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EBITDA and revenue are two key metrics of a company’s health and financial performance. Revenue is the amount of money a company brings in from its operations, while EBITDA is what revenue is left after subtracting the cost of goods sold and some other operational expenses.

Analyzing revenue and EBITDA serves different purposes for a small business. Read on to learn why each metric is important, the difference between revenue and EBITDA, and how to calculate these numbers.

What Is EBITDA?

EBITDA is a measure of profitability that stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. In other words, it’s the earnings that a business has generated prior to any debt interest expenses, tax payments, and depreciation/amortization costs of the business.

While interest, taxes, depreciation, and amortization are expenses that get considered in other financial metrics, EBITDA doesn’t factor these values in because they are outside of management’s operational control. By adding these values back to net income (gross business income minus all business expenses), many analysts believe that EBITA is a better way to measure how well a business is run.

EBITDA is not required to be included in an income statement, but if it were, it would appear a few lines below the revenue line item. A business’s EBITDA number will always be lower than its revenue figure, as certain operating expenses are deducted from it.

What EBITDA Does

EBITDA is often used by analysts to assess a business’s financial performance and operational efficiency. Because EBITDA adds back interest, taxes, depreciation and amortization (expenses that don’t directly reflect a company’s decisions) to a company’s net income, it shines a light on a business’s ability to generate cash flow from its operations.

Depreciation and amortization, for example, are non-cash expenses – they’re considered costs on an income statement but do not require the actual outlay of money. While interest and taxes do require payment in cash, they are non-operating expenses not directly affected by the business’s primary activities.

EBITDA may be calculated by investors or when you’re applying for a small business loan to estimate how well your company will be able to pay its bills and maintain or increase net income.

How EBITDA Is Calculated

One of the most common ways to calculate EBITDA is to start with net income (the bottom line of the income statement), and then add back the entries for taxes, interest, depreciation and amortization.

EBITDA Formula

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

An alternate way to calculate EBITDA is to start with operating income. Operating income is also referred to as operating profit or EBIT (Earnings Before Interest and Taxes). It’s the amount of revenue left after deducting the direct and indirect operating costs from sales revenue. If you add depreciation and amortization to operating income, you get EBITDA.

Operating Income + Depreciation + Amortization = EBITDA

Recommended: EBITDA vs Gross Profit

What Is Revenue?

Revenue (also referred to as sales or income) consists of all income generated by a business’s core activities before expenses are taken out. It includes both paid and unpaid invoices. On an income statement, revenue is listed on the top line, which is why accountants simply refer to it as the “top line.”

Revenue can come from several different places, including:

•  Product sales

•  Fees charged for services

•  Rent

•  Commissions

•  Interest on money loaned

Revenue is typically reported quarterly and annually. Annual business revenue is how much income a company generates during one year.

While revenue is vital to a company’s longevity and financial health, it doesn’t show the complete picture. Because it’s a top line item, it doesn’t take into account how much the company had to spend to make that money.

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

What Revenue Does

Revenue is a measurement of all sales activity and can indicate how well a business is doing in the market. Revenue is also what allows a business to pay its employees, purchase inventory, pay suppliers, invest in research and development, sustain itself, and grow.

Revenue can also be used as a measure of how sales are increasing or decreasing over time. If revenue is increasing from one quarter or year to the next, then the company is seeing success with its initiatives. Declining revenues year after year means that a company is shrinking or faltering.

All businesses aim to increase their revenue and lower their expenses in order to maximize profit.

Recommended: What to Know About Short-Term Business Loans

How Revenue Is Calculated

Revenue is the sum of income from the sale of goods and services. Revenue from one-time events and investment income are listed separately.

The formula for total revenue is:

Price x Quantity Sold = Total Revenue

Revenue does not take any expenses into account.

Comparing EBITDA vs Revenue

While EBITDA and revenue are related financial metrics, they have some distinct differences. Here’s a look at how they compare.

