SoFi

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.

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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.

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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.

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

SOSB0424041

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

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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.

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

SOSB0424042

Small business loans can be used to help grow your business, during tough economic times, or to get your business through a slow season. Knowing how to apply for a business loan is crucial in order to increase your chances of approval and speed up your funding time.

This step-by-step guide on how to apply for a business loan spells out reasons why you may need a business loan, the different types of loans and lenders, standard application requirements, tips for getting a small business loan, and more.

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1. Determine Why You Need a Small Business Loan

Small business owners may need funding for a variety of reasons, many of them depending on which stage you’re in. These needs include:

•   Upfront costs

•   Expanding a business

•   Managing cash flow

•   Purchasing property

•   Buying equipment or inventory

Here’s a deeper dive into these reasons.

Upfront Business Costs

As much as you may want to jump in and get your business off the ground, doing some research and planning to estimate how much funding you need can potentially help you avoid a headache in the long run.

When you’re just beginning, you must think about startup costs, including:

•   Rent, utilities, and property repairs

•   Inventory

•   Equipment

•   Marketing

•   Insurance

•   Payroll

•   Permits

•   Legal fees

Expanding Your Business

Expanding a business is no small feat, and even profitable businesses may benefit from getting a small business loan. By using a loan to fund expansion, you can secure capital without jeopardizing your business’s current cash flow, helping ensure your transition from a small to midsize business is a smooth one.

Managing Cash Flow

Many businesses deal with fluctuations in cash flow due to seasonality, the economy, world events, and other factors.

Because it can be difficult to predict and financially prepare for such fluctuations, certain types of small business loans may help offset the gaps in cash flow.

Purchasing Property

Purchasing property typically requires significant financing in the form of a long-term business loan, like a commercial real estate loan.

Buying Equipment and Inventory

All businesses have equipment and inventory needs. Whether it’s buying, replacing, or repairing materials, you need to know how to apply for business loans. Typical loans include equipment financing and inventory financing.

2. Review the Business Loan Requirements

While there isn’t a one-size-fits-all formula for business loan requirements, lenders typically base their decisions regarding approval, rates, and terms on how risky it would be to lend to your business.

Lenders usually assess risk using a variety of factors, including:

•   Credit scores

•   Business age

•   Revenue history

•   Debt-to-income ratio

•   Cash flow

Remember that individual lenders may have their own business loan requirements, so compare carefully.

Lenders Want to Know Your Credit History and Score

When you apply for a small business loan, lenders often want to look at your personal and business credit scores. If your business is new, lenders may primarily rely on your personal credit score to determine eligibility.

When you have a high credit rating, lenders may see you as a trustworthy borrower and worth the risk of lending to at more favorable rates.

Generally, traditional lenders like banks and credit unions want to see credit scores over 620-640 to be considered for a small business loan. But, several lenders do offer loans to businesses with challenged credit.

Building Business Credit

A well-established business credit history can potentially help you get better business loan rates and terms.

To establish or build business credit:

•   Separate your business from your personal finances by getting an Employer Identification Number (EIN) and maintaining a business bank account that is separate from your personal account.

•   Open a business credit card or business line of credit and make payments on time.

•   Work with vendors and suppliers who report to business credit bureaus.

•   Check your personal and business credit reports

Is Your Business Established?

Frequently, lenders see new businesses as riskier, so it may be challenging to secure a first-time business loan. If you have other sources of startup funding, consider them before applying for a small business loan.

Small business lenders typically prefer businesses that have been established for at least two years. While there are small business loans for startups, your options may be relatively limited.

Revenue History Matters

Lenders want to know how much revenue your business brings in to gauge whether you’ll be able to repay your loan. They may even have a minimum revenue requirement for small business loan applicants.

Knowing your minimum annual revenue can help determine if a lender is a good fit for your business.

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Knowing Your Debt-to-Income Ratio (DTI)

Lenders may assess your debt-to-income ratio (DTI) to make sure you can pay back the loan as part of your small business loan application.

To calculate your business’s DTI, divide your monthly expenses by your gross monthly income. Then, multiply that number by 100 and add a percent sign to see your DTI.

Debt-to-Income Ratio (DTI) = Total Monthly Expenses ÷ Gross Monthly Income x 100

Generally, if your DTI is high, it may be harder to qualify for a small business loan because having more debt than income can seem risky to potential lenders.

Is Your Cash Flow Sufficient?

