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As a small business, you have two options for preparing an income statement — a single-step income statement and a multi-step income statement. Both types of income statements will show the profits, expenses, and revenues of your business for a given reporting period. However, a multi-step income statement offers a more in-depth analysis of your business’s financial performance.

For many small businesses, the single-step income statement provides all the detail they need to assess the financial health of their companies. However, a multi-step income statement can be worth the extra time and effort it takes to prepare, especially if you’re thinking about applying for a loan or looking to attract an investor.

Here’s a closer look at multi-step income statements vs. single-step income statements, including what each one includes, their pros and cons, examples, and why you might choose one over the other.

Multi-Step vs Single-Step Income Statements

Whether it’s multi-step or single step, an income statement is a key financial statement that shows how profitable your business was over a given reporting period. Both types of income statements show your revenue, minus your expenses and losses.

However, that’s where the similarity ends. A single-step income statement uses a single equation (total revenues minus total expenses and losses) to arrive at net income. A multi-step income statement, on the other hand, follows a three-step process to calculate net income and separates operational from non-operational revenues and expenses. It also calculates gross income, which you won’t find on a single-step income statement.

Recommended: Business Cash Management: Tips for Managing Cash

Multi-Step Income Statements in Depth

The multi-step income statement uses multiple equations to determine the net income (profit) of the company and offers more details about the gains or losses of a business in a specific reporting period. Unlike a single-step income statement, it separates total revenue and expenses into operating and non-operating headings. It also calculates gross profit and operating income, which aren’t included on a single-step income statement.

While the multi-step income statement takes more time and effort to prepare, it can help provide a detailed analysis of your company’s financial performance.

How Do They Work?

Multi-step income statements are so named because they use multiple equations (or steps) to calculate net income. Along the way, they calculate gross profit and operating income.

There are three calculations involved:

To calculate gross profit:

Gross Profit = Net Sales – Cost of Goods Sold

To calculate operating income:

Operating Income = Gross Profit – Operating Expense

To calculate net income:

Net Income = Operating Income + Non-Operating Items

What Do They Include?

The multi-step income statement format separates a company’s operating revenue and operating expenses from its non-operating revenue and non-operating expenses. These statements include:

•   Net sales

•   Gross profit

•   Operating expenses

•   Operating income

•   Non-operating income and expenses

•   Net income

What Do They Indicate?

Multi-step income statements indicate how a company’s primary business activities generate revenue and affect costs compared to the performance of non-core business activities. These statements also tell you whether the company reported a profit or loss for the reporting period.

Multi-Step Income Statement Pros and Cons

Which Businesses Use Multi-Step Income Statements

Large businesses with multiple sources of revenue and many (and varied) expenses typically use a multi-income income statement. The reason is that this type of statement differentiates incomes and expenses from primary business activities with those from non-essential activities.

However, any business (large or small) that is looking to bring in a new investor or get approved for a business loan can also benefit from issuing a multi-step income statement, since it provides greater financial detail about the business.

Generally Accepted Accounting Principles (GAAP) gives public companies the option of issuing a multi-step or single-step income statement, depending on how they are structured.

Preparing Multi-Step Income Statements

To prepare a multi-step income statement, you need to select your reporting period (you might prepare these statements monthly, quarterly, or annually) and then follow these basic steps.

1.    Add operating expenses. This includes the cost of goods sold, as well as other costs (such as advertising and administrative expenses).

2.    Calculate gross profit. To do this, you subtract the cost of goods sold from the net sales.

3.    Calculate operating income. You do this by subtracting operating expenses from gross profit.

4.    Add non-operating revenues and expenses. This includes revenues and expenses from non-operating activities, including interest and the sale or purchase of investments.

5.    Calculate net income. To do this, you add together your operating income and your non-operating items.

Recommended: What Are Accounts Payable?

Multi-Step Income Statement Example

Here’s an example of a multi-step income statement for fictional company ABC.

Single-Step Income Statements in Depth

Like a multi-step income statement, a single-step income statement reports the revenue, expenses, and profit (or loss) of a business during a specific period. However, it doesn’t provide the level of detail you get with a multi-step income statement.

The single-step income statement calculates the business’s net income by subtracting losses and expenses from gains and revenue. It includes all expenses (including the cost of goods sold) in one column, rather than breaking them into subcategories like operating and non-operating expenses.

While this statement doesn’t provide as much detail about a business’s financial performance, it’s easy to understand, relatively simple to prepare, and may be all you need if you’re simply looking to assess a company’s profits, or net income.

Recommended: Sole Proprietorship vs LLC: How to Choose

How Do They Work?

A single-step income statement presents information in a simplified format. It uses a single subtotal for all revenue line items and a single subtotal for all expense line items, with a net profit or loss appearing at the bottom of the report.

The single-step income statement relies on one equation:

Net Income = (Gains + Revenue) – (Losses + expenses)

Unlike a multi-step income statement, the company’s gross profit is not shown as a subtotal. In order to determine a company’s gross profit, someone reading the income statement will need to subtract the cost of sales from net sales.

What Do They Include?

Single-step income statements include:

•   All expenses

•   All losses

•   All revenues

•   All gains

•   Net Income

What Do They Indicate?

