify for equipment loans. There are also ways to get equipment financing with poor credit, such as offering additional collateral or increasing your down payment.

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3. Business Credit Cards

Another equipment financing option is to use a small business credit card. This may be especially appealing if you are able to get a card with a 0% introductory annual percentage rate (APR). These offers often last as long as 12 to 18 months. If you can pay off the equipment in that time, you’ll get interest-free financing. If you need more time, however, you may get hit with high interest costs. Business cards also tend to have lower credit limits than other types of equipment financing options.

4. Small Business Grants

Grants for small businesses provide free money for startups and existing businesses and, in some cases, may be used for purchasing business equipment.

Grants can come from federal, state, and local governments; nonprofit and community organizations; and for-profit companies. Many are designed to help business owners who have historically had trouble getting financing from banks and investors, such as women, military veterans, and members of minority groups.

The Takeaway

It can be wise to make lease vs. buy equipment decisions on a case-by-case basis. Leasing can be a good option for business owners who have limited capital or who need equipment that must be upgraded every few years, while purchasing equipment can be a better option for established businesses or for equipment that has a long usable life.

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

Is leasing or buying heavy equipment better?

It depends on what you’re buying, how long it will last/be useful to you, and how much cash you have on hand. Leasing has financial benefits, such as lower payments and not being saddled with an outdated piece of equipment. Buying, on the other hand, may be more affordable in the long run, and you’ll own an asset you can then sell.

For tax purposes, is it better to lease or buy business equipment?

Both have tax benefits. When you purchase equipment, you can typically write off the cost of that equipment over time (known as depreciation). If you finance an equipment purchase, the interest you pay on that loan can usually be deducted as a business expense. And, if you lease, you may be able to deduct your lease payments as a business expense. Other factors can impact your decision, too; consulting with a tax professional could be worthwhile.

How is purchasing different from leasing equipment?

When you buy equipment, you own it. If you take out a loan to buy it, you may need to pay a certain amount up front, then make monthly payments that include interest. When you lease equipment, you pay a monthly fee to use it for a certain period of time and then return the equipment, though in some cases, you may have the option to purchase it.

Photo credit: iStock/Jacob Wackerhausen

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

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

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

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