Assess if you will have the cash flow to pay back the loan. Lenders may use several pieces of information to calculate your cash flow when determining if you meet their small business loan requirements.

3. Calculate the Amount of Capital Needed

Creating an adequate business capital estimate can reduce stress and avoid the need to apply for another small business loan down the road. Knowing your needs will help you figure out your chances of obtaining a loan and estimating how much of a business loan you can get.

Start by determining if your expenses are:

•   One-time purchases or ongoing: One-time major purchases can disrupt cash flow. Ongoing expenses happen monthly, quarterly, or annually and don’t change much.

•   Essential or optional: Can the business operate without this purchase? If not, it’s essential. If so, it’s optional. Essential expenses are typically prioritized over optional ones.

•   Fixed expenses: Fixed expenses don’t change significantly or often. These may include rent, insurance, or regular business expenses. Consider what your business loan may need to cover and adjust your desired amount accordingly.

Estimating Cash Flow

Project your cash flow for at least a few months out. Will you have enough to keep the business running and make loan payments? If not, applying for a business loan may need to wait.

You can use the following formula to help calculate your future cash flow:

Cash Flow Forecast = Starting Cash + Projected Inflows − Projected Outflows

Projected inflows include sales, investments, income, etc. Projected outflows include wages, rent, inventory costs, etc.

4. Choose the Right Loan for Your Small Business

Once you’ve gathered all the relevant information, you’re ready to start comparing loan options. You can do this on your own or you can work with a business loan broker.

Below are the different types of business loans and why you may want to choose one over another.

Small Business Administration (SBA) Loans

SBA loans are backed by the U.S. Small Business Administration, so they pose less of a risk to lenders. Loans guaranteed by the SBA offer relatively favorable rates and terms.

Many SBA loan programs suit the small business owners’ unique needs, but the most popular program is the SBA 7(a). These loans can be useful for qualified small businesses needing up to $5 million for almost any business-related expense.

Additional options include an SBA 7(a) Small Loan for up to $350,000, an SBA Express Loan with a turnaround of 36 hours, and an SBA 504 Loan which is used to purchase commercial real estate.

Why Choose an SBA Loan?

SBA loans are geared toward a variety of small business applicants, including startups, veterans, women, and underserved communities.

They can be used to finance large, one-time purchases or smaller, ongoing expenses, allowing your company to grow and build business credit.

Things to Keep in Mind About SBA Loans

Since SBA loans are backed by the U.S. government, the qualification and application process can be longer and more complicated than a traditional bank or online loan.

If you need funding quickly, lack a well-established business, or have poor business credit, you may want to consider a non-SBA-backed loan.

Term Loans

Small business term loans let you borrow a set amount of money that’s paid back with interest on a predetermined schedule. Lenders determine rates and terms based on your creditworthiness.

Both long- and short-term loans are available for small businesses. The type you choose to apply for depends on your company’s needs.

Why Choose Term Loans?

Term loans can be useful for large, one-time purchases because they allow you to repay over time, posing less risk to your business’s cash flow. With long- and short-term options, you decide what makes the most sense for you.

Long-term small business loans typically have lower interest rates for qualified small business loan applicants. But, extending the loan could lead to considerable accrued interest over the life of the loan.

A short-term loan may have higher interest rates, and businesses generally turn to them when they cannot qualify for another loan or line of credit.

Things to Keep in Mind About Term Loans

While you can find term loans from several types of lenders, banks and credit unions may have lower interest rates. However, they may also have more stringent business loan application eligibility requirements.

Business Line of Credit

A business line of credit can be revolving or non-revolving and grant access to funding up to your credit maximum. Interest is only charged on unpaid balances from previous billing cycles.

With a revolving line of credit, you can withdraw and repay as needed, but cannot spend over the approved credit limit.

Non-revolving lines of credit end after you’ve paid the balance in full.

Why Choose a Business Line of Credit?

If you need to manage cash flow during seasonal fluctuations or have unexpected expenses, a business line of credit can provide quick funding without the commitment of a small business loan.

Things to Keep in Mind About Business Lines of Credit

A business line of credit can be a relatively affordable option for shorter-term needs, with interest rates generally falling between 8% and 30%.

If you aren’t sure whether you’ll be able to pay the monthly balance on a line of credit, it may be worth exploring other financing options over applying for a business loan.

Microloan

Microloans are typically offered by nonprofit organizations and peer-to-peer lenders in amounts up to $50,000. Applying for these small business loans often has a personal aspect other lenders lack.

