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A depository institution is a financial institution into which consumers can deposit funds and where they will be safely held. Banks and credit unions are typical examples of these institutions.

Learning about how these institutions work and their pros and cons can build your financial literacy.

What Is a Depository Institution?

A depository institution is a place or entity — such as a bank — that allows consumers and businesses to deposit money, securities, and/or other types of assets. There, the deposit is kept safely and may earn interest.

To share a bit more detail, depository institutions are financial institutions that:

•   Engage in banking activities

•   Are recognized as a bank by either the bank supervisory or monetary authorities of the country it is incorporated in

•   Receive substantial deposits as a part of their regular course of business

•   Can accept demand deposits

In the U.S., all federally insured offices of the following are considered to be depository institutions:

•   Commercial banks

•   Mutual and stock savings banks

•   Savings or building and loan associations

•   Cooperative banks

•   Credit unions

•   International banking facilities of domestic depository institutions

How Do Depository Institutions Work?

A depository can receive funds from consumers and businesses via such means as:

•   Cash

•   Direct deposit

•   Teller or ATM deposits

•   Checks

•   Electronic transfers

The depository institution holds these funds, and they are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per ownership category, per insured financial institution. If the institution is a credit union, funds will be similarly protected by the National Credit Union Administration, or NCUA vs. FDIC.

Funds are accessible on demand (aka demand deposits rather than time deposits), and the depository institution is required to keep a certain amount of cash in its vault to ensure it has funds available for clients.

Customers are able to earn interest on different types of deposits. The depository institution also earns interest; it’s one of the ways financial institutions make money. It does so by lending money on deposit to their customers in the form of different types of loans. (For instance, some of the money on deposit might earn the account holder 2% interest, while the bank then uses the funds for a mortgage that charges 6.00% interest. There’s a good profit margin there for the depository institution.)

Recommended: What Is a Community Development Financial Institution?

Types of Depository Institutions

To better understand the purpose depository institutions serve, let’s look at some examples.

Credit Unions

Credit unions may offer many of the same services as banks, but they are owned by account holders, who are also sometimes called members. These institutions are not nonprofits. The profits that the credit union earns are paid to members in the form of dividends or are reinvested into the credit union. To put it another way, the depositors are partial owners of the credit union. You often need to live in a certain area or work at a certain profession to keep your money at a credit union.

Commercial Banks

Commercial banks are what many of us visualize when we hear the term “bank,” whether we are thinking of a major bank with hundreds of brick-and-mortar branches or an online-only entity. They are usually owned by private investors and are for-profit organizations.

Commercial banks tend to offer the most diverse services of all depository institutions, from personal banking to global banking services such as foreign exchange-related services, money management, and investment banking. The offerings may depend on how large the institution is and which customer segments it serves (say, consumers and different types of businesses).

Savings Institutions

Savings institutions are the banks that serve local communities and loan institutions. Local residents deposit their money in these institutions, and in return, they can access credit cards, consumer loans, mortgages, and small business loans.

It’s possible to set up a savings institution as a corporation or as a financial cooperative. The latter makes it possible for depositors to have an ownership share in the saving institution.

Recommended: What Is an Intermediary Bank?

Depository Institutions vs Repositories

Repositories and depositories are two different things despite the fact that their names sound almost the same. Here’s some of the key differences.

•   Depositories hold cash and other assets, but repositories hold abstract things such as intellectual knowledge, files, and data.

•   Depositories are usually credit unions, banks, and savings institutions, while repositories are typically libraries, data-storage facilities, and information-based websites.

Depository Institutions vs Non-Depositories

Unlike depository institutions, non-depository institutions don’t accept demand deposits. These are some of the differences between these two types of institutions:

•   Depository institutions accept deposits and store them for safekeeping. Non-depository institutions, on the other hand, provide financial services but can’t accept demand deposits for safekeeping.

•   Depository institutions are FDIC- or NCUA-insured, while non-depository institutions can be SEC-insured or have another type of insurance.

•   Credit unions and banks are commonly depository institutions. Non-depository institutions are often brokerage firms and insurance companies.

Pros of Depository Institutions

Depository institutions have a few benefits to note:

•   Money is safe and FDIC- or NCUA-insured

•   Accounts can earn interest on time deposits such as certificates of deposit (CDs) and possibly other deposits

•   Helps keep the economy healthy by allowing depository institution to lend out deposits and earn interest

•   Reduced risk of assets being lost or stolen

Cons of Depository Institutions

There are a few downsides to depository institutions. Consider these points:

•   Limited growth potential of deposited funds compared to investments, money market accounts, and CDs

•   Banks, credit unions, and savings institutions may charge fees for holding funds

•   Minimum account balance may be required

Tips for Choosing a Depository Institution

When it comes time to choose a depository institution, it can help to keep the following things in mind when comparing different options.

•   Type. Carefully consider if a credit union, saving institution, or commercial bank is the right fit. Some commercial banks have brick-and-mortar locations, while others offer all of their services online. Online banks usually pay higher interest rates on savings and charge fewer and/or lower fees, since they don’t have the overhead associated with operating branch locations. Credit unions also tend to offer higher interest rates and lower fees as they are not-for-profit as commercial banks are.