A single-step income statement tells you a company’s revenue and expenses for a reporting period and provides the firm’s “bottom line” — net income. In a simple, easy-to-read format, this type of income statement indicates whether the company is reporting a profit or a loss for the reporting period.

Single-Step Income Statement Pros and Cons

Which Businesses Use Single-Step Income Statements

Single-step income statements are often used by companies that have a simple business structure, such as partnerships or sole proprietors.

In general, a single-step income statement can be a good choice if your business doesn’t have complex operations and/or the need to separate operating expenses from the cost of sales. If all you need is a simple statement that reports the net income of your business, the single-step income statement may be sufficient.

Preparing Single-Step Income Statements

To prepare a single-step income statement, you need to select your reporting period (you might prepare these statements monthly, quarterly, or annually) and then follow these basic steps.

1.    Add revenues and gains. This is all the income or money received by the business throughout the period. It includes income from the sales of products and services, as well any money received from non-primary activities, such as the sale of equipment or interest received.

2.    Add expenses and losses. This includes the cost of goods sold (such as material cost, direct labor cost, and direct factory overheads), operating expenses (indirect costs associated with doing business, such as utilities, office supplies, and legal fees), non-operating expenses, and any losses.

3.    Calculate net income. Once you have numbers for total revenues and total expenses, you subtract the expenses from the revenues to come up with net income for the reporting period. This number may be positive, negative, or zero (meaning total revenue is equal to total expenses).

Recommended: Financial Projections Explained

Single-Step Income Statement Example

Here’s an example of a single-step income statement from fictional company XYZ.

The Takeaway

Both single-step and multi-step income statements provide a summary of a company’s revenues, expenses, and profits/losses over a given period of time. If you own a small business with a simple operating structure, you can choose whether you want to prepare a single-step or multi-step income statement.

Single-step income statements are easier to prepare and may provide all the details you’ll need to assess the financial health of your company. However, if your small business is seeking a business loan or looking to attract a new investor, you may want to issue a multi-step income statement, since it provides more insight into your company’s financial performance.

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

FAQ

How are single-step and multi-step income statements different?

A single step income statement uses a single calculation and only shows net income. A multi-step income statement, by contrast, uses several calculations and shows the gross profit and operating income of the business along with net income.

What are the major sections of a multi-step income statement

The major sections of a multi-step income statement include:

•   Operating expenses

•   Operating income

•   Non-operating income and expenses

•   Net income

Photo credit: iStock/visualspace

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

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

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There are approximately 5 million Hispanic- and Latine-owned owned businesses in the U.S. And those businesses are booming, according to a recent survey of 1,000 Hispanic and Latine business owners in the U.S. In fact, more than two-thirds of survey respondents report that their companies are doing the same or even better than they did before the pandemic.

Some business owners were able to turn the challenging lockdown period into an opportunity: One-third of respondents cited Covid-19 as the motivation for launching their companies.

Even as Hispanic- and Latine-owned businesses thrive, however, respondents report that some roadblocks remain. For instance, half of the Hispanic business owners surveyed say they face prejudice from their customers and from other business owners. Some 40% need a second job in order to make ends meet. Yet despite the obstacles, Hispanic business owners say they would encourage their peers to pursue their entrepreneurial dreams.

How do Hispanic- and Latine-owned businesses flourish even in tough times? Read on to learn the success strategies survey respondents shared with us.

Source: Based on a survey conducted on August 2, 2023, of 1,000 Hispanic and Latine business owners in the U.S. ages 18 and older.

Percentages have been rounded to the nearest whole number, so some data may not add up to 100%.

Who Is the Boss?

Of the Hispanic and Latine business owners who participated in our survey:

•   60% are female and 40% are male

•   62% founded or started their business

•   56% are sole proprietors, while 44% have at least one partner

Peak Performance

Despite difficulties posed by the pandemic, Latine- and Hispanic-owned businesses are thriving. Seventy-two percent of survey respondents say their business is doing the same or even better than it did before Covid.

Type of Businesses They Own

•   Retail: 22%

•   Service:17%

•   Other: 12%

•   Manufacturing: 11%

•   Restaurant/food service: 7%

•   Subscription business: 6%

•   Affiliate (earn commission when a member of their audience buys a product or service they recommend): 6%

•   Franchise/franchisee: 5%

•   Product as service: (a laundromat, for example): 4%

•   Distribution: 4%

•   Leasing/renting: (such as construction equipment leasing): 3%

•   Brokerage: (connecting buyers and sellers): 3%

Seizing the Opportunity

While some companies shuttered during Covid, a significant number of Hispanic- and Latine-owned businesses launched during that time. In fact, one-third of the Hispanic and Latine business owners surveyed started a business during or after the pandemic.

For some of the one-third of respondents who chose this answer it was a necessity: 30% took the plunge because they could no longer pay their bills and needed a source of income. But for just as many, pursuing a dream was the driving factor. Thirty percent said they launched their companies because they “realized life is short and decided to pursue a passion.”

Of Hispanic and Latine business owners with household incomes above $125,000, 36% said the pandemic gave them additional resources to work with, such as stimulus checks and more time to devote to their startups.

