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A budgeted income statement is a tool that allows businesses to estimate how well they will perform financially in the coming months and year. It looks like a regular income statement except that it estimates the expected revenue, net income, and expenses for an upcoming period instead of analyzing past performance.

A budgeted income statement can help you assess whether your future financial plans are realistic or you need to make some budget adjustments. It also allows you to anticipate (and plan for) any expected adverse changes in the market and determine whether or not you need financing.

Read on to learn more about budgeted income statements, including how to prepare one and how they can help you grow your small business.

What Are Budgeted Income Statements?

By definition, a budgeted income statement (or simply a budget income statement) is a tool to help businesses estimate future expenses, revenues, and profit for a given period. Companies that make use of budget income statements usually create them at the beginning of the fiscal year to help create a realistic budget for all four quarters. Some companies may separate this financial report into smaller monthly sections for a more detailed assessment of what the coming year may look like.

If you have plans to grow your business — say, by investing in new equipment, hiring more employees, or expanding your products or services — a budgeted income statement can help you determine if your plan is feasible. By preparing a budgeted income statement, you’ll be able to estimate your revenue and expenses, anticipate problems, and make decisions accordingly.

Before you can create a budgeted income statement, you’ll need to have created all the other operating budgets, such as the direct materials, direct labor, manufacturing overhead, and administrative expense budget.

Recommended: Guide to Merchant Bank Accounts

What Is Included in a Budgeted Income Statement?

A budgeted income statement is essentially created by subtracting the projected cost of goods sold (COGS) and other expenses from the projected net sales. It generally includes every section included in a normal income statement:

•   Sales

•   COGS

•   Gross profit (sales – COGS)

•   Operating expenses

•   Operating income (gross profit – operating income)

•   Interest expenses

•   Estimated income taxes

•   Net income

Budgeted Income Statement Example

Below is a budgeted income statement example for fictional company ABC. All numbers are based on forecasts (as well as data from previous years) and the statement represents the estimated profits and losses for the first month in the upcoming fiscal year.

Company ABC

Budgeted Income Statement

For Month Ending June 1

Based on this budgeted income statement, Company ABC estimates they will earn a net income of $9,480. This helps justify their spending and expenses because of the positive net income generated for the company.

Recommended: Insolvency vs. Bankruptcy Explained

Why Budgeted Income Statements Are Important

Budget income statements are important because they assess if a company’s financial plans look to be feasible. This can lead to a variety of benefits, including:

Risk Management

All growth involves an element of risk. A budgeted income statement helps you limit that risk by determining whether your company has the financial resources it needs to accomplish upcoming projects and plans for growth. It can help you avoid making bad business decisions and/or spending more than you can afford.

This type of statement also forces you to consider any potential pitfalls or added expenses that may come your way and plan for them so they don’t put your company at risk.

Justifying Purchases

“You have to spend money to make money” is the old adage that the budget income statement often verifies. Business owners can use a budgeted income statement to show that if the company is willing to spend X, it could potentially earn Y. This can be useful if you are looking for an outside investment or a small business loan to fund a project that might be viewed as risky.

Inform and Attract New Investors

A well-thought-out budgeted income statement can show any potential investors what your company’s expenses and profits will likely be in the coming months and year. When it’s clear business owners not only have a vision for their company’s future, but also a detailed action plan that outlines every expense and projected revenue, it can give would-be investors more confidence in the company and its mission.

Setting Targets

The projections from a budgeted income statement provides spending and earning targets that people in the company can work together to achieve. If the budgeted income statement sets a lower-than-usual budget for administrative expenses, for example, employees can then look for ways to reduce spending in order to meet the target and, in turn, increase revenue.

Tracking Performance

A budgeted income statement is also valuable to have at the end of the year because it allows you to compare profit and loss projections with actual numbers. Whether the company exceeds expectations or falls short, it provides an opportunity to ask why. For either scenario, the answers can be illuminating and affect the company’s next steps.

Recommended: Balloon Payments

Preparing a Budgeted Income Statement

Preparing a budgeted income statement is similar to a regular income statement. The only difference is that the amounts are based on projections rather than past performance.

The steps to prepare a budget income statement are:

1.    Determine projected net sales. This is the total amount of revenue you expect to bring in from sales (minus any expected returns, discounts, or allowances). You estimate net sales by multiplying the expected number of units sold by price per unit.

2.    Estimate the COGS and subtract it from the projected net sales. The COGS includes the direct costs of producing the goods or services that your company sells, such as materials, labor, and overhead costs. You then multiply the expected number of units sold by the cost of production. When you subtract COGS from projected net sales, you get estimated gross margin.

3.    Estimate selling and administrative expenses and subtract them from the gross margin. Selling and administrative expenses can include advertising, rent, salaries, and other general and administrative expenses.

4.    Estimate interest payments and taxes and subtract them from the remaining number. By calculating interest payments and other deductions, you can get an estimated net income for the projected period.