Recommended: EBIDA Explained

Similarities Between EBITDA vs Revenue

Both EBITDA and revenue are measures of a company’s financial performance and can be important predictors of a business’s future prospects.

The more revenue a company generates, for instance, the more money it has to work with to pay down expenses and generate a profit. A strong EBITDA number, on the other hand, indicates that a company will be able to pay its bills and maintain or increase net income. It also indicates that a company is being run well.

Investors will often look at both revenue and EBITDA to gauge the health of a business.

Differences Between EBITDA vs Revenue

The main difference between EBITDA and revenue is that revenue measures sales activity, while EBITDA measures how profitable the business is.

Revenue is calculated by adding up income from all business operations, whereas EBITDA takes that revenue and then subtracts expenses in order to measure profit.

Another key difference is that the Financial Accounting Standards Board (FASB), which establishes the rules and standards of Generally Accepted Accounting Principles (GAAP), requires revenue to be reported on the income statement, but not EBITDA.

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Pros and Cons of EBITDA

Where EBITDA Shines

Many analysts, business owners, and investors prefer EBITDA over other business metrics because it specifically measures the operational profitability of a firm.

When calculating EBITDA, the only costs subtracted from revenue are ones that are directly linked to the company’s operations (such as rent, salaries, marketing, and research). Capital structure decisions, which are reflected in depreciation, amortization, and debt expenses, aren’t included. As a result, it gives analysts a way to more accurately compare performance between companies with different capital structures.

Limitations of EBITDA

However, EBITDA doesn’t reflect a business’s actual net earnings (gross business income minus all business expenses). Indeed, some companies can report a seemingly strong EBITDA while stating negative profits at the bottom line.

EBITDA can sometimes be misleading because costs associated with debt aren’t included. This means that any unhealthy debt decisions made by the company will be overlooked if you only look at EBITDA.

EBITDA also excludes depreciation and amortization expenses. However, machines, tools, and other assets lose their value over time, and copyrights and patents expire. EBITDA fails to account for these costs.

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

The Takeaway

Both revenue and EBITDA are used to analyze and evaluate how well a company is performing. Revenue is the key top line on a financial statement, showing income generated by the company’s sales activities before expenses are deducted. EBITDA starts at the bottom of the income statement with net income, then adds back expenses (like interest on debt) that aren’t directly related to a company’s operations.

EBITDA can be helpful for seeing how a business performs from year to year, but it does not reflect a company’s real income. That’s why if you’re exploring business loans or looking to attract an investor, EBITDA will likely be one of several metrics used to gauge the health of your business.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

Are EBITDA and revenue the same?

No. Revenue measures sales while EBITDA (earnings before interest, taxes, depreciation, and amortization) measures the profitability of a business.

Can EBITDA be higher than revenue?

No. EBITDA (earnings before interest, taxes, depreciation, and amortization) will be lower than revenue because it tells you how much revenue is left after subtracting the cost of goods sold and some other operational expenses.

What is considered a good EBITDA-to-revenue ratio?

EBITDA-to-revenue ratio, also known as EBITDA margin, shows how much cash a company generates for each dollar of sales revenue, before accounting for interest, taxes, amortization, and depreciation. A “good” EBITDA margin depends on the industry, but, generally speaking, an EBITDA margin of 10% or higher is considered good.

Why is EBITDA better than net income?

EBITDA will be higher than net income because it’s the net income before taking out interest, taxes, amortization, and depreciation. While EBITDA is not necessarily “better” than net income, it is a better indicator of whether or not the business will be profitable.

Is EBITDA a profit or loss?

EBITDA shows the profitability of a business. It shows earnings before interest, taxes, depreciation, and amortization.

Photo credit: iStock/eclipse_images

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.

SOSB0324012

After serving in the military, many former service members find that launching a business is a natural transition. Indeed, veterans often possess the skill sets and experience that make them ideally suited for the challenges of entrepreneurship, including leadership, discipline, and the ability to perform under pressure.

But all business owners may eventually face the need for external financing, and that includes veterans. And disabled veterans who were injured in the line of duty do have some additional resources to tap into, as well as more traditional forms of business financing. Read on to explore the opportunities.