Pain Points

Hispanic- and Latine-owned businesses do face some challenges, however, including:

Inflation Is a Major Concern

The high cost of supplies due to inflation poses the biggest threat to the growth of their business, 54% of respondents say. This was almost double the second greatest obstacle — difficulty hiring qualified employees.

Factors Affecting Business Growth

•   High cost of supplies due to inflation: 54%

•   Difficulty hiring qualified employees: 28%

•   Banks’ reluctance to approve loans: 26%

•   Decline in brick-and-mortar business in favor of the internet: 25%

•   Supply chain issues: 25%

Good Funding Is Hard to Find

Securing the capital to start a business is often difficult for Hispanic and Latine business owners, according to a recent report from the Stanford Graduate School of Business. Almost half (49%) of the Lantern survey respondents said they used their personal savings to help start or acquire their businesses. And 29% used family savings to help get their business off the ground.

Household income determines how Latine- and Hispanic-owned businesses are funded, our survey found. Respondents with household incomes less than $50,000 were much more likely to use personal savings than those whose household incomes were more than $125,000. Some of the higher earners secured home-equity loans or small business loans. Those with lower household incomes did not and instead resorted to personal credit cards and personal assets other than savings.

Where the Startup Money Came From

Those with household incomes under $50,000 used:

•   Personal savings: 56%

•   Family savings: 25%

•   Personal credit cards:11%

•   Personal assets other than savings: 8%

Those with household incomes over $125,000 used:

•   Personal savings: 36%

•   Family savings: 31%

•   Home equity loan: 20%

•   Business loan from a financial institution: 13%

•   Business credit cards: 12%

If you’re thinking about opening a business and looking for startup money, there are small business grants available. Explore the options to find out if you qualify.

They Need Another Job to Make Ends Meet

For a significant number of survey respondents, owning a business doesn’t generate enough income — almost 40% have a second job. That includes 44% of Hispanic and Latine business owners who are 24 and younger.

Prejudice Is Still Prevalent

Half of Hispanic and Latine business owners say they’ve experienced prejudice from customers, business acquaintances, or vendors because of their heritage. Of those, 39% experience it at least quarterly.

Those most likely to face prejudice are younger and work in the food business:

•   67% of business owners 24 and under have experienced prejudice

•   62% of restaurant/food service business owners say they’ve faced prejudice

The Trickiest Part of Being the Boss

Work/life balance is the toughest part of owning a company, according to 34% of Hispanic and Latine business owners. Women were the most likely to struggle with this — 60% of respondents who chose this answer were women. Other issues Hispanic and Latine business owners wrestle with:

•   Becoming and staying profitable: 32%

•   Scaling their business for growth: 27%

•   Managing cash flow: 25%

•   Assessing and taking risks: 24%

Recommended: Starting a Small Business

The Family Business

Many Hispanic and Latine business owners keep it all in the family by employing relatives, especially siblings — 41% said they brought a brother or sister onboard. And of the 44% of respondents who own their business with at least one other person, 31% co-own with a sibling.

Other family members they’re most likely to employ:

•   Cousin: 27%

•   Parent: 23%

•   Aunt/uncle: 15%

•   Grandparent: 13%

Social Media Makes a Difference

Promoting their business was the most challenging aspect of starting it, survey respondents report. So how do they get the word out? Most Hispanic and Latine business owners (57%) say they use social media to publicize their business. Thirty-seven percent have a website, and 31% rely on listings on online marketplaces to help draw customers in.

Paying It Forward

Supporting their community, culture, and heritage is a priority for Hispanic and Latine business owners. As a bonus, doing good work often allows them to promote their companies at the same time.

How they give back:

•   34% encourage other businesses to work with Hispanic and Latine businesses and communities

•   33% try to educate their customers and the public about Hispanic and Latine heritage

•   33% sponsor or participate in Hispanic and Latine community events or groups

•   29% contribute to Hispanic and Latine programs or causes

•   22% seek out other Hispanic- and Latine-owned businesses to work with

Their Best Business Advice

Despite the challenges they may face as business owners, survey respondents encourage others to pursue entrepreneurship. These are the words of wisdom they would pass along to those hoping to start Hispanic- and Latine-owned businesses.

Rise above prejudice and racism:

“Don’t be afraid and don’t let racism discourage you.”
“If you can, go for it. You will face racism, but don’t let that deter you from chasing your dreams.”

Be proud of your heritage and promote it:

“Admire your heritage, no matter what people say. Be proud of what you do and who you are.”
“Embrace your cultural heritage and leverage it as a unique selling point in your business.”
“Do what you love and express your culture.”

Recommended: Grants for Minority Owned Businesses

The Takeaway

Despite some challenges, many Hispanic- and Latine-owned businesses are flourishing post-pandemic. Most are doing the same or even better than they did before Covid-19, according to our survey. Hispanic and Latine business owners take great pride in their heritage, and they use their businesses to give back to their communities and raise awareness of their culture.

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.

Photo credit: iStock/FG Trade Latin

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.

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

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While both insolvency and bankruptcy describe a situation where a person or company is unable to pay their debts, bankruptcy is a legal declaration – it’s what can happen if insolvency doesn’t get resolved.

Keep reading for a closer look at bankruptcy vs insolvency, how each situation can happen to a person or small business, and the pros and cons of formally filing for bankruptcy.