•   Features. Look for a depository institution that offers perks and services that suit your needs. Special features may include high interest rates, early access to direct-deposit paychecks, cash back deals, fee-free ATMs, and free access to credit scores.

•   Fees. Shop around to see which depository institution has the lowest and/or fewest fees, such as account maintenance fees and overdraft fees. As noted above, credit unions tend to charge lower and/or fewer fees than commercial banks, as do online banks.

•   Convenience. If you like to bank locally and know your bank tellers and officers, choosing an institution that has branches in your neighborhood is a wise move. If you prefer the seamlessness of banking 24/7 by app, however, you might opt to open an online savings account.

Recommended: What Is an Online Savings Account?

The Takeaway

Commercial banks, credit unions, and savings institutions are all examples of depository institutions. Depository institutions can be places to safely store funds that can then easily be accessed. Funds will typically be insured by either the FDIC or NCUA up to their usual limits of $250,000 per depositor, per ownership category, per insured institution.

Looking for a bank to deposit your money in that pays a great APY?

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

What is the difference between a bank and a depository?

There is no difference between a bank and a depository. A bank is a type of depository institution. Credit unions and saving institutions can also be depositories.

What are the types of depository institutions?

There are three main types of depository institutions. Commercial banks, credit unions, and savings institutions are all types of depository institutions.

Are commercial banks depositories?

Yes, commercial banks are one kind of depository institution where consumers can securely stash their money.

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SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

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If you’re starting a new business, you need resources. One way to fund your business might be through a “rollover as business startup,” also known as a ROBS. This arrangement allows would-be business owners to tap into their retirement savings to pay for their new corporation’s startup costs or to buy an existing business. Like other types of small business financing, a ROBS has its own pros, cons, and legal issues for entrepreneurs to consider.

Understanding ROBS (Rollover for Business Startups)

A ROBS can help cover startup costs as an alternative to small business loans. If you’re pondering a ROBS, the first step is to understand how the process works and how it compares to traditional business financing.

How ROBS Works

During a ROBS, money from eligible retirement accounts — such as a 401(k) or a traditional individual retirement account (IRA) — is rolled over and invested in a new business or franchise. Here’s how.

•   The entrepreneur sets up a C corporation (a corporation structure that allows shareholders).

•   A plan sponsor creates a retirement plan for the new corporation.

•   The entrepreneur becomes an employee of the C corporation and also the beneficiary of the new retirement plan.

•   The entrepreneur executes a 401(k) rollover of money from their existing retirement accounts into the new retirement plan; the sponsor then uses those funds to purchase stock in the C corporation.

•   The entrepreneur can use the proceeds from the sale of the stock to fund the business.

ROBS vs Traditional Business Financing

One of the biggest differences between ROBS and traditional startup business loans is that ROBS does not require a credit check. Many traditional business financing options have minimum credit scores for approval.

Examples of credit-based financing would be business lines of credit (including a business credit card) and targeted business loans like equipment loans.

Recommended: Equipment Financing

The ROBS Process

The ROBS process can be complicated. It involves a series of specific legal and tax arrangements, so you will likely want to hire an accountant and a lawyer to handle the process. They can help keep you from running afoul of IRS requirements and provide detailed tips for starting your new business.

Legal Requirements and Setup Steps

Setting up and completing a ROBS usually follows some established steps. As noted above, it involves forming a C corporation, after which a plan sponsor creates a tax-advantaged retirement plan for that corporation. The entrepreneur is the C corporation’s employee and the new retirement plan’s beneficiary. This allows the tax-free 401(k) rollover of the entrepreneur’s money from their existing accounts into that new plan. The ROBS plan then uses the rolled-over assets to purchase the C corporation’s stock; the proceeds go toward funding the new business.

Potential Tax Implications

With a ROBS, you roll over money directly from your existing retirement account into the new plan’s account, so you typically don’t have to pay taxes on the distributions. And if you follow 401(k) withdrawal rules, you’ll likely escape the 10% penalty for taking your money out before age 59½.

However, a ROBS does call for specific tax filings. The IRS requires the sponsor of the new retirement plan to file a Form 5500, “Annual Return/Report of Employee Benefit Plan,” each year.

Also, at the time of the rollover, the sponsor of the new plan needs to issue you a copy of the 1099-R form, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.” You’ll need to report that information on your tax return.

To make sure you’ve covered all your bases, it may be wise to have an accountant or a tax lawyer on your side as you go through the ROBS process.

Pros and Cons of ROBS Financing

ROBS financing, like all financing methods, has its pluses and minuses. Reviewing the benefits and drawbacks will help you decide what’s best for your finances and business.

Benefits for Entrepreneurs

•   ROBS is a tax-free way to fund a startup or purchase an existing business without taking on new debt. After all, you’re using your own money.

•   There are no credit requirements involved in doing a ROBS. So this method could be an option to consider if you have bad credit.

•   A ROBS transaction doesn’t require a loan approval process. As a result, you don’t have to meet strict lender requirements like minimum annual revenue amounts.