Tips on Qualifying for Disabled Veteran Small Business Loans

There are many types of small business financing, including loans and grants, that you may qualify for as a disabled veteran business owner. The U.S. Small Business Administration (SBA) Veterans Advantage Program, for instance, offers savings on fees for a variety of SBA loans.

As you explore your options, you’ll want to focus on what makes the most sense for your financing needs, looking at qualification criteria, loan amounts, rates, and repayment terms. It’s important to have a plan in place so you know how much you need and what you plan to use the money for. Then you can narrow in on the most suitable small business loans.

Recommended: What to Know About Short-term Business Loans

Loans Available for Disabled Veterans

There are a number of small business financing opportunities designed with veterans in mind, regardless of their disability status, as well as options that aren’t exclusive to veterans but may appeal to them.

SBA Veterans Advantage Program

The SBA offers the Veterans Advantage Program to reduce fees associated with its popular 7(a) loan program. For 7(a) loans less than $150,000, eligible veterans (regardless of disability status) get the SBA guaranty fee waived, along with the annual service fee.

For SBA Express loans (which are less than $350,000), the program waives the guaranty fee.

Non-7(a) Express loans may also be eligible for the veteran’s program and come with a 50% reduction of the upfront guarantee fee.

Military Reservists Economic Injury Disaster Loans

The SBA also offers a Military Reservists Economic Injury Disaster Loan (MREIDL). This can be used by any eligible company that cannot meet its normal operating expenses because an essential employee is called to active duty as a reservist. While this isn’t expressly designed for disabled veterans, the MREIDL is helpful for business owners who are committed to hiring the talents of other service members who still serve in a reserve capacity.

The maximum amount for this type of veteran small business loan is $2 million and is determined by the SBA based on the actual economic injury sustained by the business.

Angel Investors

If you’re comfortable giving up equity in exchange for working capital, there are angel investors who specifically focus on veteran-owned businesses.

An angel investor is a high-net-worth, accredited investor who uses their own money to invest in a start-up with high growth potential. They typically invest very early in businesses. You can search for angel investors on LinkedIn and on sites that have a special interest in veteran-led startups such as Localvest, Academy Investor Network, Vet-Biz, and Hivers and Strivers.

Online Business Loans

You can apply for a small business loan online with any type of lender that looks like a match for your company. These loans are open to all business owners. Usually lending criteria include a certain amount of time in business and a minimum monthly or annual revenue. Funding is usually faster compared to other types of small business loans.

Small Business Line of Credit

A line of credit gives you access to working capital as you need it, rather than as the lump sum you’d get with a traditional business loan. It acts more like a credit card, allowing you to withdraw funds up to your credit limit. Interest accrues only on your outstanding balance.

Equipment Financing

Equipment financing is a type of funding that can help you purchase machinery and equipment. The benefit of using this as a small business loan for disabled veterans is that it uses the purchased equipment as collateral so you can minimize your responsibility for the loan. Typically, both new and used equipment is eligible for financing. Plus, you may be able to finance up to 100% of the total equipment cost, including soft costs like delivery.

The Loan Process for Veterans With Disabilities

The loan process varies depending on the type of financing you choose. Online loans, lines of credit, and equipment financing likely have a shorter application and processing time. SBA loans and angel investors, on the other hand, typically have a longer approval period, meaning it takes longer to get funds.

Recommended: How Business Bank Accounts Work

Small Business Loans for Disabled Veterans With Bad Credit

It is possible to get a small business loan with bad credit, but you’ll probably experience some challenges. If your business has been around for more than two years, you may be more likely to get approved using your business credit rather than your personal credit score.

If either score is poor, expect to pay higher interest rates. You may also need to supply more collateral than you would if you had good credit. If possible, you might want to consider adding a cosigner to the loan to help strengthen your application.

Applying for Small Business Loans for Disabled Veterans in 6 Steps

The application process may vary depending on the lender and type of loan. Follow these steps to guide you through each decision you have to make.