Why Choose a Microloan?

Microloans are used for businesses needing small amounts of financing. Mission-based lenders can be one option when searching for microloans because they may offer specialty funding for minorities and underserved communities.

SBA microloans are also available and may offer more competitive interest rates than other lenders.

Things to Keep in Mind About Microloans

Generally, eligibility requirements for business microloans aren’t as strict as they are for term loans.

Check with lenders to confirm interest rates so you can accurately estimate how much a microloan may cost.

Equipment Financing

Equipment financing is for purchasing business-related equipment like machinery or vehicles, where the equipment acts as collateral.

Both small business startups and established businesses may benefit from equipment loans to keep business operations running smoothly.

Why Choose Equipment Financing?

If your business needs new equipment but doesn’t have the savings to purchase it, equipment loans may offer favorable interest rates. There are also leasing options if you anticipate regularly replacing or upgrading equipment.

Things to Keep in Mind About Equipment Financing

Generally, the equipment acts as collateral when pursuing equipment financing. This type of financing can also be limiting, as you can only use the funds for business-related equipment.

Invoice Factoring and Financing

With invoice financing, lenders use your business’ unpaid invoices as collateral for a cash advance. You are responsible for collecting unpaid invoices from clients and repaying the lender once you receive payment.

With invoice factoring, a lender purchases unpaid invoices from you, then collects payment directly from your clients.

Why Choose Invoice Factoring and Financing?

Business-to-business (B2B) organizations with irregular billing cycles can use invoice financing or factoring to pay for operating expenses without waiting for clients to pay.

Lenders advance a percentage of the outstanding invoice amounts, which you can use to reinvest in your business or pay your bills.

Things to Keep in Mind About Invoice Factoring and Financing

Business-to-consumer (B2C) organizations that don’t invoice customers regularly will likely be ineligible for invoice factoring or financing.

Additionally, because the lender takes on more risk with invoice factoring, the terms may not be as favorable as those for invoice financing.

However, if you choose invoice financing, you are responsible for collecting payments from customers and paying the lender. If customers are late, any late fees from the lender fall to you.

Lenders may also charge non-refundable processing and repayment fees for invoice financing and factoring. Check with your lender about additional fees so you can budget accurately.

Recommended: Guide to Accounts Receivable Factoring

Commercial Real Estate Loans

Getting a business loan for commercial real estate allows you to purchase a building for business use. These loans can be in the millions, and typically offer competitive interest rates because they are backed with the real estate you are purchasing.

Why Choose Commercial Real Estate Loans?

If you need to acquire a business property, a commercial real estate loan may be your only option for financing. Because commercial real estate can be pricey, paying for it without getting a business loan could strain the business’s finances and cash flow.

Things to Keep in Mind About Commercial Real Estate Loans

Commercial real estate loan approval and structure typically factor in loan-to-value (LTV) ratio: the size of the loan divided by the value of the property, expressed as a percentage.

Loan-to-Value Ratio (LTV) = Loan Amount ÷ Commercial Property Value

Usually, the lower the LTV, the better the rates and terms you’ll receive on the loan. Most commercial real estate loans have LTVs between 75% and 80%.

Commercial real estate loans may carry additional costs for things like appraisal, inspection, and filing fees. Ask your lender about expenses to gauge whether a commercial real estate loan is the right choice for you.

5. Compare Types of Lenders for Small Business Loans

Banks, credit unions, online lenders, and peer-to-peer networks all offer loans for small businesses.

Online Lenders

Online lending can be helpful for small businesses that are just starting out or need funding quickly. Applying for a business loan online may offer several advantages, including:

•   Fast application review

•   Quick access to funds

•   Can be easier to qualify for with little business credit or history

•   Easy to compare different lenders

•   Options for unsecured loans

However, online lenders typically can’t beat the APRs from banks and credit unions.

Traditional Banks

Banks can offer term loans, lines of credit, equipment loans, and credit cards. Some banks partner with the SBA and offer government-backed loans for approved borrowers, including their 7(a) programs.

Additionally, interest rates and terms may be more favorable with a bank than other types of lenders. But, applying for a business loan with a bank typically takes more time than with an online lender.

Small businesses may find it challenging to get approved for a business loan with a bank, because banks may require good credit, collateral, and established business history. Funding may also take longer to get because of the more rigorous application and approval process.