Risks and Considerations

•   You are risking your retirement money by tying it to the success of your company. According to the IRS, most ROBS businesses either fail or are at risk of failure, with high rates of bankruptcy, liens, and corporate dissolutions.

•   There is an opportunity cost to taking your money out of the market. Even if your business succeeds, you will lose the potential gains from a rising stock market, the tax-deferred savings of an IRA or 401(k), and the power of compound interest over time.

•   You must set up your business as a C corporation. This could add costs and extra requirements for small businesses. C corporations have to pay taxes on profits, hold annual shareholder meetings, and adopt more extensive record-keeping and operational processes.

Recommended: Small Business Grants: Where to Find Funding

Is ROBS Right for Your Business?

Before undertaking a ROBS, you should consider whether you and your business are well suited for this process.

Ideal Candidates and Situations

If there is an ideal candidate for a ROBS, it’s likely to be someone with:

•   A full understanding of a C corporation’s structure and compliance requirements, and

•   An amply funded retirement account with money they can afford to put at risk, and

•   Enough funds to sustain the administrative expenses of setting up and maintaining the corporation and the new retirement plan

With these issues in mind, some advisers caution that ROBS may be your best option only if you’re unable to qualify for other forms of business funding. A business owner with a poor credit score or short business history might be in this position.

The Takeaway

ROBS can be a tax-free way to fund a business by using your own retirement savings. However, ROBS is not without its risks and costs, most notably that an unsuccessful business could deplete your retirement money. Setting up a ROBS is a complex process, so it’s wise to consider all pros and cons before deciding whether to go the ROBS route.

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.

With one simple search, see if you qualify and explore quotes for your business.

FAQ

How much does it cost to set up a ROBS transaction?

Setting up a ROBS transaction typically involves fees of up to $5,000. There are also ongoing plan administration charges.

What retirement accounts can be used for ROBS?

The retirement accounts that can be used for ROBS include 401(k) plans, traditional IRAs, governmental 457(b) retirement plans, 403(b) retirement plans, Thrift Savings Plans, SIMPLE IRA plans, SEP IRAs, and Keogh plans. Some retirement accounts are not eligible; two examples are tax-exempt 457(b) retirement plans and Roth IRAs.

What are the IRS requirements for a compliant ROBS setup?

For a ROBS to be IRS compliant, you must establish a C corporation with a qualified retirement plan. You will need to file a Form 5500 with the IRS each year. Additional rules may apply to your particular situation, so it’s prudent to check with an accountant or other tax professional.

What happens to my retirement funds if the business fails?

If you execute a ROBS and the startup business later fails, you could lose your retirement funds. It’s important to understand this before undertaking a ROBS.

Can I use ROBS to buy an existing business?

Yes, you can use ROBS to buy an existing business, not just a new business. However, the existing business must be structured as a C corporation.

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Photo credit: iStock/nortonrsx

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.

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Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) is a financial metric that can be used to assess the health and earnings potential of a business.

Like regular EBITDA, adjusted EBITDA adds back interest, taxes, and depreciation/amortization to net income. However, it also adds or removes certain non-recurring sources of income or unusual expenses that might temporarily skew earnings. This can help investors, analysts, and business owners more accurately understand how well a company is performing compared to its industry peers.

Read on for a closer look at what adjusted EBITDA is, how it’s calculated, its pros and cons, and what it can tell you about your small business.

What Is Adjusted EBITDA?

Adjusted EBITDA builds on the standard EBITDA formula, which adds back non-operational, non-recurring, and non-cash expenses to net income to get a better sense of a firm’s operational strength. Adjusted EBITDA may also subtract any unusual expenses from net income, since they aren’t likely to occur again.

Definition and Core Concept

Adjusted EBITDA and EBITDA add interest on debt, taxes, and the non-cash expenses depreciation/amortization back to net income to arrive at an earnings number that focuses on a firm’s operational efficiency.

Here’s a look at what EBITDA (and adjusted EBITDA) adds back and why:

•  Interest: This refers to interest on debt, such as small businesses loans. EBITDA excludes this expense because the amount of debt a company takes on depends on the financing structure of a company.

•  Taxes: Because taxes vary by region, companies with similar sales can pay significantly different amounts in taxes. This can skew their net income and make it difficult to accurately compare two companies in different locations.

•  Amortization and depreciation: Depreciation spreads out the cost of a tangible asset over the course of its useful life, while amortization does the same with intangible assets, such as patents, licenses, copyrights, and trademarks. EBITDA adds these non-cash expenses back to net income because they depend on the historical investments the company has made, not on its current operating performance.

Adjusted EBITDA, however, goes one step further than EBITDA by also removing any irregular, one-time, or non-recurring income or expenses (such as redundant assets, bonuses paid to owners, or rentals above or below fair market value) to further zero in on a firm’s performance and earnings potential.

It’s important to note that like EBITDA, adjusted EBITDA is not recognized by Generally Accepted Accounting Principles (GAAP).