Recommended: Do Businesses Get Tax Refunds?

Limitations of Budgeted Income Statements

While there are numerous benefits to preparing a budgeted income statement, this type of financial statement also has some limitations.

For one, a budgeted income statement is based on estimates and assumptions. While these assumptions are based on historical sales data and expected market conditions, actual sales and market conditions could turn out to be different than anticipated. In other words, these numbers are not set in stone.

Another downside to budgeted income statements is that they take a fair amount of time and effort, as well as business expertise, to prepare.

These statements are also somewhat inflexible. Because they are based on information from several other budgets, making any change to a budgeted income statement requires making a corresponding change in the supporting budgets.

Recommended: Understanding Short-Term Business Loans

The Takeaway

A budgeted income statement can help businesses maximize profits and decrease expenses by forecasting how much they are likely to make and spend. It can be used as a tool for growth and strategic planning to ensure your company has the financial resources needed to have a successful year.

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 included in a budgeted income statement?

A budget income statement often includes estimates for sales, cost of goods sold (COGS), gross profit, operating income and expenses, interest expenses, income taxes, and net income.

Should all businesses use budgeted income statements?

Preparing a budgeted income statement can be a smart move for any business because it helps to justify expenses and verify that plans for future growth are financially feasible.

How do budgeted income statements help investors?

Budgeted income statements help investors by providing a company’s projected revenues and expenses for the coming months or year. It also allows investors to see how the company’s expected performance compares to previous years.

Photo credit: iStock/fizkes

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

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

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

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Vendor financing occurs when a company procures goods or services from a vendor without making immediate payment. Instead, the vendor agrees to extend that company debt or equity financing, or to make a trade swap.

Vendor financing can be a good solution if a small business is having temporary cash flow issues and doesn’t want to apply for third-party financing, or would have trouble qualifying for a traditional business loan.

Whether this is a good idea for your business depends on the terms of the vendor financing agreement. Read on for a closer look at how vendor financing works, its pros and cons, plus alternative funding options to consider when cash flow is tight.

What Is Vendor Financing?

Vendor financing, also sometimes referred to as trade credit, is when one company loans another company the money it needs to purchase its goods or services.

How the borrowing company will repay the loan to the vendor will depend on the agreement, but vendor financing typically takes one of three forms. The vendor gives you the goods/services in exchange for:

•  A promise of repayment (typically with interest)

•  Equity in your company

•  Goods or services you provide to them

Depending on the arrangement, the vendor financing may not cover the full purchase. In that case, you may need to make a down payment.

How Vendor Financing Works

While vendor financing allows borrowing companies to avoid applying for a small business loan with a traditional financing institution, there still needs to be some sort of loan agreement between both parties if debt is being created.

With debt financing, it can be a good idea to establish the following details before you sign off on the deal.
Loan term: When is payment expected in full?

•  Down payment: Does the borrowing company need to put down a minimum payment to receive the goods or services?

•  Interest: Will there be a financing fee and what will the rate be?

•  Collateral: Are the purchased goods to be used as collateral?

•  Payment: Is the borrowing company expected to make regular monthly payments or one balloon payment?

•  Fees:

•   Are there to be any additional fees for the loan? What happens if a payment is missed?

If equity financing or a service swap is used instead of debt financing, then an alternative agreement would need to be drawn up.

Recommended: Guide to Depository Institutions

Vendor Financing Example

Here’s an example of vendor financing: A small flooring company needs to purchase $20,000 worth of materials to complete the floors of a new school. Normally, it would be able to make the purchase without any issues, but four of its past ten clients have yet to pay their invoices, which means the company is currently having temporary liquidity issues.

Because the flooring company has been working with its supplier for a number of years, the supplier is willing to provide the $20,000 worth of flooring materials if the borrowing company agrees to pay back the full amount within 6 months with 10% interest. They need to make an initial deposit of $2,000, followed by monthly installment payments. Because the contract the flooring company has with the school district is so large, they readily agree to the terms and conditions from the vendor.

Recommended: What Is Budgeted Income Statement?

Pros and Cons of Vendor Financing

The chart below captures the pros and cons of vendor financing:

Types of Vendor Financing

As mentioned above, there are three main types of vendor financing. Here’s a closer look at each type.

Debt Financing

With debt financing, the borrower receives the products or services but must pay back the vendor in regular installments with interest. If the vendor will only finance a percentage of the cost, the borrower will likely need to make a down payment. Should the borrower default on payments, the vendor writes the debt off as a bad debt. Further business between the two companies is unlikely, and the defaulting company’s reputation with other vendors is likely to be damaged as well since they didn’t practice good business money management.

Equity Financing

With equity financing, the vendor provides the borrower with the requested amount of products or services in exchange for equity in the borrower’s company. This means the vendor becomes a shareholder and will receive dividends and also weigh in on business decisions. Equity vendor financing tends to be more common with startup companies that may have difficulty getting financing from banks or other lenders.