Peer-to-Peer (P2P) Lending Networks

Peer-to-peer (P2P) lenders match small business loan applicants directly with investors (not financial institutions). As a result, they may be attractive to small businesses struggling to get financing elsewhere.

Deciding factors may include credit scores and social media profiles — anything that helps each party determine if they want to partner. These business loan requirements vary greatly as a result.

P2P marketplaces set the terms and rates for the loans, which vary depending on the borrower’s creditworthiness. They also help facilitate money transfers and payments.

As you’re researching your options, investigate transaction fees charged by different P2P marketplaces, which could fall to you, the investor, or both.

Credit Union

Credit unions are similar to banks, but are member-owned and not-for-profit. As a result, profits are typically returned to members in benefits such as reduced fees, more competitive loan interest rates, or higher rates on savings accounts.

Many people choose to apply for business loans from credit unions because they offer competitive interest rates and terms, and may have more flexible qualification standards. They also tend to be community-oriented, which may benefit small businesses wanting to invest in the areas they live.

6. Gather Documents and Apply

The final step is gathering the necessary documentation for your small business loan application(s).

Documents you need to provide vary by loan and lender. But, here are a few items lenders typically require:

•   Business and personal bank statements

•   Business and personal tax returns

•   Business legal documents

•   Personal identification and resume

•   Business plan

•   Revenue statements

•   Accounts receivable and payable

How you’ll apply for a business loan depends on the lender. An online lender may permit you to link your business accounts through its website. For a bank or credit union, you will likely apply in person at the branch (if they have brick-and-mortar locations) or via a phone call.

What to Expect After Applying

Once you’ve applied, you’ll wait to see if you’re approved. Some lenders approve borrowers instantly, whereas others may take a few business days. If the lender requests additional documentation, be sure to respond quickly to prevent delaying the process. Once approved, funds typically will be in your account within one day to one week.

What Happens When You Get Your Loan

You will be notified when the loan is approved and the next steps in the process. For example, after an SBA loan is approved, you can expect to receive the funds in the designated bank account after five to seven business days.

The Takeaway

To apply for a small business loan, you’ll first want to determine what it is you need a business loan for. Knowing this will help you choose the right type of small business loan for your situation.

Once you’ve decided on a loan, you’ll want to review the loan requirements, gather the necessary documentation, and research and compare lenders. Shopping around for lenders allows you to find the best rate and terms for your small business.

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

FAQ

Is it hard to get approved for a small business loan?

There are many different types of small business loans you may qualify for, even if you have bad credit or are a brand new business. However, in order to qualify for the best rates, lenders will want to see good to excellent credit, stable business income, and at least six months of business history.

Can I get a loan for a first time business?

Yes, startups can qualify for small business loans. Qualifications will vary by lender, but most will want to see good credit scores and an in-depth business plan. You also may need to back your loan with collateral or a personal guarantee.

What credit score do you need for an SBA loan?

The minimum credit score needed for an SBA loan is typically between 620 and 640 or higher. If you do not meet that requirement, you may want to consider other types of business loans, including term loans, a business line of credit, or equipment financing.

Photo credit: iStock/JLco – Julia Amaral

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.

Small Business Loans
*Reference to “same day funding” or “funding within 24 hours” describes a general capability of many lenders you can reach through SoFi’s marketplace. This funding timing is not guaranteed. Your experience with any lender will vary based on requirements of the lender and the loan you apply for. To determine the timing of funds availability, you must inquire directly with any lender. In addition, your access to any funds from a loan may be dependent on your bank's ability to clear a transfer and make funds available.

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.

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

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Michigan has about 910,000 small business owners statewide who could apply for small business grants. Submitting an application and competing for Michigan small business grants can help you grow your small or medium-size enterprise in the Wolverine State.

Michigan’s economy has a gross domestic product of $674.8 billion as of 2023. That’s the 14th largest GDP in the United States out of the 50 states and the District of Columbia.

Below we highlight some of the top small business grants in Michigan.

Grants for Small Businesses in Michigan

If you’re looking for small business grants in Michigan, here are some potential options to consider:

Michigan’s State Trade Expansion Program (MI-STEP)

•   Program description: MI-STEP is a grant reimbursement program that can help you export your goods and services from the Wolverine State to foreign markets.

•   Incentive: Receive up to $15K in reimbursements for eligible business expenses, including international marketing and trade show participation costs.