Importance in Financial Analysis

Adjusted EBITDA is a crucial metric in financial analysis because it provides a clearer picture of a company’s profitability by excluding non-operational, non-recurring, and non-cash expenses. Unlike standard EBITDA, adjusted EBITDA removes one-time costs, stock-based compensation, and extraordinary expenses, offering investors and analysts a more accurate view of a company’s core financial health.

Recommended: What Are Retained Earnings?

Adjusted EBITDA Formula

The EBITDA formula is:

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

The formula for adjusted EBITDA is:

Adjusted EBITDA = Standard EBITDA +/- Adjustments

Who Uses Adjusted EBITDA & What Does It Tell You?

Analysts and investors might use adjusted EBITDA when doing a valuation of a company, while lenders might use this metric to better assess the profitability of a business applying for a small business loan.

Because it removes one-off income and expenses, a business owner might use adjusted EBITDA to get a better handle on their firm’s profitability. By excluding certain irregular items that are not likely to recur in future periods, this metric can also help owners with budgeting and forecasting.

Industries Relying on Adjusted EBITDA

Industries that rely on adjusted EBITDA include private equity, real estate, technology, healthcare, and manufacturing. Private equity firms use it to assess acquisition targets, stripping out non-recurring expenses for a clearer profitability picture. Real estate companies adjust for property depreciation, while tech firms exclude stock-based compensation. Healthcare businesses account for regulatory costs, and manufacturers remove fluctuations in raw material prices.

By using adjusted EBITDA, these industries ensure a more accurate reflection of operational performance.

Recommended: What Is Growth Equity?

How Does Adjusted EBITDA Work?

Adjusted EBITDA works by simply removing various one-time charges and irregular income sources from the EBITDA calculation. The goal is to find a normalized earnings figure that is not distorted by unusual activities.

Calculating Adjusted EBITDA

Calculating adjusted EBITDA vs. EBITDA is very similar — the only difference is that adjusted EBITDA adds or subtracts certain non-recurring items.

The items excluded in adjusted EBITDA can vary widely from one business to another, but some of the most common EBITDA adjustments include:

•   Small business start-up costs

•   Litigation costs

•   Special donations

•   One-time gains or losses

•   Investments

•   Maintenance and repairs expenses

•   Foreign exchange income or losses

•   Above-market owners’ compensation (private companies)

•   Real estate expenses

•   New hire expenses

Another version of EBITDA, EBITDAR, adjusts EBITDA only by removing restructuring and rent costs.

Recommended: How to Buy a Business

How Is Adjusted EBITDA Used?

Adjusted EBITDA is used in financial decision-making and for investors and analysts to assess a company’s core earnings.

Financial Decision-Making

Adjusted EBITDA is most often used for determining the value of a company for transactions like mergers, acquisitions, or raising capital. It helps management identify areas for improvement without the distortion of interest, taxes, depreciation, and other non-recurring items.

Investor and Analyst Perspectives

Investors and analysts rely on adjusted EBITDA to gauge a company’s true earning potential and financial stability. By stripping out one-time expenses, they can better compare companies across industries and assess long-term growth prospects, making it a valuable tool for valuation and investment decisions.

💡 Recommended: Improving Business Financial Performance

Pros and Cons of Adjusted EBITDA

As with any valuation tool, there are advantages and disadvantages to using adjusted EBITDA. Here’s a look at how they stack up.

Pros of Adjusted EBITDA	Cons of Adjusted EBITDA
Provides a valuation based on regular and actual transactions	Takes knowledge and skill to identify non-operation or non-recurring expenses
Aids in predicting future business earnings	Not recognized by the GAAP
Allows analysts to compare companies apples-to-apples	Aggressive accounting techniques can result in manipulated valuation figures

Adjusted EBITDA Example

We’ll use fictional company ABC to show how to calculate adjusted EBITDA. Here are some of the inputs found on the company’s financial statements.

Net income: $700,000

Taxes: $100,000

Interest expense: $10,000

Depreciation & amortization: $40,000

Adjustments: $50,000

To calculate standard EBITDA:

Standard EBITDA = $700,000 (net income) + $100,000 (taxes) + $10,000 (interest) + $40,000 (depreciation & amortization)

Standard EBITDA = $850,000

The next step is to find adjusted EBITDA by adding back the adjustments. Keep in mind that unusual income sources are subtracted, while unusual expenses would be added back to arrive at adjusted EBITDA. With company ABC, the adjustments are irregular expenses, so they are added back to earnings.

Adjusted EBITDA = $850,000 (standard EBITDA) + $50,000 (adjustments)

Adjusted EBITDA = $900,000

Recommended: Average Business Loan Interest Rates 2025

The Takeaway

Adjusted EBITDA is another earnings measurement of a business. It uses the standard EBITDA formula to gauge earnings from a company’s core operations, then adds or subtracts certain anomalies so that income is normalized.

While not a GAAP or small business loan requirement, knowing your company’s adjusted EBITDA can offer important clues into its financial health. It can also help you forecast future earnings and make important business decisions, such as whether or not to seek out financing to help expedite growth.

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.

With one simple search, see if you qualify and explore quotes for your business.

FAQ

Is adjusted EBITDA the same thing as net income?