Service Swap

A service swap is an agreement between two companies where no debt or equity is exchanged. Instead, both businesses agree that the services or products one offers are of the same value to the services or products offered by the other. In other words, it is an equal trade. This type of vendor financing tends to be more informal and only occurs between companies that already have a strong working relationship.

Recommended: Guide to Restaurant Expansion

Alternatives to Vendor Financing

With so many different types of business loans on the market, there are a number of alternatives to vendor financing. Here are some other ways you may be able to get short- or long-term capital funding.

Merchant Cash Advance

A merchant cash advance (MCA) is a unique type of financial product that doesn’t involve traditional monthly payments. Instead, an MCA company gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee. MCAs can be handy for small businesses that need cash quickly, but tend to cost significantly more than other types of financing.

Invoice Financing

With invoice financing, you receive a cash advance on your outstanding customer invoices. When your customers pay you, you pay the lender back, plus fees. Since your invoices serve as collateral for the loan, invoice financing can be easier to qualify for than a traditional small business loan. However, costs tend to be higher.

Recommended: Do Businesses Get Tax Refunds?

Small Business Loan

There are a variety of small business loans on the market. Traditional bank and small business administration (SBA) loans typically have the lowest interest rates, but can be difficult (and time consuming) to qualify for. Online lenders often offer faster funding, but may charge higher rates. You may also consider short-term business loans vs. long-term ones.

The Takeaway

Vendor financing is a way to fund the purchase of goods or services from a vendor when cash is tight. However, it’s not your only, or always your best, option, since vendor financing often comes with higher interest rates than those charged by traditional lending institutions.

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.

FAQ

How does vendor financing work in retail and in financial services?

Vendor financing works in a similar way no matter what the industry. With this type of financing, the vendor selling you a product or service also finances it. Vendors can take many different forms, including business-to-business suppliers, payroll management firms, and security companies.

What are some risks of vendor financing?

There are risks on both sides of the deal. If a borrower is unable to make their payments on time, they risk ruining the working relationship they have with the vendor, which could jeopardize future business dealings with that company. For vendors, there is a risk that they will never get paid for their goods/services and have to write the loan off as a bad debt.

Are vendor financing and seller financing the same thing?

No. They are similar, but not the same thing. Seller financing refers to a form of real estate lending in which a property owner also serves as a mortgage lender. Vendor financing, on the other hand, is a business-to-business arrangement in which a vendor that is selling a product or service to a business also finances it.

Photo credit: iStock/Ridofranz

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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If you’re looking at loan options for your small business, you have two main choices: fixed or variable interest rate loans. Variable rate loans typically come with lower rates than their fixed rate counterparts but the rate could rise over time. Fixed rate loans keep the same rate throughout the term of the loan, which can be a benefit if market rates go up, but a drawback if rates go down.

Keep reading to learn the difference between fixed and variable rate small business loans, the pros and cons of each, and factors that can help you determine which could be better for your small business.

What Are Small Business Loans?

A small business loan is money that is borrowed from a bank, credit union, or alternative lender. The borrower is expected to use the money for business-related expenses, such as:

•  Working capital

•  Real estate

•  Inventory

•  Business acquisitions

•  Renovations

•  Asset acquisition

There are various types of small business loans to choose from, including term loans, Small Business Administration (SBA) loans, business lines of credit, equipment financing, merchant cash advances, and more. In addition to the type of loan, you’ll also want to consider the type of interest you want — fixed or variable. Though in some cases you’ll have a choice, business Loans typically come with one or the other, so you’ll want to factor that in when deciding on the best type of financing for your business.

What Are Fixed Interest Rate Loans?

A fixed rate loan comes with an interest rate that does not change throughout the life of the loan. Once the loan is processed, monthly payments are the same until the loan is paid off. This means borrowers can easily budget for a fixed rate loan because they know exactly how much each payment is going to be. They also know how much they are going to pay for the loan overall.

The downside to a fixed rate loan is that if the market changes and banks start loaning at lower interest rates, borrowers with a fixed rate loan won’t see any changes. On the flip side, if rates go up, fixed rate borrowers are protected from any increases.

Recommended: Amortization vs Depreciation

Types of Fixed Rate Business Loans

Types of small business loans that may come with fixed rates include:

•  Short-term business loans

•  Long-term business loans

•  SBA loans

•  Commercial real estate loans

•  Invoice financing

Fixed Interest Rate Loan Example

Let’s assume you borrow $50,000 to purchase an additional asset for your company. For this example, the repayment period is five years and the annual percentage rate (APR) is fixed at 7%.

Your monthly payment would be $990.06 for the life of the loan, and you would pay $9,403.60 in total interest.

What Are Variable Interest Rate Loans?