•   General requirements: Here are some of the general requirements for this grant:

◦   Be a Michigan-based small business

◦   Be able to provide a Michigan Licensing and Regulatory Affairs (LARA) annual report or business structure filings from a county registrar’s office

◦   Understand how exporting works and the cost of doing business with foreign buyers

◦   Provide an employer identification number (EIN) linked to a Michigan address

◦   Be in good standing with the Michigan Department of Treasury and other regulatory agencies

◦   Be an export-ready U.S. company

◦   Have a product or service consisting of at least 51% U.S. content

◦   Minimum gross annual revenue of $100K

◦   Wholesale distributors of imported products are not eligible for MI-STEP grants

•   How to apply: Access and submit a completed MI-STEP grant application through the Michigan Economic Development Corporation (MEDC) Project Portal.

Match on Main Grant Program

•   Program description: Match on Main is a reimbursement grant program for eligible small businesses operating in a Michigan business district.

•   Incentive: Be reimbursed up to $25K for eligible expenses on project activities, such as the cost of making interior building renovations to a permanent commercial space.

•   General requirements: Here are some of the general requirements for this grant if you’re an eligible small business owner:

◦   Have a local government, downtown development authority, Michigan Main Street program, or other eligible organization apply on your behalf

◦   Be headquartered in Michigan

◦   Be located within a traditional downtown, historic, or mixed-use location zoned for concentrated commercial development in Michigan

◦   Sell products or services face to face as an eligible business

◦   Have a proposed project that incurs eligible expenses, such as costs for interior building renovations or electrical improvements

•   How to apply: Work with an eligible applicant who can submit a Match on Main grant application on your behalf, such as the local government where your business is based.

Michigan Workplace Improvement to Safety and Health (MIWISH) Grant Program

•   Program description: The Michigan Occupational Safety and Health Administration (MIOSHA) offers MIWISH matching grants to eligible employers who buy items that promote workplace safety.

•   Incentive: Receive up to $5,000 in matching funds to buy items and training services that help improve the safety and health of your employees.

•   General requirements: Here are some of the general requirements for this grant:

◦   Have 250 employees or less

◦   Come under the jurisdiction of MIOSHA

◦   Conduct a site-specific evaluation justifying the purchase of any safety equipment

◦   Implement a workplace safety project that reduces the risk of injury or disease to employees

•   How to apply: Complete the MIWISH grant application available online.

Motor City Match Grants

•   Program description: Motor City Match is a business assistance program that provides cash grants to eligible small business owners who need additional funding to open a new establishment in Detroit. The program can also benefit existing Detroit business owners who need additional funding to complete façade improvements.

•   Incentive: Receive gap funding grants of up to $100K to open a new business in Detroit or grants of up to $25,000 to complete façade improvements to your existing Detroit business.

•   General requirements: Here are some of the general requirements for this grant:

◦   Be a new businessperson opening your first location in Detroit, an existing business owner opening an additional location in Detroit, or an existing Detroit business owner who needs additional funding to complete façade improvements

◦   Have a clear budget on the total project costs to open a new establishment or complete façade improvements

◦   Have the ability to invest a minimum for 10% of the total project costs in your own equity

◦   Have a need for additional funding that you can’t find elsewhere

◦   Have been open and operating for at least one year if you’re seeking funding for façade improvements

•   How to apply: Access the Motor City Match grant application online and submit a completed application when the grant round opens.

City of Wayne Façade Improvement Program Grants

•   Program description: The City of Wayne Downtown Development Authority (DDA) offers Tax Increment Financing (TIF) cash grants to eligible property owners who enhance the general aesthetics of a building exterior or façade.

•   Incentive: Receive up to $10K in reimbursements for making façade improvements to an eligible property in the City of Wayne’s downtown TIF district.

•   General requirements: Here are some of the general requirements for this grant if you’re a small business owner:

◦   Own commercial property or other eligible real estate in the City of Wayne’s downtown TIF district

◦   All personal and real property taxes are paid up to date

◦   Payment of all water charges and special assessments are current

◦   Have a certificate of good standing from the state of Michigan

◦   Propose a detailed project that would improve a blighted property or help prevent deterioration in the downtown district

◦   Comply with all City of Wayne regulations, codes, and ordinances

•   How to apply: Access the City of Wayne Façade Improvement Program grant application online and submit a completed application to the City of Wayne Community Development Department.

Who Provides Small Business Grants in Michigan?

Local and state government agencies, including the MEDC, offer a variety of small business grants in Michigan.