What Is Bankruptcy?

Bankruptcy is a legal lifeline that an individual or company can use when they are unable to pay their debts. Debtor’s file for bankruptcy through the federal court system, and in return they receive aid in discharging their debts or making a plan to repay them. Individuals, couples, corporations, and small businesses can file for bankruptcy.

Bankruptcy is designed to give individuals and businesses who are unable to pay their debts a fresh start, while also giving creditors a chance to recoup at least some of what they are owed when a debtor’s assets are liquidated.

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

Recommended: Free Credit Score Monitoring

How Does Bankruptcy Work?

Before a debtor can file for bankruptcy, there are a few requirements they need to meet. First, they need to demonstrate that they can’t repay their debts, as the courts can choose to toss out bankruptcy cases when they believe an individual has enough assets to cover their debts. They also need to get credit counseling with a government-approved credit counselor, who can help them assess their assets and determine if there are better alternatives to bankruptcy.

If, after receiving counseling, the debtor moves forward with their bankruptcy case, they’ll need to decide what type of bankruptcy to file.

Bankruptcy provides an automatic stay of collections and immediate relief from creditors who must stop collections proceedings while your case is active. The courts will look at the debtor’s assets and decide how much they can reasonably pay and which debts they don’t have to pay.

Types of Bankruptcy

The three main types of bankruptcy for individuals and businesses are Chapter 7, Chapter 11, and Chapter 13.

Chapter 7 Bankruptcy

Also known as “straight bankruptcy” or “liquidation bankruptcy,” Chapter 7 bankruptcy is the most common type of bankruptcy. It entails the selling or “liquidating” of an individual or business’s assets to distribute to creditors. Certain assets are exempt from this sale, however, such as cars needed for transportation, basic household furnishings, and the tools needed for work.

Once the assets are liquidated and the debtor has given what money they can to their creditors, the rest of their debt is discharged. However, there are a few exceptions — an individual is still on the hook for child support, court-ordered alimony, taxes, and student loans.

A Chapter 7 bankruptcy will stay on the debtor’s credit report for 10 years after the filing date. And if that person/business gets in over their head again, they won’t be able to file for this chapter for another eight years.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is designed to help struggling businesses restructure their finances so they can remain open. With this type of bankruptcy, a debtor is able to remain in control of their business and renegotiate the terms of their debts with creditors, such as modifying interest, payment due dates, and other terms. It can sometimes even erase debt entirely.

Chapter 11 bankruptcy allows a business to stay intact and come out the other side as a healthy business. However, it can be the most complex of all the bankruptcy chapters. It also tends to be the most expensive type of bankruptcy proceeding.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy may be an option for individuals or business owners who have a regular income stream. It allows the debtor to keep their property and develop a new payment plan to pay back either part or all of their outstanding debts over three to five years. A Chapter 13 bankruptcy stays on an individual’s or business’s credit report for seven years, and those who find themselves swamped by debt yet again can file for this chapter after just two years.

Recommended: What to Know About Short-Term Business Loans

What Is Insolvency?

Insolvency is when an individual or business is unable to pay outstanding debts to creditors or banks due to lack of funds. A person or company can be insolvent without going bankrupt. However, if they are bankrupt, they are, by definition, insolvent.

Insolvent individuals and businesses have options to help them pay back their debt. They could borrow money, increase income, or negotiate repayment with creditors. If these options fail, bankruptcy may be the only remaining possibility.

Recommended: Types of Business Loans

How Does Insolvency Work?

There are two different types of insolvency: Cash flow insolvency and balance sheet insolvency. Cash flow insolvency, or illiquidity, occurs when an individual doesn’t have the money to pay off their debts. Balance sheet insolvency occurs when total debts exceed the value of total assets.

A business could be cash flow insolvent while being balance sheet solvent if they have assets they could sell that are worth more than their debt. The reverse is also possible: A business can be balance sheet insolvent (debts exceed assets), but cash flow solvent if it’s able to meet its immediate financial obligations. In fact, many businesses operate this way.

When an insolvent individual or business is unable to meet their debt obligations, creditors will begin efforts to collect their due. At this point, insolvency can become a real problem.

For example, if an individual holds secured debt, such as a mortgage, the lender may start foreclosure proceedings on their home. If these go through, the individuals will lose their home, and the bank will sell it to help recoup the debt. For unsecured debt, such as credit cards or personal loans, lenders may send the debt to a collections agency, which may then hound the individual in an effort to get them to pay.

Insolvency vs Bankruptcy

Insolvency and bankruptcy are not the same thing, but they are very much related. Here’s a quick look at the similarities and differences between the two terms.

Similarities

The main characteristic that insolvency and bankruptcy share is the inability to pay off debts. This may mean that an individual or business does not have the cash to pay them off or enough assets to liquidate to cover the debt.

Bankruptcy can damage a person’s or business’s credit score for up to 10 years, making it more difficult for a filer to acquire credit in the medium-term. Insolvency can also damage a debtor’s credit if they are unable to pay their bills on time (though not nearly as much as bankruptcy). A delinquent payment will remain on a person’s or business’s credit report for seven years. While bankruptcy is much more damaging, both insolvency and bankruptcy can hurt your chances of approval when applying for a small business loan.