The rate on a variable interest rate loan mirrors the market, which means a loan with this type of interest may have different monthly payments from one month to the next. However, in a stable economy, the payment amounts may not fluctuate significantly.

On the plus side, variable rate loans usually offer lower interest rates than the fixed rate version of the same type of loan. And, in some cases, you might be able to get an introductory rate that is guaranteed for a set number of months. However, there are also some downsides to choosing a variable interest rate loan. Should market rates go up during your loan term, your rate (and monthly payments) will likely go up. If your business’s cash flow is tight, this can make budgeting difficult.

Another challenge with a variable rate loan is that you won’t know what the total cost of your loan will be until you’re done making payments. With a fixed interest rate, you always know exactly what you’re paying month-to-month and the total cost of the loan.

Recommended: What You Should Know About Short-Term Business Loans

Types of Variable Rate Business Loans

Types of small business loans that may come with variable rates include:

•  Business lines of credit

•  Invoice financing

•  SBA loans

•  Merchant cash advances

•  Commercial real estate loans

Variable Interest Rate Loan Example

The previous fixed rate loan example saw the borrower take out a $50,000 loan with a five-year repayment period and a 7% APR. Overall, that borrower will pay $9,403.60 in interest over the life of the loan.

If the borrower were to choose a variable rate interest loan instead, they might be offered a 6% APR, which could be a better deal if rates don’t go up (leading to just $7,998.40 in total interest). However, if the APR goes up to 8% during the loan’s term, it could end up costing more than going with a fixed rate of 7%.

Recommended: Tax Deductions for Business Donations

3 Factors to Consider When Choosing the Best Loan for Your Business

When choosing whether to go with a fixed or variable interest rate loan, there are a number of things to keep in mind.

1. How Comfortable You Are With Risk

As a small business owner, you’ll want to first consider risk — and how much you’re willing to take. Many businesses want predictable monthly expenses and are willing to miss out on “historic lows” because they don’t like the idea of being vulnerable to market fluctuations.

Because of this, business owners will often choose a loan with a fixed rate.

2. Your Monthly Budget

If your business’s budget is tight, a fixed rate loan may be a good option, since you’ll know exactly what to expect each month. If, on the other hand, you have some breathing room in your monthly budget, you might want to take advantage of the lower rates that often come with variable rate loans, knowing that you’ll still be able to cover your payments should they go up in the future.

Recommended: Business Cash Management, Explained

3. The Type of Loan

Certain types of small business loans, such as term loans, come with fixed rates. Other loan types, such as business lines of credit, have variable rates. If you are set on a specific type of loan, you may not have a choice in whether or not you receive a fixed or a variable interest rate.

Recommended: What Is a Balloon Payment?

The Takeaway

Both fixed and variable rate small business loans have advantages and disadvantages. Knowing your budget, financial goals, and risk comfort will help guide you when it comes to choosing the right loan for your needs.

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 faster to get a fixed or variable rate business loan?

The type of interest rate you receive has no impact on how long it will take to get a small business loan. Some small business lenders, such as online lenders, may be able to fund your loan within 24 hours of approval. Other lenders, such as traditional banks, may take one to two weeks to fund your loan. The type of loan you’re applying for also has an effect on funding time. SBA loans, for example, generally take much longer to fund than short-term business loans.

Which is easier to get between variable and fixed interest small business loans?

Whether you apply for a fixed or variable rate small business loan, lenders will look at your credit score, your business income, and the length of time you’ve been in business. The type of interest rate you receive does not make it any easier or harder to obtain the loan.

Are fixed or variable interest rate business loans typically cheaper?

Variable interest rate business loans typically start out at a lower interest rate than fixed rate loans. If you are able to pay the loan off quickly, or if the market rate doesn’t go up during your loan term, a variable rate loan may save you money. However, the rate on a variable rate loan can also increase over time, making it more expensive in the long run.

Do small business loans have a fixed interest rate?

A small business loan may have a fixed or variable interest rate. With a fixed rate loan, the interest rate and monthly payment won’t change over the life of the loan, making it easier to budget for repayment. Lump sum term business loans typically have fixed rates.

A variable rate loan may carry a lower initial rate than a fixed rate loan, but that rate can rise (or fall) over time since it’s tied to a benchmark rate that fluctuates with the market. A business line of credit may come with a variable interest rate.

How do you tell if a loan is fixed or variable?

You can find out if your small business loan has a fixed or variable rate by looking at your loan contract and repayment terms.

Photo credit: iStock/Talaj

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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Mezzanine financing is a unique business financing product that allows the lender to convert unpaid debt into equity should the business default on payments. These loans are often layered on top of conventional loans in a typical capital structure, hence how they got their name.

Mezzanine financing allows business owners to borrow a larger amount of capital than they would be able to get with a conventional loan. This type of loan tends to be used during the expansion phase of an established company, rather than as start-up or early-phase funding.

Read on to learn the pros and cons of mezzanine financing, how it compares to debt and equity financing, plus other funding options you may want to consider for your business.