You can compare small business grants in Michigan with similar programs in other states, such as:

•   NJ small business grants

•   Wisconsin small business grants

Do You Have to Pay Back a Small Business Grant?

A small business grant typically comes with terms and conditions, and you may be responsible for paying back the grant if you violate those terms. In general, small and midsized business owners are not required to pay back an SMB grant absent any violations.

You typically have to sign a funding agreement to accept a small business grant. As mentioned above, the grant may come with certain conditions. Using the grant for an illegitimate purpose may violate the agreement and require business owners to pay back the grant.

Small business grants may require you to spend the money by a certain date. You may also have to provide proof of payment and a written statement detailing how you’ve spent the grant.

Recommended: What to Know About Short-Term Business Loans

Who Is Eligible for Small Business Grants in Michigan?

Local business owners or operators of an enterprise with fewer than 500 employees may be eligible for small business grants in Michigan.

The U.S. Small Business Administration’s Office of Advocacy generally defines a small business as an independent business having fewer than 500 employees. A small business, including individuals who freelance, may be eligible for small business grants.

What Industries Does Michigan Support With Grants?

Michigan offers a variety of grants supporting the following industries:

•   Cannabis

•   Construction

•   Fabricated metal product manufacturing

•   Food manufacturing

•   Machinery manufacturing

•   Metal industries

•   Nonmetallic mineral product manufacturing

•   Nursing and residential care facilities

•   Plastics and rubber products manufacturing

•   Primary metal manufacturing

•   Retail trade (store and nonstore retailers)

•   Transportation equipment manufacturing

•   Wood product manufacturing

Michigan Resources for SMB Owners Looking for Funding

Here are some resources for small and medium-sized businesses looking for funding in the Wolverine State:

Michigan Small Business Development Center (SBDC)

The Michigan SBDC is a statewide program that can provide Michigan’s small business owners with the following services:

•   Webinars and workshops about running and growing your business

•   Market research

•   No-cost consulting

SBA District Office in Michigan

The U.S. Small Business Administration (SBA) is a federal agency that provides resources and support to small business owners. The SBA Michigan District Office serves the entire Wolverine State with a main office in Detroit and satellite office in Grand Rapids.

Alternative Funding Sources for Small Businesses in Michigan

Here are some alternative funding sources for small businesses in Michigan:

Michigan State Small Business Credit Initiative (SSBCI)

Michigan’s SSBCI is a federally funded program for small business owners in the Wolverine State. Federal law — the American Rescue Plan Act of 2021 — allocates nearly $237 million to Michigan’s State Small Business Credit Initiative program.

Here’s how Michigan plans to use the SSBCI funding:

•   Michigan Small Business Venture Capital Program — $75 million. This program can help eligible startups access venture capital.

•   Michigan Collateral Support Program — $71.1 million. This program provides cash collateral to help small businesses qualify for small business loans.

•   Michigan Loan Participation Program — $48.2 million. This program uses SSBCI funds alongside private funds to support loans to borrowers who need financing for a diversification or expansion project in Michigan.

•   Michigan Loan Guarantee Program — $40.3 million. This program provides lenders with short-term, partial guarantees to support loans offered to eligible borrowers, including socially and economically disadvantaged individuals who own small businesses in the Wolverine State.

•   Michigan Capital Access Program — $2.37 million. This program uses SSBCI matching funds to support portfolio insurance on small business loans.

Michigan Microloan Lenders

Community-based nonprofits may offer microloans of up to $50,000 to small business owners in Michigan, including microloans for women-owned small businesses. In general, microloans can range from $500 to $50K and may be available to startups.

Michigan SMB Loans from Private Lenders

Banks, credit unions, and private lenders may offer different types of small business loans to Michigan business owners.

Here are some of the funding products you may consider depending on your needs:

•   Commercial real estate loans

•   Equipment financing

•   Small business loans for startups

•   Working capital lines of credit

The Takeaway

Small businesses in Michigan can apply for small business grants available from government and private sources.

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

FAQ

How do you get a small business grant in Michigan?

You can apply for Michigan small business grants, but there’s no guarantee you’ll get approved for one. You may have to submit a grant application as a qualified small business owner to be considered for a small business grant in Michigan.

How hard is it to get a business loan in Michigan?

You may have difficulty getting a small business loan in Michigan if you have bad credit or insufficient business experience. You generally have to pay back business loans with interest.

What is the easiest SBA loan to get approved for?