No. Adjusted EBITDA starts with net income, then adds interest on debt, taxes, and depreciation/amortization expenses to come up with EBITDA (earnings before interest, taxes, depreciation, and amortization). It then adds or subtracts unusual expenses or income (so-called “adjustments”) to arrive at adjusted EBITDA.

What is considered a good adjusted EBITDA margin?

EBITDA (earnings before interest, taxes, depreciation, and amortization) margin gives you a numerical valuation expressed as a percentage:

EBITDA margin = EBITDA / Total revenue

Generally speaking, an adjusted EBITDA margin of 10% or more is considered good.

What does adjusted EBITDA tell you?

Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) removes non-recurring, irregular, and one-time items that may distort EBITDA. It helps analysts and investors assess a firm’s earning potential and make comparisons across a variety of companies in the same industry.

How often is adjusted EBITDA calculated?

Adjusted EBITDA is typically calculated on a quarterly and annual basis, aligning with financial reporting periods. However, companies may also calculate it monthly for internal analysis or strategic decision-making. The frequency depends on the company’s needs, industry standards, and investor expectations for tracking financial performance and operational efficiency.

Can adjusted EBITDA be negative?

Yes, adjusted EBITDA can be negative if a company’s operating expenses exceed its revenue, even after adjustments for interest, taxes, depreciation, and amortization. A negative adjusted EBITDA may indicate financial struggles, inefficiencies, or a startup in its growth phase with high initial costs and low revenue generation.

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Photo credit: iStock/svetikd

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.

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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If you’re interested in exploring your entrepreneurial side and breaking free of the traditional 9-to-5, you might consider starting a small business. But it’s not something to venture into without mapping out a strategy for success first.

There’s some groundwork that needs to be laid when you’re working toward owning a business. That includes refining your concept, taking care of the legal aspects of starting a new company, and getting your finances in order.

If you’re looking for a checklist of steps to follow when you’re starting your new business, this guide can help. Keep reading for 10 steps on how to start a business.

💡 Recommended: How to Get a Loan to Buy a Business

1. Research Your Idea

At the core of every successful business is a great idea. Depending on the type of business you’re interested in starting, you may have what you believe is a winning concept for a product or service you’d like to offer.

Before you get too far along in the process of starting your new business, however, it’s important to do some market research. Specifically, you should be thinking about these questions.

•   How original or unique is this concept?

•   Are there other businesses with a similar product or service?

•   How successful are those businesses and who are the biggest competitors?

•   What’s the long-term outlook for this product or service like?

•   How much demand is there overall for what I plan to offer?

At this stage, the goal is to determine whether owning your own business is viable, based on what you envision for your products or services.

Recommended: 23 Small Business Ideas

2. Identify Your Target Customers

Part of conducting market research when starting a small business involves finding your target customers. These are the people who are most likely to buy your product or service.

Creating an avatar that embodies your ideal customer can help. As you create your avatar, try to paint as clear a picture as possible and consider things like:

•   Basic demographics, such as age or gender

•   Income and employment

•   Education level

•   Geographic location

•   Hobbies or interests

It’s also important to consider what problems your ideal customers are facing that your business can help to solve. Being able to solve problems and offer solutions is one of the keys to owning a business that has staying power.

Recommended: Business Growth Strategies

3. Draft a Business Plan

A business plan is an important document to have when starting a new business. This is essentially a roadmap or playbook of how you plan to start, run, and grow the business over time.

There are different formats business plans can take, depending on the scale of the company you’re trying to start. A traditional business plan includes an executive summary and description of the company. But it also covers things like:

•   Market research and analysis

•   Organization and management structure

•   Details about the products or services you plan to offer

•   Marketing and how you plan to promote the business

•   Estimated startup and operational costs

•   Key financial ratios, such as estimated profit and loss

Broadly speaking, your business plan should identify what your goals for the business are and how you plan to go about achieving them. Writing a business plan can help you get organized in the early stages of starting a small business and give you a reference that you can check your progress against.

💡 Recommended: Stages of Business Growth

4. Plan Your New Business Budget

One of the most important steps in how to set up a business involves estimating your costs. The cost to start a business has two dimensions: estimating how much money you’ll need to get the business up and running and how much you’ll have to spend on an ongoing basis to maintain it.

When calculating startup costs, consider everything you may need to spend to get off the ground. That may include things like:

•   Leasing a space if you’re starting a brick-and-mortar business

•   Utility, cellphone, and internet service deposits

•   Purchasing or leasing equipment

•   Hiring and training staff if you plan to have employees

•   Purchasing necessary business licenses and/or paying registration fees

•   Marketing and promotion costs

•   Production costs to create your products

•   Website hosting and/or ecommerce setup

Those are the bigger expenses you may need to plan for when starting a new business. Once the business is open, your small business accounting will include ongoing costs such as:

•   Rent or lease payments

•   Utilities

•   Payroll if you have employees

•   Supplies and equipment

•   Marketing and advertising costs

•   Basic living expenses

If you plan to stick with your current job while owning your own business in the early stages, then you may have steady income that can cover your living expenses. But those may not be enough to cover your business expenses until your venture begins turning a profit. For that reason, it’s important to consider the next step in the process.