What Is Mezzanine Financing?

Mezzanine financing is defined as a hybrid of equity and debt financing. While there are many different ways this type of funding can be structured, it often starts out as a small business loan then, should the business default on payments, the lender can turn the loan into an equity ownership in the business.

Mezzanine financing might be used by companies when they are unable to access the amount of funding they need for a large capital investment through traditional debt products.

Mezzanine financing is typically structured as subordinated debt, which means it falls below senior debt. It is also typically unsecured, meaning it is not backed up by a lien or any type of business asset. Should the borrowing company go bankrupt, senior debt holders get first dibs on any of a company’s assets. The subordinated debt lender would be next in priority.
Since the odds of getting repaid in the event of liquidation are lower, lenders generally see subordinated debt as riskier than senior debt. To compensate for this, they usually charge higher interest rates than senior debt lenders.

Recommended: Insolvency vs. Bankruptcy

How Does Mezzanine Financing Work?

There are a variety of arrangements available for mezzanine financing. In some cases, a lender/investor might get immediate equity in a business. Often, however, the lender/investor will acquire warrants for purchasing equity at a later date. For example, if the company can’t pay back the funding, the lender then gets a share of equity instead. In this way, equity in the business is used as security.

A key benefit of mezzanine financing is that the loan is usually treated as equity on the balance sheet. As a result, it does not count as debt in the calculation of the company’s debt-to-equity ratio. This can improve the firm’s leverage position and make it possible for them to borrow in other ways, such as through standard bank loans.

Mezzanine funding generally isn’t available to startups or young companies. To receive mezzanine financing, a business must typically have an established reputation, solid product offering, history of profitability, and realistic growth plans.

Once a business owner finishes an expansion or large project using the mezzanine financing, they can often refinance the loan with a more conventional (and, ideally, less expensive) long-term business loan.

Recommended: Commercial Bridge Loans Explained

Mezzanine Financing Structure

Businesses looking to raise money have two basic options: debt (where you borrow money using a business loan) or equity (where you sell a share of your business in return for cash). Mezzanine financing can offer a sort of middle ground, since it is structured as a combination of debt and equity securities.

How mezzanine debt is structured often depends on the needs of the borrowing company. Common options include:

•  Cash interest payments With this structure, the business makes a periodic cash payment based on a percentage of the outstanding balance of the mezzanine financing. The interest rate can either be fixed, variable, or a combination (such as fixed for a certain period, then variable).

•  Payable in kind (PIK) Interest PIK is a periodic interest payment where the payment is added to the principal instead of being paid in cash. This structure can alleviate short-term strains on a company’s cash flow.

•  Ownership interest Mezzanine capital can use a variety of instruments to convey ownership interest, including preferred equity, warrants, and conversion features (similar to a convertible bond).

Maturity

Mezzanine financing generally matures in five years or more. When mezzanine financing matures, the borrower may be expected to pay off the principal with one balloon payment.

Redemption

Certain events trigger an automatic redemption provision (also called a mandatory prepayment provision). Examples include: asset sales, change of control transactions, and major acquisitions. If any applicable event occurs, the debt must be repaid.

Transferability

Generally, the lender in mezzanine financing has the right to transfer the loan unless there are restrictions outlined in the original contract. For instance, an issuer may limit transfers to competitors or only allow the mezzanine debt and equity to transfer together.

Recommended: Balloon Payments Explained

Pros and Cons of Mezzanine Financing

Pros

Mezzanine debt can be attractive to business owners because it does not require any collateral. Companies that utilize mezzanine financing often already have their assets tied up with other senior debt. They might then use mezzanine financing to complete a company buyout or initiate a large-scale purchase.

Mezzanine financing also offers flexibility. Because there are numerous ways mezzanine debt can be structured, the loan terms are negotiable for both the borrower and the lender. In some ways, it can be thought of as a common sense loan, since both parties must agree to the terms and conditions for the deal to move forward.

Also, depending on the deal, many mezzanine financing contracts allow for interest-only payments in the beginning. This gives the borrowing company time to get the company buyout or large-scale project up and rolling. These interest payments are generally a tax-deductible business expense for the borrower.

Cons

Mezzanine financing generally comes with much higher interest rates than traditional business loans. Sometimes higher rates means the lender has lower borrower requirements, but this is not the case with mezzanine financing. Before loaning a large amount to a company, mezzanine lenders typically want to see a proven record of success.

Since the loans are unsecured, the lenders will often incorporate restrictive conditions on the borrowers, such as warrants, options of partial ownership, and/or the agreement not to take out additional loans.

Any owner who considers mezzanine financing also needs to keep in mind that conversion to equity is always a possibility. If that happens, it will result in dilution of ownership and some loss of company control. It can also trigger a negative reaction from shareholders.