1.   Create a business plan. It’s important to know how you plan to use the funds and what type of outcome you expect. A plan can capture and summarize your research on business cash management.

2.   Determine your needs. Once you know what you want to achieve, price it out so you have a specific funding request. You don’t want to get stuck with too little and not accomplish your goals. But you also don’t want to borrow (and pay for) more than you need.

3.   Research lender eligibility requirements. Find out the criteria for different loan programs you’re interested in, such as time in business and annual revenue. This way, you won’t waste time applying to lenders that aren’t a good fit.

4.   Assemble required documentation. You’ll likely need both personal and business details, including financial statements and tax returns.

5.   Compare multiple lenders. As you complete your research, narrow down your list to the top lenders that match your needs. Find out if you can get a loan quote without impacting your credit score.

6.   Choose the best loan option. Once you have rates, terms, and fees to compare, you’ll be ready to make a decision and submit your full loan application.

Small Business Grants for Disabled Veterans

In addition to loans for disabled veterans with small businesses, you can also look for disabled veteran business grants. Here are some places to start.

GrantWatch

You may be able to find small business grants for veterans at GrantWatch. You can search for grants based on filters such as:

•  Interest

•  Location

•  Funding source

•  Keyword

Grants.gov

Grants.gov is a database that focuses on federal grants. You can search by keyword, eligibility, funding instrument, agency, and/or category.

Service-Disabled Veteran-Owned Small Business Program

The Service-Disabled Veteran-Owned Small Business Program through the SBA ensures that eligible businesses receive at least 3% of federal contracting dollars each year. In order to be eligible, 51% of the business must be owned by one or more service-disabled veterans.

Second Service Foundation

Another option to find small business grants for disabled veterans is through Second Service Foundation (formerly StreetShares Foundation), a nonprofit serving the military entrepreneurial community. The organization supports military entrepreneurs through coaching, resources, and capital, as well as a mentorship program.

The Takeaway

Disabled veterans have a variety of financing resources to consider when growing a small business. In addition to taking advantage of grant programs and SBA financing discounts, you may want to consider all of your financing options.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

Photo credit: iStock/Martinns

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.

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

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

SOSB0324011

You may have heard a rumor that there are business loans from the Small Business Administration (SBA) that you don’t have to pay back. Could that possibly be true?

The short answer: All SBA loans need to be repaid. If you are wondering if there is forgiveness for Covid-19 related small business loans, the answer is no.

However, it’s important to know that there is a special hardship plan for those who took out SBA loans because of Covid-19 and are having trouble repaying the money.

What Is an SBA Loan?

The SBA backs several types of loans:

7(a) Loans

The 7(a) loans for small businesses are among the most popular options, as they offer up to $5 million at low interest rates and can be used for working capital, to refinance business debt, or to buy furniture, fixtures, or supplies.

CDC/504 Loans

SBA’s 504 Loans also have a cap of $5 million. They can be used to purchase buildings or land, build new facilities, or buy equipment.

Microloans

There are microloans for businesses that need a smaller amount of capital. These loans provide up to $50,000 to help businesses start up or expand operations.

Paying Back the SBA Loans

SBA loans, which are provided through banks and other approved lenders, are popular because they often offer lower interest rates than traditional banks and may have less stringent qualifications than some bank loans.

Returning to the question of whether you have to pay back SBA loans: For the ones we’ve discussed so far, yes, you do. But there’s one other kind of SBA loan we haven’t talked about yet. The Economic Injury Disaster Loan.

What Is an Economic Injury Disaster Loan?

The Economic Injury Disaster Loan (EIDL) is offered to a business in a disaster area that has been negatively impacted. A disaster could be a major storm, flooding, or drought.

This loan was made available to businesses that weren’t able to pay their ordinary and necessary business expenses because of the qualifying disaster, and the funds provide working capital to help them resume business as usual. To qualify, businesses must not have been able to get financing elsewhere.