There’s no guarantee you’ll get approved for any SBA loan, but SBA microloans may be one of the easier ones to get if you’re a new business owner. Startups may be eligible for SBA microloans of up to $50K. If you’re looking for a streamlined application process, SBA Express working capital loans are an option you may consider.

Photo credit: iStock/RgStudio

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.

SOSB0424045

Even though nonprofit organizations don’t earn profits or pay taxes, they still need to prepare financial statements. These documents help organizations meet their financial accountability and transparency requirements under state and federal law. They also help nonprofits understand their performance and make decisions based on that information.

While some nonprofit financial statements are similar to what for-profit businesses file, there are also some key differences. Here’s a look at five essential financial documents for nonprofits, what each statement is designed to show, plus an example of a nonprofit financial statement.

Nonprofit Financial Reporting and Tax-Exempt Status

The Internal Revenue Service (IRS) is responsible for determining the tax-exempt status of a nonprofit organization. To maintain your IRS 501(c)(3) status, you are required to submit four financial statements to the IRS each year: a balance sheet, income statement, statement of cash flows, and statement of functional expenses.

Many nonprofits will also share these financial statements with their donors, and use them in their annual reports. Financial statements give donors a better understanding of how your organization is doing. Foundations also typically require nonprofits to provide financial statements when they apply for grants.

5 Most Important Nonprofit Financial Documents

Here’s a look at five key financial statements for profits. Three of these reports are similar to for-profit business financial statements. One of the statements (the functional expenses statement) is entirely unique to nonprofits.

1. Nonprofit Statement of Financial Position

Similar to the balance sheet of a for-profit entity, the statement of financial position is the financial statement that gives the most insight about the overall financial health of a nonprofit.
With for-profit organizations, the balance sheet equation is: assets = liabilities + owner’s equity.

As a nonprofit organization, you do not have owner’s equity because you are not a publicly-traded company, so the equation is slightly different. It looks like this:

Assets = Liabilities + Net Assets

Here’s a closer look at each component of a nonprofit balance sheet.

Assets

A nonprofit’s assets are what the organization owns. It includes items like your cash assets, accounts receivable, property and equipment investments, long-term receivables, and prepaid expenses. It also includes intangible assets, such as copyrights, trademarks, or patents, that your nonprofit owns.

Assets are listed in order of liquidity, or their ability to be converted into cash. For example, cash is already a liquid asset, so it’s listed first in the assets section. Investments in property and equipment, on the other hand, would need to be sold to become liquid, making it challenging to use them for operating expenses.

Liabilities

This is where you’ll list the things your nonprofit owes, such as your accounts payable, grants payable (if you give grants to other organizations), debt, and other expenses.

While assets are organized by liquidity, liabilities are usually organized by due date. Short-term liabilities (owed within the year) are labeled as “current liabilities,” while obligations that can be paid over multiple years are considered “long-term liabilities.”

Net Assets

A nonprofit’s net assets are its assets minus its liabilities, or, in other words, any assets left over after liabilities are taken out.

Total Assets – Total Liabilities = Net Assets

However, because some money received may have been given for a very specific purpose, net assets needs to be broken down into the following three categories:

1.   Without Donor Restrictions (funds that can be used for any purpose)

2.   With Donor Restrictions (funds that can only be used for a specific purpose)

3.   With Temporary Donor Restrictions (funds that are free to be used for other purposes so long as the original purpose was fulfilled or the time for it has come and gone)

Understanding a nonprofit’s net assets is pivotal to both short- and long-term planning. This is because it’s possible for a nonprofit to have plenty of money, yet still struggle month to month. For example, it may have run a very successful fundraising campaign, but if it pledged that money to one specific mission or purpose, then that money cannot be used for things like rent, salaries, or utilities, even if it is sorely needed.

What Does the Statement of Financial Position Tell You?

A nonprofit’s statement of financial position can tell you how well the organization is performing financially at a given moment in time. Generally, a healthy nonprofit will have assets that are greater than their liabilities, and their net assets will have a large surplus that can be used to achieve its future goals.

The statement of financial position also gives board members, donors, and foundations a clear view of your organization’s available cash and where you are as compared to past years.

Keep in mind, though, that this report is more accurate and helpful if your organization uses an accrual method of accounting, rather than the cash method. Accrual accounting allows nonprofits to record revenue when earned and expenses when incurred rather than when the money actually enters or leaves the account (which is how cash accounting works). As a result, it can provide a more accurate statement about when financial changes occurred, and a more accurate nonprofit balance sheet.