Mezzanine Financing Example

Mezzanine debt is commonly used in leveraged buyouts. To illustrate how it works, let’s say company ABC is interested in buying company XYZ for $100 million using a loan. The lender, however, only wants to put up 80% of the value and offers ABC a loan of $80 million.

ABC can’t or doesn’t want to come up with $20 million of its own capital, so it looks for a mezzanine lender to finance $15 million. By doing this, ABC only has to invest $5 million of its own capital to buy XYZ. The lender, on the other hand, will be able to convert the debt to equity if certain requirements are met.

Using this method of financing leverages ABC’s potential return while minimizing the amount of capital it has to put up to make the acquisition.

Mezzanine Loans

The amount of money a company can borrow with a mezzanine loan will vary depending on the lender. Often, a mezzanine lender will offer 4 to 4.5 times a company’s EBITDA (earnings before interest, taxes, depreciation, and amortization). Few companies are able to produce assets valuable enough to secure a loan of this size, which is why mezzanine loans can shift to company equity if and when needed.

Comparing Mezzanine, Debt, and Equity Financing

Alternatives to Mezzanine Debt

Mezzanine financing isn’t the only way to get the capital you need for business growth or expansion. There are many kinds of business loans on the market that may fit your company’s funding needs. Here are some to consider.

Business Term Loan

Business term loans provide you with a lump sum of capital – anywhere from $2,000 to $5 million – that you pay back (plus interest) on a fixed schedule over the loan’s term. Collateral, such as equipment or real estate, is often required.

Banks tend to offer low rates on term loans but carry stricter requirements — such as a strong personal credit score and high annual revenue — and take longer to fund. Bank term loans typically have long repayment terms of up to 10 years.

Online lenders offer speed and convenience but often charge higher rates. They also tend to have looser qualifications than banks. In addition, you can often get short-term loans with repayment terms between three months and three years from online business lenders.

Equipment Financing

Equipment financing is a loan for purchasing machinery and equipment essential to running your business. You may be able to get an equipment loan equal to up to 100% of the value of the equipment you’re looking to purchase — depending on which finance company you use and your business’s qualifications.

Since the equipment you are purchasing serves as collateral for the loan, you don’t need to put any business assets on the line to secure an equipment loan.

There are equipment finance companies that focus solely on this type of small business loan. But you can also get an equipment loan from lenders such as the U.S. Small Business Administration (SBA), banks, and other lenders.

Business Line of Credit

If you’re looking for a short-term, flexible form of financing, a business line of credit may be worth exploring. A credit line allows you to withdraw funds as needed up to a predetermined amount and only pay interest on the money you withdraw. Once you repay the funds you’ve borrowed, you can continue to draw on the line.

This type of financing is typically offered as unsecured debt, so you don’t need to provide collateral. Many unsecured lines of credit come with a variable interest rate and offer amounts ranging from $10,000 to $100,000.

To get a credit line larger than $100,000, you may need to secure it with a blanket lien on your assets or a certificate of deposit.

The Takeaway

Mezzanine financing can provide a company with its capital needs without putting its assets at risk. However, should the company default on payments, the lender may be able to convert the loan into equity, which will dilute ownership of the 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

Why use mezzanine financing?

Mezzanine financing is a hybrid of debt and equity financing that allows business owners to borrow a larger amount of capital than they could get with a conventional loan.

What are some examples of mezzanine financing?

A common example of mezzanine financing is when a private equity firm wants to buy a company and the bank only wants to lend them 80% of the cost. Instead of having to put up the remaining 20%, the private equity firm might find a mezzanine lender to invest some or most of the rest. The mezzanine lender would be able to convert the debt to equity if certain requirements are met.

What form of mezzanine financing is most common?

The most common structure of mezzanine financing is unsecured subordinated debt (or sub-debt). Sub-debt falls directly below senior debt in the event of a liquidation.

Photo credit: iStock/andresr

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

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

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

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There are over 953,000 small businesses in New Jersey, representing 99% of all businesses in the state. Collectively, NJ’s small business owners employ nearly 2 million individuals, which is over 49% of the state’s total workforce. To make it easier for small businesses to flourish in NJ, the state offers a range of funding opportunities, including small business grants. Unlike business loans, business grants generally do not need to be repaid.

While competition for small business grants in New Jersey can be stiff, it’s a good idea to explore any possible grant opportunities your startup or business might qualify for. Read on to learn more about how to get a small business grant in NJ, plus other ways you may be able to get the capital you need to start or grow your business in the Garden State.

Grants for Small Businesses in NJ

If you’re looking for small business grants in New Jersey, here are some options to consider.

Food Retail Innovation in Delivery Grant (FRIDG) Program

•  Program description: The FRIDG program provides independent NJ supermarkets and other eligible food retailers with funds to buy self-contained, temperature-controlled lockers.

•  Incentive: Receive up to $250,000 in reimbursements for buying self-contained, temperature-controlled lockers for grocery delivery.