In 2020, the disaster program was made available for those whose businesses suffered from the
pandemic. Over 4 million businesses were approved for nearly $390 billion in COVID Economic Injury Disaster Loans.

The Targeted EIDL Advance provided funds of up to $10,000 to applicants who were in a low-income community, could demonstrate more than 30% reduction in revenue during an eight-week period beginning on March 2, 2020, or later, and had 300 or fewer employees.

The Supplemental Targeted Advance provided a supplemental payment of $5,000 that did not have to be repaid. The combined amount of the Supplemental Targeted Advance ($5,000) with any previously received EIDL Advance or Targeted EIDL Advance ($10,000) could not exceed $15,000.

Applicants had to be located in a low-income community, prove more than a 50% economic loss during an eight-week period beginning on March 2, 2020, or later, and had 10 or fewer employees.

As of January 1, 2022, the SBA stopped accepting applications for new COVID-19 EIDL loans or advances.

Recommended: Startup Business Loans Bad Credit

Economic Injury Disaster Advance Grants

We’re now ready to answer your question: Do you have to pay back all SBA disaster loans?

Early recipients of the EIDL loans were eligible for EIDL Advance funds, which didn’t have to be repaid. There was a cap of $1,000 per employee for eligible applicants, up to $10,000. A total of $20 billion was given in these Advance grants.

Recipients did not have to be approved for an EIDL loan to receive the Advance grant. Those that were receiving a loan had the amount of the Advance deducted from their total loan eligibility.

To summarize: If you received an Economic Injury Disaster Loan, you are required to pay it back in full. However, if you received your loan during the period when either of the Advance funds were offered and you were approved for an Advance, that portion did not have to be repaid. Those Advance grants were distributed several years ago.

Recommended: What Does a Personal Guarantee Mean?

Hardship Plan for Covid-19 Loans

Some businesses are still struggling to repay their COVID-19 loans from the SBA. While they hoped their businesses would be back on a sure footing, inflation or other issues have caused revenue shortfalls.

In February 2024, the SBA expanded the eligibility for its Hardship Accommodation Plan (HAP) for borrowers who were struggling with loan payments. This includes borrowers who are not current on the loan, are already in default but are not in Treasury Cross-Servicing, and those that have previously participated in HAP.

•  If you previously applied to HAP and were turned down, you should take advantage of the plan’s recent expansions and try again.

•  You do not have to bring the loan current to enroll in HAP.

•  If you do not make HAP payments, your loan will re-enter default and resume the path to Treasury referral.

•  To discuss your HAP eligibility, contact SBA’s COVID-19 EIDL Assistance by phone or email.

EIDL Loan Terms

The COVID-19 loans might not be available any longer, but the EIDL program is worth considering if your business qualifies due to a natural disaster.

Businesses of all sizes located in declared disaster areas can get help. Also, private nonprofit organizations, homeowners, and renters are affected by declared disasters, including civil unrest and natural disasters such as hurricanes, flooding, and wildfires.

Recommended: What Does a Personal Guarantee Mean?

Eligibility

•  Substantial economic injury means the business is unable to meet its obligations and pay its ordinary and necessary operating expenses.

•  EIDL provides the necessary working capital to help small businesses impacted by a disaster survive until normal operations resume.

•  EIDL assistance is available only to small businesses when SBA determines they are unable to obtain credit elsewhere.

The Takeaway

The EIDL Covid-19 loans, low-interest loans from the SBA offering help through the pandemic, were life savers for small businesses. Just as all small business loans must be repaid, those EIDL loans must be repaid too, except for some of the Advance grants distributed early on in the pandemic. The EIDL program is still in existence, but it’s intended for businesses that have suffered the impact of natural disasters, not Covid.

If you are having a difficult time repaying your Covid-19 loan from the SBA, a Hardship Program is still open for applications.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

What can I use EIDL funds for?

Working capital to make regular payments for operating expenses, including payroll, rent/mortgage, utilities, and other ordinary business expenses, and to pay business debt incurred at any time.