Differences

The main difference between insolvency and bankruptcy is that insolvency is a state of being, whereas bankruptcy is a legal designation. Someone who is insolvent has not necessarily filed for bankruptcy, as there may be other tactics they can use to pay down their debt. Insolvency can often be reversed by negotiating with creditors or with an infusion of cash, such as an inheritance, bonus at work, or large business payment.

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

Here’s a look at bankruptcy vs insolvency at a glance:

Pros and Cons of Filing for Bankruptcy

Bankruptcy can be a solution to insolvency, but it comes with a number of downsides. Here’s a look at the pros and cons.

Recommended: What Is a Small Business Audit?

Pros of Filing for Bankruptcy

•   Stay of collections and repossessions: When you file for bankruptcy, there is an automatic stay of collections. Creditors must hit the pause button on collecting debt, repossessing property, garnishing wages, filing lawsuits, and making phone calls.

•   Debt relief: Your creditors will likely be forced to accept whatever payment is determined in your bankruptcy case, including no payment. You may be able to discharge most of your unsecured debt, including credit cards, personal loans, and medical bills.

•   A chance to start over: Once bankruptcy proceedings are over, an individual or business can begin to rebuild their finances and reestablish good credit.

Cons of Filing Bankruptcy

•   Your credit score will take a hit: A Chapter 7 bankruptcy will remain on your credit report for 10 years, while a Chapter 13 bankruptcy stays on your report for seven years. During that time, it will likely be much harder to secure new lines of credit, as lenders may see the bankruptcy filing as a red flag.

•   Some debts may remain: While you may be able to discharge most unsecured debt, other debt can’t be wiped out. You must still pay child support and alimony, tax liens, and student loans.

•   You could lose assets of value: Depending on which type of bankruptcy you qualify for, your income, and how much equity you have in your assets, you could lose personal or business items of value that must be sold off to pay creditors.

Here’s a look at the pros and cons of filing for Chapter 7 bankruptcy at a glance:

Recommended: Debt Convenants Explained

The Takeaway

Though people may say they are “bankrupt” when they are too broke to pay off their debts and obligations, it’s not actually the correct word. The right term is insolvent. In order to be bankrupt, the person must first file a petition with the court declaring their bankruptcy.

Insolvency that can’t be solved results in bankruptcy. And, while filing for bankruptcy comes with a host of cons, it also provides a chance to make a fresh start, rebuild your credit, and once again have an opportunity to take out loans and lines of credit for yourself or your business.

Options for getting out of debt include budgeting and saving so you can more easily tackle your debts, filing for bankruptcy, or taking out a small business loan to consolidate your debts and possibly pay them off faster.

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

FAQ

What do you lose if you have to declare bankruptcy?

When you declare bankruptcy, you may have to sell certain assets to help settle debts with creditors. And, the bankruptcy will be a negative mark on your credit report for seven years when filing Chapter 13 bankruptcy or 10 years when filing Chapter 7 bankruptcy.

How much debt do you need to be in to file for bankruptcy?

Federal bankruptcy law doesn’t specify any minimum debt amount to file a bankruptcy case. However, you must prove that the value of your assets is less than the amount of debt you owe.

What does financially insolvent mean?

Individuals who are financially insolvent either do not have the cash flow to cover their debts or the total value of their assets is less than their total debt. Insolvency does not automatically mean someone is bankrupt.

Photo credit: iStock/golubovy

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.

SOSB0424049

If you’re seeking funding for your small business, you may have heard about bridge lending. A business bridge loan, also known as a commercial bridge loan, can offer cash flow in the short-term if you have costs to cover before other financing comes through. In other words, commercial bridge loans can save a business in a pinch, especially when it comes to purchasing real estate.

Keep reading to learn more about what a commercial bridge loan is, how they’re typically used, their pros and cons, and more.

What Is a Commercial Bridge Loan?

A commercial bridge loan is a type of short-term financing that effectively bridges the gap between the time of application and when another form of cash or funding will be available. That’s why bridge lending can also be called gap financing or interim financing.

Because of their purpose, bridge loans have short terms, typically up to one year. These loans are usually secured, meaning they’re backed by collateral of some type, such as inventory or real estate. Bridge loans also generally have higher interest rates compared to traditional loans.

Recommended: What Is Accounts Receivable Factoring?

How Do They Work?

Say that a business wants to buy a piece of property that’s located next to their building to expand parking spots. They won’t have the cash necessary to make the down payment on that property and pay the closing costs for another four or five months. They’re afraid that, if they wait that long to make an offer, someone else will snap up this prime piece of real estate. The solution could be a commercial bridge loan.

This business could take out a bridge loan by using the equity in their current building to fund the purchase of the new property. This type of loan can also combine the mortgage of both of these properties, at least in the short term, so the business only needs to manage one real estate loan.

Then, the business would likely refinance their properties in more traditional ways, looking for an affordable, long-term mortgage.

Just like with any other type of loan, different lenders will have different lending programs. When comparing commercial bridge loans, two aspects to consider include:

•   Speed of funding: Businesses typically seek these types of loans because they have an urgent funding need. Check a variety of lenders to find one that can meet your timeline.