•  General requirements:

◦  Be an independent or chain supermarket owner or other qualifying food retailer

◦  Have a physical retail location in New Jersey and the ability to service and make deliveries to a locker located in a designated food desert community (FDC)

◦  Be in good standing with NJ state regulators, including the Division of Taxation, Department of Environmental Protection (NJDEP), and Department of Labor and Workforce Development (NJDOL)

•  How to apply: You can complete and submit a FRIDG application through the New Jersey Economic Development Authority (NJEDA) website.

NJ Small Business Improvement Grant

•  Program description: The NJ Small Business Improvement Grant offers partial reimbursement to eligible small business owners who make capital improvements or buy new furniture, fixtures, and equipment.

•  Incentive: Receive 50% of eligible total project costs up to $50,000.

•  General requirements:

◦  Be a small business that rents or owns commercial property

◦  
Complete a capital improvement project costing at least $5,000 or buy and install furniture, fixtures, and equipment costing at least $5,000

◦  Payment must have been made within the two years prior to your application date

◦  Provide a current tax clearance certificate prior to approval

◦  Be in good standing with the NJDOL and NJDEP

◦  Not be in default of any N.J. state assistance programs

◦  Be willing to pay wages that are the greater of $15 an hour or 120% of the minimum wage rate

◦  Remain in the location for at least two years for grants up to $25K or at least four years for all other grant award amounts

•  How to apply: You can complete and submit an NJ Small Business Improvement Grant application through the New Jersey Economic Development Authority (NJEDA) website.

NJ Small Business Lease Grant

•  Program description: The NJ Small Business Lease Grant offers grant funding to cover a portion of lease payments for businesses and nonprofits leasing new or additional space.

•  Incentive: Two grant awards of 20% of the annual lease payments on a minimum 5-year lease term.

•  General requirements:

◦  Be a NJ small business or nonprofit with a minimum five-year lease term or longer

◦  Meet the following additional lease criteria:

■  Occupy first floor (street-level) space in the Garden State

■  Space must have dimensions between 250 and 10,000 square feet

■  You must have signed the lease within 12 months prior to applying for this NJ grant

■  The lease is considered market rate based on commercial real estate information

◦  Provide a current tax clearance certificate prior to approval

◦  Provide certification from the landlord showing you are current on lease payments

◦  Be in good standing with the NJDOL and NJDEP

◦  Not be in default of any NJ state assistance programs

◦  Be willing to pay wages that are the greater of $15 an hour or 120% of the minimum wage rate

◦  Commit to remaining in the leased facility for at least five years

•  How to apply: You can complete and submit an NJ Small Business Lease Grant application through the NJEDA website. Applicants who have applied for or received a license or a certification from the New Jersey Cannabis Regulatory Commission are not eligible for this grant.

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

Atlantic City Revitalization Grant Program

•  Program description: The Atlantic City Revitalization Grant Program is awarding grants between $1M and $10M for capital projects that address and improve the communities and neighborhoods within Atlantic City.

•  Incentive: Receive between $1M and $10M in grant funds to cover up to 50% of eligible capital project costs (including soft and hard construction costs).

•  General requirements:

◦  Be a for-profit or nonprofit entity that is overseeing a real estate development project and coordinating the activities related to the project

◦  Projects must be new construction for a commercial end use that addresses a community need, or be a renovation/restoration of a vacant (or partially vacant) building in need of repair

◦  The developer fee cannot exceed 8% of total project costs.

◦  All projects must be fully completed by the end of calendar year 2026 (as per US Treasury deadlines)

•  How to apply: Anyone interested in applying to the Atlantic City Revitalization Grant Program should email [email protected] to set up a call to discuss their application with NJEDA staff prior to applying.

Upskill: NJ Incumbent Worker Training Grant Program

•  Program description: This NJ upskilling grant program provides resources to support the training of current employees to help increase the competitiveness of both the employee and employer.

•  Incentive: Eligible NJ employers can receive up to 50% cost reimbursement assistance to train incumbent frontline employees to meet current and future occupational skill requirements.

•  General requirements:

◦  Be a NJ-based employer

◦  Have employees concentrated in one of the following nine strategic business sectors:

■  Advanced manufacturing

■  Clean energy

■  Film and digital media

■  Finance and professional services

■  Food and beverage (non-retail)

■  Life sciences

■  Offshore wind

■  Technology

■  Transportation and logistics

◦  Develop a job-training plan that would enhance the skills of existing employees to meet current and future business goals

◦  Commit to retain your trainees for at least six months after training is completed

◦  Provide a current tax clearance certificate

◦  Have a federal Employer Identification Number (EIN)

◦  Have a Unique Entity Identifier (UEI) number

•  How to apply: Register with the NJ Department of Labor and Workforce Development’s online IGX system and notify NJDOL of your intent to apply for the Upskill: NJ Incumbent Worker Training Grant.

Who Provides Small Business Grants in NJ?