Can I still get an EIDL loan because of COVID-19?

No, you can’t. The COVID-19 EIDL program is not accepting new applications, increasing requests, or reconsidering applications. As of May 16, 2022, the COVID-19 EIDL portal (also known as the “RAPID portal”) is closed. Borrowers who need copies of their loan documents can contact SBA at 833-853-5638.

Is there forgiveness for EIDL loans if you can’t pay?

No. But the SBA is offering a Hardship Accommodation Plan for borrowers experiencing short-term financial challenges. Borrowers eligible for this plan may make reduced payments for six months. Interest will continue to accrue, which may increase (or create) a balloon payment due at the end of the loan term.

Photo credit: iStock/whitebalance.oatt

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.

SOSB0324010

Like any small business, a partnership can choose from among several different types of business loans to meet financing needs, including a bank or a SBA term loan, a business line of credit, or a cash advance. It’s also possible for one partner to personally loan capital to the business. This type of partnership loan is treated in a similar way to a loan from a third-party lender.

Which type of partnership loan will work best for your business will depend on how much capital you’re looking for, how your partnership is set up, and the personal resources of each partner. Read on to learn how to get the right type of partnership business loan.

What Is a Partnership Loan?

A business partnership is a way of organizing a company that is owned by two or more people. The partners typically invest their money in the business (or buys into the partnership), and each partner benefits from any profits and sustains part of any losses.

When a partnership needs an influx of funds, say, to increase working capital or expand the business, it may choose to borrow money from a third party, such as a bank or online lender. If the partnership is new or has poor credit, however, it might have trouble qualifying for a small business loan with favorable rates and terms. In that case, one of the partners might choose to loan the partnership the money it needs. Either scenario can be considered a partnership loan.

If, at some point, the owners of a partnership decide to go their separate ways, one partner can typically buy out another partner by getting partner buyout financing.

How Partnership Loans Work

Taking out a loan from a third party in the name of the business works the same way as any small business loan. When applying for a business loan, the partners will likely need to provide business financial documentation and a business plan, as well as information about their own personal financials, including tax returns and personal financial statements.

If a loan is coming from one of the partners, the process involves drawing up paperwork to define the terms of the loan, including the amount, interest rate, and repayment schedule. If the business fails, the partner’s loan will be treated as a business debt that gets paid back before partner distributions of any profits.

In a general partnership, all partners are personally liable for all business debts. In a limited partnership, a limited partner can’t be forced to pay off business debts or claims with personal assets.

Recommended: Typical Small Business Loan Fees

4 Types of Partnership Loans

There are many types of business loans available to partnerships. Here are some you and your partner (or partners) may want to consider.

1. Bank Loans to Partnerships

Banks offer traditional term loans, in which you borrow a set amount of money and pay it back with interest on a predetermined schedule. These loans typically come with competitive rates and terms, but they can also be difficult to qualify for. If you have strong credit and can afford to wait for financing, a bank loan can be a great option for a partnership loan.

2. SBA Loans to a Partnership

The U.S. Small Business Administration (SBA) doesn’t provide business loans, but partially guarantees loans that banks and other lenders make to small businesses. By partially guaranteeing the loan, they eliminate some of the risk to the lender. As a result, SBA loans typically offer high amounts, low interest rates, and long repayment terms. However, they have fairly stringent requirements to qualify.

The standard SBA 7(a) loan can be a good option for partnerships that need working capital or want to expand or acquire a business. The SBA 504/CDC loan can be ideal for a partnership that wants to finance the purchase of equipment or real estate or make upgrades to existing property.

3. Business Lines of Credit

A business line of credit is similar to a credit card, but the difference is that the line of credit can be much higher if you have a strong financial profile. Business lines of credit can be a great option if your partnership needs working capital but doesn’t have a set amount that it needs to borrow. With this option, you only pay interest on what you actually borrow.