Recommended: Starting a Business and Refinancing Student Loans

5. Weigh Financing Options

When deciding how to start your own business, finances are a focal point. You need to know what you’re set to spend — and how you plan to pay for it.

Bootstrapping could be a possibility if you have a sizable amount of cash tucked away in savings that you could tap into. But that may not be a reality, in which case you’ll need to explore other options for small business financing. There are two broad categories of business financing: equity and debt.

Recommended: Rollover for Business Startups

Equity Financing Explained

With equity financing, you exchange an ownership stake in the business for funds from investors. This is typically how angel investing or venture capital investing works.

The upside of this type of business financing is that there’s nothing to pay back. This can be a real advantage as you’re attempting to achieve a positive cash flow while you get your startup off the ground. And whether the business succeeds or fails, with equity you’re not obligated to make investors whole financially. So the investor shoulders much of the risk in this financing equation.

The trade-off, however, is that each equity investor owns part of your business and as such, can have a say in how it’s run. That may not be ideal if you’d prefer to have complete control over business decision-making.

Debt Financing Explained

Debt financing is just what it sounds like: debt you take on to fund your business. For example, that can mean:

•   Small business loans

•   Small business lines of credit

•   Small business credit cards

•   Personal business loan or lines of credit

You borrow a set amount of money and agree to pay it back to a lender, typically with interest. Small business loans can be found at traditional banks and credit unions or through online lenders.

Starting a small business with debt may not be a perfect solution, but you don’t have to give up any of your ownership. And you can compare loans for small businesses or personal loan options to find one that fits your budget and offers the best repayment terms, based on your credit profile.

Recommended: How to Apply for a Small Business Loan

Small Business Grants

There’s also a third potential funding option you may consider in lieu of debt or equity financing. Small business grants can provide funding to start a new business with no repayment required. Getting small business grants can be time-consuming and competitive, however, so if you need money to start a new business quickly you may want to explore loans instead.

Recommended: Percentage of Businesses That Fail

6. Choose a Business Name

When selecting a name for your small business, consider what kind of brand reputation you want to build and what you want to be known for. You may choose your own name or something that embodies what your business is all about.

Before finalizing your choice of name, do your homework. Specifically, make sure the name isn’t trademarked or otherwise being used by any other business entity, as this could create legal headaches later. If you plan to launch a website or social media accounts for your business, you’ll also want to check to see if your business domain name and social media handles are available.

Recommended: Commercial Real Estate Loans

7. Determine Your Business Structure

Choosing a legal structure is next on the list of steps to starting a business. A legal structure is how your business will operate. The most common business structures are:

•   Sole proprietorship

•   Partnership

•   S-corporation

•   C-corporation

•   Limited liability company (LLC)

Your choice of business structure matters for a few reasons. First, it determines what kind of liability you have in situations where your business is sued. With a sole proprietorship, for example, you and the business are treated as one and the same. So if you’re sued by a customer or supplier, then your personal assets could be attached if a judgment is entered against you in civil court. An LLC, on the other hand, shields your personal assets.

Your choice of business structure can also affect taxation and how you pay taxes. Again, with a sole proprietorship, you and the business are treated as one and the same for tax purposes. Corporations, however, are taxed differently. So, depending on how much profit you anticipate the business generating, one structure may be better than another.

A third consideration has to do with getting business funding. If you plan to take out one or more business loans, then your business structure may influence what type of financing you’re able to qualify for and how much you can borrow.

Recommended: EBITDA Explained

8. Make Your Business Legal

If you have a business name and structure, the next step is making your business legal. This may include:

•   Registering your business with state and local agencies

•   Obtaining an Employer Identification Number (EIN) from the IRS and a state tax ID if needed

•   Securing any licenses or certifications required to operate

•   Filing trademark or patent applications for business names or products, if applicable

What, if any of these steps, are required for starting a small business will depend largely on where you plan to do business. Some states may require a separate tax ID to go along with your federal tax ID, while others don’t, for instance. Depending on what type of business you plan to operate, you may need a special license before you can open your doors.

If you’re unsure what you need to do to register, contacting your local chamber of commerce or your state’s business development agency can be good places to start. Keep in mind that you may need to pay certain fees to register or obtain necessary licenses when starting a small business.

Recommended: Amortization vs. Depreciation

9. Open a Business Bank Account

Once you’ve registered your business and made it legal, you can open a business bank account. Having a separate bank account can make sense when owning your own business for a few reasons.

First, this is a good way to keep business and personal expenses separate. When you’re paying your household bills and business expenses out of the same account, it can get confusing as to which funds are going where. It’s easier to keep track of business cash flow and personal cash flow when they’re in separate accounts.

Next, having a business bank account can make filing taxes easier. If you plan to deduct certain business expenses, then having all of those expenses linked to a single account can minimize headaches when filing taxes. Separate business and personal bank accounts may also be necessary if you want to avoid mingling funds because you’ve chosen something other than a sole proprietorship as a business structure.