Recommended: How to Start a NGO

2. Income Statement (Statement of Activities)

For nonprofits, income statements are often referred to as statements of activities. Like a for-profit company’s income statement, a statement of activities shows all of the financial activity that has taken place in your organization and the financial result of your work.

In contrast to the balance sheet, which is a picture at a single point in time, nonprofit income statements show financial activity over a period of time (usually a quarter or year).

The basic equation is:
Revenues – Expenses = Change in Net Assets

Here’s a look at each component:

•  Revenues This includes all flows of cash into your organization, such as donations, grants, fundraising, earned revenue, and government funding. To comply with Generally Accepted Accounting Principles (GAAP), you must separate your revenue into at least two categories – restricted revenue and unrestricted revenue.

•  Expenses This section reports all cash that flows out of your organization, including the cost of programs, fundraising, and overhead.

•  Change in Net Assets This is your nonprofit’s “bottom line.” In the for-profit world, they call the difference between revenues and expenses net income (or profit). But a nonprofit calls the difference between revenue and expenses change in net assets. This is your surplus, or funds available to continue operations.

Recommended: Nonprofit vs. Foundations

3. Cash Flow Statement

A nonprofit’s cash flow statement provides information on how cash flows in and out of an organization on a regular basis. Typically pulled on a monthly basis, this report provides insight into the specific activities that are bringing funds into the organization, and how those funds are being spent.

Like a for-profit cash flow statement, a nonprofit cash flow statement is divided into:

•  Operating activities This includes revenues and expenses from operating your nonprofit (such as the cost to pay salaries and buy office supplies) and revenue from contributions.

•  Investing activities This includes things like interest earned on investments, the purchase of long-term investments, and payments on long-term investments (such as buildings, land, or equipment).

•  Financing activities This includes earnings and expenses from financial activities, such as interest earned from savings or interest or fees paid on loans.

The above breakdown allows you to see exactly where your nonprofit has extra cash, and where your organization may be spending too much cash.

4. Functional Expenses Statement

Unique to nonprofits, this statement shows how expenses are incurred for each functional area of the business. Functional areas of the organization often include programs, fundraising, and management. The expenses listed in this statement are broken down further into exact expenses, including salaries, events, and administrative costs.

One of the reasons nonprofits track expenses is to report on the percentage of its funds that go toward programs compared to funds spent on administration costs, such as employee salaries. Donors often want to see how expenses are being distributed. The IRS also asks for some of the information in this statement when you file your Form 990.

Recommended: Ohio Small Business Grants

5. Annual Report

An annual report is a document sent to your donor base letting them know how your organization has grown and changed over the past year. These reports are typically designed to highlight the organization’s major accomplishments, thank both donors and volunteers, as well as (hopefully) inspire other potential donors to contribute to your nonprofit’s success.

Nonprofit annual report often include:

•  Financial statements

•  Accomplishments

•  Impact stories

•  Mission statements

•  Donor spotlights (such as major donors and recurring donors)

Though nonprofits are not required to create an annual report, many organizations compile and release one every year, as it can be an invaluable fundraising tool.

Recommended: Net Present Value: How to Calculate NPV

Example of Financial Position Document

Here’s an example of a fictional nonprofit organization’s financial statement (a.k.a. nonprofit balance sheet).

Recommended: Small Business Grant Proposal Guide

The Takeaway

Nonprofit organizations are required to file financial statements with the IRS to follow compliance laws. However, that is not the only reason why you would want to compile these reports. Preparing detailed financial statements can give you important insights into your organization. It also provides transparency to donors and, in turn, opens up opportunities to solicit significant gifts. You’ll also need financial statements if your organization ever decides to take out a loan from a bank or online lender.

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

FAQ

Are nonprofit financial statements available to the public?

All nonprofits with gross receipts above $50,000 are required to file an IRS Form 990. This form includes a nonprofit’s figures for revenue, expenses, assets, and liabilities, as well as the salaries of the directors, officers, and executives of the corporation. An organization’s 990 form is publicly available and may be found on their website or on a nonprofit database such as GuideStar.

What is a nonprofit income statement called?

A nonprofit’s version of an income statement is called a statement of activities.

How do you prepare a nonprofit balance sheet?

For a nonprofit balance sheet, you use the equation: Assets = Liabilities + Net Assets (instead of Owner’s Equity).

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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.

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