•   Incentives to prepay: This is a short-term form of funding — in other words, a temporary loan. Ask lenders if you can receive a prepayment discount or otherwise save money by paying it off even earlier.

Also, ask each lender if they offer open or closed bridge loans. Open bridge loans don’t have hard and fast repayment dates, offering more flexibility. These may come with higher interest rates and make it more difficult to get approved, though. Closed loans, on the other hand, have a set payoff date and, in return, can be easier to obtain with lower interest rates.

How Are They Different From Traditional Loans?

People typically take out a bridge loan because they need fast access to cash for a short period of time. Traditional loans usually have a longer approval process and almost always have a longer term.

Sometimes, repayment of a bridge loan resembles that of traditional loans, with a monthly payment required. Other times, the borrower would make interest-only payments until the end of the loan term, and then make one final payment to pay the loan off. And in other cases, the interest owed is taken from the loan amount at the time of closing.

As mentioned above, bridge loans also tend to be more expensive than traditional loans. Not only do they usually have higher interest rates, but bridge loans also tend to have hefty origination fees.

Pros and Cons of Commercial Bridge Loans

Now, take a look at the benefits and downsides of these small business loans.

Pros

•   Businesses can get cash fast for immediate needs, typically real estate investing.

•   To facilitate the fast need for funds, the application, underwriting, and funding processes are typically streamlined.

•   Can be used to cover day-to-day expenses while a transaction is in progress.

Cons

•   Interest rates are higher than many other loan types.

•   This is a secured loan with property serving as collateral.

•   They often have high origination fees.

Recommended: Mezzanine Financing

Common Uses for Commercial Bridge Loans

Although commercial bridge lending is often used when purchasing real estate, there are other reasons that a business may look into a bridge loan.

Fix-and-Flip Project

A fix-and-flip project involves purchasing a property, fixing it up or renovating it, and selling it for a profit. This is typically done over the course of a few months. Because bridge loans are short-term financing options, they can be used to purchase and fund these types of projects. Once the home is resold, the money can be used to pay off the loan.

Delay in Customer Payment

If a business offers services to other businesses (meaning it’s a B2B company), they invoice their customers for payment. The company would then use the money paid on these invoices to cover payroll, rent, utilities, and other expenses. If customers don’t pay on time, they still need to pay their own bills — and so they could use this type of loan to bridge their cash flow issues.

Expanding Your Business

A small manufacturing firm, for example, may have an opportunity to expand their services but need to buy new equipment to do so. Perhaps they’ll go to an auction to get the best pricing, which means they’d need to have funds without knowing exactly what they’ll purchase. This would make it challenging to obtain conventional financing ahead of time. Bridge lending can offer a solution in this scenario.

Insurance Claims

When a business leverages bridge lending, they can use the money in ways they see fit. So, if there’s some sort of disaster (a fire, flood, or tornado, for example), then a business could use the funding to take care of immediate expenses while waiting for business insurance claims to be processed.

Buying Inventory

Sometimes, businesses use bridge lending services when they need to buy inventory to sell. For instance, they may need to restock their shelves after sales increased or get ready for the holiday season. The business could then pay off the loan through sales proceeds or by refinancing to another type of business loan.

Recommended: Business Loan Brokers

Where Can I Get a Commercial Bridge Loan?

You can get a commercial bridge loan through a bank, credit union, private lender, or online lender.

Banks and credit unions may offer lower rates than direct and online lenders, but it may take longer to get approved and the requirements may be more stringent. Direct lenders typically have less strict requirements. Also, they may offer interest-only payments for the first few years until the final payment is due.

Like with other types of small business loans, you’ll want to shop around to find the best rate and terms for your situation.

Recommended: Comparing Personal Loans vs. Business Loans

Alternatives to Commercial Bridge Loans

If a commercial bridge loan is not right for you, there are other options to secure small business financing, including:

•   Small business grants: Small business grants are lump sums awarded by federal, state, or local governments or by private corporations that do not need to be repaid.

•   Small business loan: Traditional small business loans can be short or long-term, be backed with collateral or have no collateral, and can come with competitive interest rates for those with good credit scores.

•   Business line of credit: A business line of credit gives a business access to funding where interest is charged on the outstanding balance, not on the amount that’s available to use. Businesses can use the funds as needed and repay them in a revolving manner, as long as they don’t exceed the approved limit for the line of credit.

•   SBA loans: SBA loans are guaranteed by the U.S. Small Business Administration (SBA) and offered by certain lenders. Loans are available up to $5 million to cover a wide range of business needs.

•   Invoice factoring: With invoice factoring, businesses can use their unpaid customer invoices as collateral. This helps B2B companies to manage their cash flow with the factoring company, which is then responsible for collecting the outstanding amount.

The Takeaway

Commercial bridge lending can provide businesses with a fast influx of cash on a short-term basis. Business owners can leverage this funding to buy real estate, expand operations, and manage cash flow. There can be cons, though, to bridge loans, such as higher interest rates and shorter repayment terms.

If this type of lending isn’t right for you, there are other types of small business funding to consider, including SBA loans, invoice factoring, and long-term small business loans.

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

FAQ

What is a commercial bridge loan?

A commercial bridge loan is used to secure funding while you wait for long-term funding to come through. It’s used to “bridge the gap” between the period of time it would normally take for a normal business loan to close. In most cases, commercial bridge loans are used when purchasing real estate.