When comparing business bank accounts, pay attention to fees you may pay, as well as minimum deposit or minimum balance requirements. Also consider whether the account offers access to merchant services if you need help with things like payroll or accounting.

Recommended: How to Accept Payments Online

10. Hire Staff and Plan Workload

Not all startups will require employees, especially in the beginning. But if yours does, it’s a good idea to figure out what areas you’ll need help in and for how many hours you want employees to work. If you’re running a coffee shop, for example, you will likely need at least one other barista to help you.

At this point, you may be able to start figuring out what tasks will need to be done each day and each week, how long they’ll take, and who can do them. In your coffee shop, someone will have to get there early to prepare the tables, make the coffee, and set up. And at the end of the day, someone will have to stay late to clean up and close down the shop.

Depending on how much project management is involved in your particular startup, you may want to use task management software to track what needs to be done and who will do it. You should already have budgeted for payroll, but it’s also important to figure out when and how often each employee will be coming in and what exactly each will be working on.

💡 Recommended: Small Business Checking

Additional Considerations

When starting a business, beyond the basics of writing a business plan and figuring out funding, several crucial factors can impact your long-term success. Paying attention to areas like accounting software, marketing strategies, and legal compliance can streamline operations and protect your business from costly mistakes.

Accounting Software

One item a new small business should consider investing in is accounting software. Proper financial management is essential for tracking expenses, monitoring cash flow, and filing taxes accurately.

Marketing Agency

A well-executed marketing strategy is key to attracting and retaining customers. If you lack in-house expertise, hiring a marketing agency can be a smart investment. Working with professionals ensures that your marketing campaigns are data-driven and optimized for performance, leading to better brand visibility and customer engagement.

Legal and Regulatory Compliance

Ensuring legal and regulatory compliance is crucial for avoiding penalties and legal issues. Depending on your business type and location, you may need permits, licenses, or registrations. Consulting with a business attorney can help you navigate contracts, intellectual property, and local business laws.

Recommended: Advantages of Buying a Franchise

The Takeaway

After reading through this list of steps to starting a business, it can seem like a lot. But breaking down each step into smaller, actionable tasks can make the process less daunting.

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.

With one simple search, see if you qualify and explore quotes for your business.

FAQ

What is the easiest small business to start?

The easiest small business to start typically requires low startup costs and minimal specialized skills, such as freelance services (writing, graphic design, virtual assistance), online retail, or consulting in a field of expertise. These businesses can be started from home with flexible hours.

What type of small business is most successful?

Service-based small businesses, like accounting, IT support, and digital marketing, tend to be the most successful due to low overhead and consistent demand. Businesses in healthcare, home improvement, and e-commerce also perform well, as they address essential or growing market needs, leading to higher profitability and long-term stability.

Do I need a business license?

Yes, most businesses require a business license to operate legally. The need for a license depends on your industry, location, and business type. Local, state, or federal authorities may issue the required licenses, ensuring your business complies with regulations, taxation, and zoning laws. Always check specific local requirements.

When should I hire employees?

You should hire employees when your workload exceeds your capacity, hindering growth or customer satisfaction. Signs include consistently missing deadlines, turning away clients, or lacking specialized skills. Hiring can help scale your business, improve efficiency, and allow you to focus on high-value tasks that drive growth and profitability.

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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.

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

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

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

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The main difference between retail vs. corporate banking lies in what type of services they provide and to whom. Retail banking is consumer-focused while corporate banking, also referred to as business banking, is designed to meet the needs of businesses.

Banks can offer both retail and business banking services to attract both types of clients. Understanding how each one works makes it easier to distinguish between retail vs. corporate banking.

What Is Retail Banking?

Retail banking refers to banking services and products offered to retail customers, meaning individuals. Retail banking can also be referred to as consumer banking or personal banking. The kinds of products and services offered by retail banks are designed for personal money management — such as checking and savings accounts, certificates of deposit (CDs), debit cards, and more.

In the U.S., the Office of the Comptroller of the Currency (OCC) is responsible for overseeing banks at the national level. Banks with assets in excess of $10 billion are also regulated by the Consumer Financial Protection Bureau (CFPB). In addition to federal regulation, retail banks can also be subject to regulation and oversight at the state level. These organizations help ensure that services are being provided in keeping with the law and that charges are not excessive.

Recommended: How Do Retail Banks Make Money?

Services Offered Under Retail Banking

Retail banks typically offer products and services that are designed to help everyday people manage their finances. This is the key distinguishing factor between retail vs. business banking. For example, some of the services retail banks may offer include:

•   Deposit account services: Retail banks can allow consumers to open checking accounts, savings accounts, money market accounts, and other deposit accounts to hold their money safely and securely.

•   Mortgage lending: Homeowners often require a loan to purchase a home, and many retail banks provide mortgages to qualified borrowers.

•   Secured and unsecured loans: In addition to home loans, retail banks can issue other types of loans, including auto loans, personal loans, home equity loans, and lines of credit.

•   Credit cards: Credit cards offer convenience for making purchases; many of them also offer rewards to consumers for using them. Retail banks may issue credit cards to creditworthy customers.

•   Certificates of deposit: Certificates of deposit (or CD accounts) are special types of deposit accounts that allow you to earn interest on your money for a set term.