Recommended: Credit Memo vs. Debit Memo

4. Cash Advances

Also called a merchant cash advance (or MCA), a cash advance isn’t technically a loan, but a sale of future revenue in return for cash today. With an MCA, you sell your future revenue at a discount to a merchant cash advance company. To collect their money, the advance provider will usually deduct a percentage of your daily credit and debit card sales.

The benefit of this type of partnership financing is that when business is slow, you pay back less, and when business is booming, you pay back more. The downside, however, is that an MCA is one of the most expensive types of business financing on the market.

Recommended: Can Personal Loans Be Used to Start a Business?

Why Business Partnerships Might Need Loans

Here are some common reasons why a business partnership might benefit from outside funding.

To Boost Cash Flow

Cash flow can be a constant challenge for any small business. Without sufficient working capital, your partnership may struggle to manage day-to-day business operations, pay your employees, or cover emergency expenses. A short-term business loan can help you keep funds flowing through your business, even when profits dip.

To Fund a Marketing Campaign

Marketing is often key to a business’s success. But common methods — like advertising, social media marketing, public relations, and search engine optimization — cost money, which you might not have sitting around. A partnership business loan can help you start or expand your marketing efforts. This can lead to more customers and, in turn, more profits.

To Hire More Staff

You and your partners may like keeping things lean. However, if your small team is doing it all — from bookkeeping to sales to customer service — things could start falling through the cracks, impairing your business. Financing can allow you to bring on more employees, freeing you and your partners up to focus more on the big picture — growing your company.

To Buy Equipment or Inventory

A business loan can help your partnership buy important pieces of equipment you might be lacking, or replace equipment that has become outdated or inefficient. With equipment financing, you can often use the equipment you’re buying as collateral, which means you don’t have to put any of your partnership’s assets on the line.

If your partnership business sells products, there may be times when you want to place a bulk order, say before your busy season or if you find a discounted price. A short-term business loan can help you cover the cost of keeping your warehouse fully stocked.

Recommended: Business Cash Management, Explained

Types of Partnerships

Choosing a business structure is an important decision in the early days of a new business. While any business that is operated by two or more owners falls under the partnership category, there are several different types of partnerships, and each set-up has its pros and cons. Here’s a look at the three different types of partnerships.

General Partnerships

A general partnership is the simplest type of partnership and the easiest to set up. In fact, it’s the default business structure when more than one person starts a business and does not formally file documents with the secretary of state.

In a general partnership, all of the owners share equal rights and responsibilities, and each partner has full responsibility for all of the business’s debts. There are no legal state filing requirements for general partnerships, which means the business doesn’t have to pay ongoing state fees.

Benefits of a general partnership: It’s quick and easy to establish and set up, and ongoing costs are lower than other types of partnerships.

Drawbacks of a general partnership: Because general partnerships are very similar to sole proprietorships, any personal assets each member possesses can be used to settle debts and legal disputes. Should you be sued or default on a loan and your business is unable to settle the issue, your personal assets may be at risk.

Recommended: Comparing Personal Loans vs Business Loans

Limited Partnerships

In a limited partnership, limited partners are able to enjoy a separation between their business and personal assets. Should the business become unable to pay its debts, a limited partner won’t lose any personal assets, such as their house or car. Limited partners also do not play a role in day-to-day management operations, though they still benefit from business profits.

At least one of the business owners in a limited partnership, however, must accept general partnership status. While the general partner is able to enjoy sole control over the management and daily operations of the business, that person’s personal assets would be vulnerable to the business’s debts and obligations.

Benefits of a limited partnership: Limited partners don’t have to worry about their personal assets ever being at risk, and the general partner can enjoy complete control over the company.

Drawbacks of a limited partnership: The general partner is at risk of losing their personal assets in the event of a legal dispute or loan default. In addition, limited partners have no say in the management of the business.

Limited Liability Partnership

A limited liability partnership offers personal liability protection for all of the partners involved. This can be an ideal type of partnership for lawyers, doctors, dentists, and other professional businesses because it protects each partner from the debts, mistakes, or malpractices of another individual in the partnership.