State government agencies, including the NJEDA and the NJ Department of State, offer a variety of small business grants in New Jersey.

Do You Have to Pay Back a Small Business Grant?

Generally, no. Unlike small business loans, you typically do not need to repay the funds you receive through a small business grant. That said, small business grants typically come with terms and conditions, and you may be responsible for paying back the grant if you violate those terms.

You typically have to sign a funding agreement to accept a small business grant. Using the grant for an illegitimate purpose may violate the agreement and require business owners to pay back the grant.

In addition, 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.

Who Is Eligible for Small Business Grants in NJ?

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

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 with just a few employees, even self-employed individuals, may be eligible for small business grants.

What Industries Does NJ Support With Grants?

New Jersey offers grants supporting a variety of industries, including:

•  Advanced manufacturing

•  Clean energy

•  Film and digital media

•  Finance and professional services

•  Food and beverage (non-retail)

•  Life sciences

•  Offshore wind

•  Technology

•  Transportation and logistics

•  Retail trade (store and nonstore retailers)

NJ Resources for SMB Owners Looking for Funding

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

New Jersey Small Business Development Center (NJSBDC)

The NJSBDC is a statewide program that can provide NJ small business owners with the following services at no cost:

•  Business training courses, seminars, webinars, and workshops

•  Entrepreneur Certificate Program (ECP)

•  Confidential business counseling

Recommended: New York Small Business Grants

SBA District Office in NJ

The U.S. Small Business Administration (SBA) is a federal agency that provides resources and support to small business owners. The SBA’s New Jersey District Office in Newark serves all 21 counties in the Garden State.

Alternative Funding Sources for Small Businesses in NJ

If you don’t qualify for small business grants in NJ, you’re not necessarily out of funding options. Here are some other ways you may be able to get the capital you need to launch or grow your business in the Garden State.

NJ Microloan Lenders

Community-based nonprofits may offer microloans of anywhere from $500 to $50,000 to underserved small business owners in New Jersey, such as women and minorities. Interest rates tend to be low (or zero in some cases), and the qualification criteria are often less stringent compared with other business loans.

Microloans can provide an infusion of cash to get a startup off the ground or grow an existing business. However, you may need to provide a microlender with a personal guarantee and collateral in order to secure funding.

Recommended: Mompreneurs: Generational Wealth and Real-Time Struggles

New Jersey SMB Term Loans from Private Lenders

Many banks, credit unions, and online lenders in NJ offer term loans to small businesses. With this type of loan, you receive a lump sum of money up front then repay it (plus interest) over a set period of time. You can use the funds for a variety of business-related purposes, including expansion, buying equipment, and working capital.
Online alternative lenders tend to have more flexible eligibility criteria than traditional banks, making them a good option for businesses that are just starting out. However, interest rates tend to be higher.

Recommended: Grants for Maryland Small Business

NJ SBA Loans

The SBA offers a range of loan programs to help small businesses secure funding. These loans are partially guaranteed by the SBA, which reduces risk for lenders and increases accessibility for businesses. The 7(a) loan program is one of the most popular SBA loans, since it provides funds that can be used for a variety of business needs. SBA loans typically offer longer repayment terms and lower interest rates compared to conventional business loans.

Business Lines of Credit

A business line of credit provides businesses with flexible access to funds up to a predetermined limit. Unlike traditional loans, a line of credit allows businesses to borrow only what they need, when they need it. This flexibility can be helpful for managing cash flow, covering unexpected expenses, and taking advantage of growth opportunities.

Business lines of credit typically have variable interest rates and can be secured or unsecured, depending on the lender and the borrower’s creditworthiness.

Equipment Financing

Equipment financing is specifically designed to help businesses acquire needed equipment. The equipment itself serves as collateral for the loan, which can make it easier to get approved. This type of financing can be used to purchase machinery, vehicles, technology, and other essential equipment. Terms for equipment financing vary based on the lender and the type of equipment, but generally feature fixed interest rates and repayment terms from three to ten years.

Recommended: Types of Small Business Loan Fees

The Takeaway

New Jersey small businesses qualify for grants, ranging from state or local governments to 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 New Jersey?

To find a small business grant in New Jersey, you might start by contacting the state’s Economic Development Administration and your local Small Business Development Center. You typically need to submit a grant application as a qualified small business owner to be considered for a small business grant in New Jersey.

How hard is it to get a business loan in New Jersey?

To get a business loan from a bank, you typically need to have strong financials and have been in business for at least two years. Online alternative lenders tend to have more flexible qualification criteria for small business loans but generally charge higher interest rates.

What is the easiest SBA loan to get approved for?

There’s no guarantee you’ll get approved for any U.S. Small Business Administration (SBA) loan, but SBA microloans can 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 $50,000. If you’re looking for a streamlined application process, you may want to look into an SBA Express loan.

Photo credit: iStock/PeopleImages

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.

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