Banks may also offer insurance to their retail clients. Private banking may also be available for higher net-worth customers.

Retail banks usually make money by accruing interest on the money they lend via loans and other vehicles. They may also charge various fees for banking services, including overdraft fees, loan origination fees, and checking account fees. Some retail banks have physical branches, while others operate exclusively online.

What Is Corporate Banking?

Corporate banking is the branch of banking that offers its services and products to business entities. That includes large corporations as well as small and medium-sized business operations. Corporate banks may also serve government agencies and entities. While services may include deposit accounts, these banks also may offer credit and asset management, lines of credit, payment processing, and tools that facilitate international trade.

Like retail banks, corporate banks can charge fees for the various services they provide. Banking services can be directed toward a corporate audience in general or be tailored to target the needs of specific industries, such as healthcare or companies that operate in the tech space.

Recommended: When Would I Need a Business Bank Account?

Services Offered Under Corporate Banking

The services offered by corporate banks are designed to suit the needs of businesses large and small. The kinds of services a corporate bank can offer include:

•   Deposit account: Business banking can include many of the same deposit options as retail banking, such as checking accounts, savings accounts, and money market accounts.

•   Debt financing: Corporate banks can offer debt financing options to startups and established businesses that need capital to fund expansion projects and growth.

•   Trade lines of credit: Trade financing can make it easier for businesses to cover day-to-day operating expenses. Examples of trade financing that corporate banks may offer include merchant cash advances, purchase order financing, and accounts receivable processing.

•   Payments processing: Corporate banks can act as payment processors to help businesses complete financial transactions when providing products or services to their customers.

•   Treasury management: Treasury management services can help businesses keep cash flowing steadily and smoothly.

•   Global banking: Businesses that are interested in expanding into foreign markets may rely on business banking services to reach their goal.

Key Differences Between Retail and Corporate Banking

Retail and corporate banking both have the same goal: serving the needs of their customers. But the way they achieve this goal differs. Here are some of the most noteworthy differences between retail banking vs. business banking.

Business Model

Retail banking’s business model is built around meeting the needs of retail banking clients. Banks that operate in the retail space are primarily concerned with three things: deposits, money management, and consumer credit.

Corporate banks, on the other hand, base their business models around products and services that are utilized by business entities. That includes offering business bank accounts, providing avenues for securing capital, and offering financial advice.

Customer Base

Retail banks are geared toward consumers who rely on financial products like personal checking accounts, savings accounts, or unsecured loans. A retail bank can offer accounts to different types of consumers, including specialized accounts for kids, teens, students, or seniors. But generally, they’re consumer-facing and work with everyday people to help them manage their money.

That’s a difference between retail vs. corporate banking: The latter is business-centric. For example, a corporate bank may offer services to companies with a valuation in the millions. Or it may cater to smaller businesses that need help with things like payment processing or cash flow management. Some business banks may serve companies both large and small.

Processing Costs

As mentioned, both retail and corporate banks can charge fees for the services they provide. These fees are designed to make up for the bank’s own handling costs for processing transactions. Both types of banks can also charge interest on loans, lines of credit, and credit cards. These are some of the ways that banks earn money.

In general, retail banks tend to have lower handling costs which means lower fees for consumers. Corporate banks, on the other hand, typically have higher processing costs which means their clients pay more for their products and services.

Value of Transactions

Since retail banks serve everyday consumers, the average value of transactions processed tends to be lower compared to that of corporate banks. A corporate bank, for example, might process a transaction valued at several million dollars for a single customer. Someone who’s adding money to their personal checking account vs. a business checking account, meanwhile, may be depositing a few hundred or few thousand dollars.

Profitability

Here’s another key difference between business banking vs. retail banking: Business banking tends to generate more profits. That’s because corporate banks typically deal in higher value transactions than retail banks.

The Takeaway

The difference between retail vs. business banking is quite straightforward: Retail banking serves individual customers’ needs, while corporate banking serves the needs of companies of all sizes, as well as other organizations.

For most people, retail banking is a good choice to manage and optimize their financial lives. For instance, you can use a retail bank account to pay bills, deposit your paychecks, transfer money to savings, and make purchases or withdrawals using your debit card.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

Is corporate banking better than retail?

Corporate banking is not necessarily better than retail banking; they’re designed to serve different audiences. Corporate banking is usually a wise choice for a business entity, while retail banking is designed to serve individuals with their personal banking needs.

Is a current account retail or corporate?

Current accounts can be offered by retail and corporate banks. Generally speaking, a current account is a bank account that allows you to make deposits and withdrawals. A checking account, either personal or business, is an example of a current account.

Why do banks focus on retail banking?

Banks focus on retail banking because there’s a need for it among consumers; many adults might be interested in a checking account, a debit card, and a credit card, for example. The demand for retail banking also allows banks to generate revenue by charging fees for deposit accounts and interest on loans and lines of credit. That said, corporate banking also serves an important need and generates income for banks as well.

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Photo credit: iStock/https://www.fotogestoeber.de

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

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

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

3.30% APY
Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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