What are the cons to a commercial bridge loan?

Cons to a commercial bridge loan include higher interest rates, additional and/or higher fees, and shorter repayment terms.

How is a commercial bridge loan different from a traditional loan?

A commercial bridge loan is a short-term form of funding that allows you to purchase a property while you wait to secure a traditional financing option. Traditional loans, on the other hand, typically have longer repayment periods and lower interest rates. These loans do not close as fast as bridge loans, though.

Photo credit: iStock/alvarez

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.

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

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Your restaurant is a neighborhood hotspot with constant lines out the door. Local foodie influencers are spreading the love on social media. And your staff is running the show like a well-oiled machine. Is it time to expand and start at your next location?

It could be. The only way to know is to do your homework. Restaurant expansion takes careful planning and consideration. If you’re just starting on your journey, this guide is for you. Read on to learn key signs that it may be time to expand, plus tips on how to grow your restaurant business.

1. Measuring the Profitability of Your Restaurant

Any restaurant expansion business plan begins with the numbers — those being profit margin. If you’re in it for the long haul, strength must precede growth.

The average profit margin for full-service restaurants tends to fall between 3 and 5%. Your restaurant’s profit margins should match or, ideally, exceed these numbers. If not, then you may want to reduce your restaurant’s operating expenses and increase revenue before you look into expanding.

To calculate your restaurant’s profit margins, first determine what you’re spending on cost of goods sold (COGS) and operating expenses (OPEX) each year. Next, you’ll need your yearly revenue.

Once you have determined all three, you are ready to calculate your restaurant’s profit margin.

The formula to determine profit margin is:
(Revenue- (COGS + OPEX)) / Revenue * 100 = Profit Margin

Or

Profit/ Revenue * 100= Profit Margin

Example: Safe Harbor, an imaginary seafood restaurant, makes about $400,000 a year. The owner spends around $380,000 on COGS and OPEX:

($400,000 – $380,000) / $400,000 * 100= 5% profit margin

At 5%, Safe Harbor’s profit margin is around the current national average for a full-service restaurant. If the restaurant is in a large enough area that can support another restaurant, the business owner may want to consider business expansion.

But numbers aren’t everything, you’ll also want to ask yourself some key questions:

•   Why do you want to open another location?

•   What has made your restaurant successful?

•   How much of your success is due to the actual location of the restaurant?

•   Who would run your new location?

•   Can the same success be transferred to another location?

Doing a formal SWOT (strengths, weaknesses, opportunities, and threats) analysis can also be helpful for any business considering expansion.

2. Funding Your Restaurant Expansion

If you consider your first location to be successful and another location is warranted, it’s time to move on to the next step — securing funding. Generally, it’s wise to consider the new location as a completely new venture, and not rely on your current location to fund the new one. That means you may want to explore business loans early in the process.

When applying for a business loan, make sure you understand any lender requirements (such as minimum amount of time in business or business credit score). Doing so will expedite the application process and improve your odds of getting approved.

There are a variety of business loans on the market that can help a restaurant expand. Here are some of the more popular options.

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

SBA Loans

Opening a restaurant can be a lot easier with a Small Business Administration (SBA) loan. These loans are backed by the government, which reduces risk to the lender and, as a result, come with some of the better rates and terms on the business lending market. The application process can be long and cumbersome, however. Restaurant owners looking for fast money may want to consider alternative loan options.

Term Loans

Term business loans are offered by banks, credit unions, and online lenders and can be short term (up to one year) or long term (up to 20 years). Long-term loans come with lower monthly payments, which could help a new business building its monthly cash flow. Short-term loans will have higher monthly payments but typically come with lower interest rates, which reduces the total cost of the loan.

Lines of Credit

A business line of credit can be a good option for occasional gaps in cash flow. Unlike loans, a line of credit allows you to borrow up to a certain limit and pay interest on only the portion of money you borrow — similar to the way a credit card works. You then repay the funds and can continue to draw on the line. Compared to a standard credit card, business lines of credit generally come with higher credit limits and lower interest rates.

Merchant Cash Advances

A merchant cash advance is a unique financing option in which a company gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee.

Merchant cash advances can be useful if you need capital immediately to cover cash-flow shortages. And, merchant cash advance companies may work with businesses with bad credit, startups, as well as those with previous financial difficulties. However, interest rates can be as high as 350%, depending on the lender, size of the advance, and how long it takes to repay.

Equipment Loans

Equipment loans can help you buy expensive restaurant equipment, and the item you purchase with funds typically serves as the collateral for the loan, which means you don’t have to put any other restaurant assets on the line. Rates will depend on the value of the equipment and the strength of your business.

3. Looking at What Makes Your Restaurant Successful

If you already have a successful location, chances are you already intrinsically know how to grow a restaurant business. Still, it can be a good idea to look at each of the categories below and consider what you’ve done well, and repeat what you can.

Interior Design

Does your restaurant have a unique design that attracts your customers? What vibe or energy did you purposefully create? If the furniture was unique and sourced from an unusual location, contact the business owner to see if you can order additional staple pieces.

Customer Experience

When are your customers visiting your restaurant? Is dinner your busiest time? Are you primarily getting blue or white-collar workers? Take whatever reason customers are choosing your restaurant over others and expand upon it at your next location to further enhance their dining experience.

Food

If you are opening the same concept in a nearby area, you might want to start off with the same menu as the first location. Over time, you can assess menu item popularity and adjust as necessary. If the potential customers, demographics, and food taste may be different at the new locale, however, you may want to take that into consideration when creating the new menu and pricing.

Branding

Branding is complex and multi-faceted, but if your original restaurant has a unique brand and a clearly defined demographic, that may be one of the secret ingredients to your success. If your next restaurant is a clone in a new location (and not an attempt to capture a new demographic with a different brand), then it’s paramount that your next location meets customer expectations by maintaining the same brand.

4. Finding a Location

The answer to how to grow a restaurant business often comes down to its location, but finding that sweet spot to get the maximum amount of business at a reasonable cost can be difficult.

Restaurants can grow by word of mouth, and so one strategy is to open your next location relatively close to the first one, so you’re not starting at ground zero. Many of your customers will have already eaten at your first location, so word should spread quickly and organically.

However, opening in an entirely new city can also have its benefits, especially if you have a target audience that is untapped in that area. Just keep in mind that it will likely require more marketing, as well as more time traveling between both locations to solve and address problems as they arise.

Recommended: Small Business Grants in NC

5. Writing a Business Plan

Even though you already have one successful restaurant, you will need to write a new business plan for your next restaurant. Some of the information will likely remain the same, such as human resource practices, accounting, and technology. However, there will likely be sections that will need to be tailored to the new location, including:

•   Analysis of nearby competition

•   Amount of foot traffic

•   Peak traveling hours

•   Types of customers you expect to get:

◦   Travelers

◦   Workers

◦   Families

◦   Tourists

◦   Locals

6. Applying for Licenses and Permits

Make sure you research zoning laws for your new location and apply early for any licenses or permits your new restaurant will need. If you’re moving to a new location, don’t assume the area will have the same laws and regulations. You’ll want to research state, county, and city regulations, as all of these can vary. Generally, visiting your state’s website can help you find out which permits and licenses you need.

7. Marketing Your New Restaurant

Even if you have a strong brand, don’t assume your new restaurant will do well from word of mouth alone. It’s important to create a marketing plan unique to each location that includes:

•   Social media strategy

•   Website updates

•   Email marketing

•   Soft opening event

•   Grand opening event

•   Media outreach

Recommended: Starting a Minority Woman-Owned Business

8. Hiring Staff and Managers

Since you can’t physically be in two restaurants at the same time, it’s important to hire managers you can trust to stay on top of day-to-day operations. You may want to hire a new manager for your existing location, to free you to manage the new location.

It’s also a good idea to hire new staff and managers a month or two before opening the new location. That way, you can train them at your existing restaurant with existing staff who already know the ropes. Hire only the best because you’ll need a culture of excellence to ensure your new location makes the best impression possible.

9. Purchasing Equipment, Supplies, and Food

If you plan for your new location to mirror your first, consider getting the same equipment so you can easily train your new staff before opening day. However, you may also want to take advantage of newer tools and technology that could increase efficiency in your new location.

Also review your financial statements related to supplies, and don’t forget to consider whether the new location is larger or smaller than the first.

Also, take this time to buy as much shelf-stable ingredients and liquor (if serving) as possible, so you’ll have less to do the closer you get to opening day.

Recommended: Lease or Purchase Equipment

10. Organizing an Outstanding Grand Opening

To prepare for the grand opening, it can be a good idea to have a soft opening with less than a full house. This gives your staff a practice run for the actual opening and gives you a chance to get some feedback before the restaurant officially opens. For the official big day, invite as many friends, customers, and local business owners (including friendly competition) as you can. Encourage them to leave a review online so that word gets out.

Pros and Cons of Expanding a Restaurant

Is Expanding the Right Choice for You?

Cash flow and profit margins from the first restaurant are the first things you need to pay attention to and analyze. If they are strong, that’s a good sign.

However, you may also want to consider speaking with a CPA before you move forward with any decisions.

Other strong indicators that expansion is the right choice include:

•   Your restaurant has repeat customers on a consistent basis

•   You routinely have a packed house during peak business hours

•   Customers ask if you’re considering expanding

•   There is a low restaurant per capita ratio for your area

•   Other non-franchise restaurants are able to support multiple locations

Recommended: Loans for Bars

The Takeaway

Restaurant expansion takes careful consideration. Figure out first if it’s the right time to expand and then learn how to grow your restaurant business.

FAQ

How can you promote your restaurant?

There are all kinds of ways to promote your restaurant business. They include creating a unique website, posting on social media, getting a Google business profile, and listing your site on common restaurant apps.

Is expanding your restaurant business always a good idea?

No. Expansion should only be considered if the original restaurant’s profit margin is consistently strong and the new location can support another restaurant.

Is expanding a restaurant the only way to increase revenue?

If your restaurant is consistently maxed out, then some form of expansion is likely necessary. However, revenue is not the same thing as profit. You may be able to increase your restaurant’s profits by decreasing overhead costs and optimizing your menu.

Photo credit: iStock/SouthWorks

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

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

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

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