Benefits of a Limited Liability Partnership: All business owners are protected from any kind of legal disputes or debts incurred by their peers. This type of partnership also offers the flexibility to bring more partners in, as well as let partners out.

Drawbacks of a Limited Liability Partnership: Any partners involved in wrongful or negligent acts are still personally liable. In addition, it can be difficult to navigate any business changes since no one person is in charge. Businesses often circumvent this by assigning roles to each partner and signing a partnership agreement.

Pros and Cons of Partnerships

Partnership Shareholder Loans

A shareholder is an investor in a corporation, and a shareholder loan refers to a loan provided to a corporation by one or more of its shareholders.

When a partner lends money to a partnership business, on the other hand, that loan is called a partner loan. It’s not a shareholder loan because partners don’t own shares in a partnership; they own interests or a percentage stake. Only loans made by shareholders can be called shareholder loans. However, the terms — and the results — of shareholder loans vs. partnership loans are similar.

Bona Fide Debt

For a shareholder or partnership loan to be considered a bona fide debt, it needs to be treated as a loan from a third party with a written promissory note or loan agreement. It also needs to have a fixed payment date and stated interest rate. With this arrangement, the business can typically deduct interest it pays the lending partner (or shareholder) just as if the loan were between two unrelated parties. In addition, the lending partner or shareholder will typically need to report that interest as income.

Loans From Members to the LLC Partnership

A limited liability company (LLC) is not a partnership; all of the LLC owners are referred to as members, rather than partners. However, just like partners can loan money to a partnership, LLC members can loan money to the LLC.

The Takeaway

If your partnership firm is looking for capital, there are all kinds of small business financing options to consider. To make sure you’re getting the best rates and terms for your business, it can be a good idea to shop around and compare the various small business loan options.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

Can a partnership get a business loan?

Yes, partnerships are eligible to get the same business loans that are available to all small businesses.

Can a partnership lend money to a partner?

Yes, just as a partner can loan the business money, the business can loan money to one of the partners.

Are loans from partnerships treated differently from other business loans?

No, whether a loan comes from a third party, the partnership, or one of the partners, it is treated the same way.

Can a partnership take a loan from partners?

A partner can typically borrow from the partnership, as long as all the partners agree to the loan. The partnership should draw up a promissory note that details all the terms of the loan and have it signed by the borrowing partner.

Photo credit: iStock/nortonrsx

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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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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Credit and debit memos are documents or items on financial statements that add to (in the case of a credit) or reduce (in the case of a debit) your account balance. They are used to correct charge mistakes or any changes in the amount you owe or the amount due to you.

When reading bank statements, as well as invoices from vendors, you may see these two terms and want to know more about what they are and why they are important.

What Is a Credit Memo?

There are a few places you may see what’s called a credit memo: on an invoice from a vendor, on your bank statement, or on your credit card statement. No matter where you see the credit memo, it signifies the same thing.

A credit memo is shown when money is added to an account. In the case of a bank or credit card statement, you might see a credit memo if you were reimbursed for fees or earned interest on a bank account. With a vendor invoice, you might see a credit memo if you were overcharged on a previous invoice and are now receiving credit for that amount you overpaid.

Credit Memo Examples

These examples can help you identify them when you see them.

Bank Account and Credit Card Statement Credit Memos

•  Interest earned

•  Fees reimbursed

•  Reimbursement of unauthorized transaction

•  Credit for returned product purchase

Vendor Invoice Credit Memos

•  Correction of invoice error

•  Credit for overpayment

•  Discount for paying invoice early

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What Is a Debit Memo?

In contrast, a debit memo, also called a debit memorandum, decreases the amount of money in an account.

For bank and credit card statements, that might be a fee or interest charged. For vendor invoices, the debit memo might happen when you are charged a late fee for an unpaid invoice.

It’s important to understand the difference between a credit memo vs. debit memo because the amount of money you have in your business bank account (or the amount you owe on a credit card or vendor invoice) will be impacted, as will your accounts payable.

Recommended: Small Business Financial Ratios

Debit Memo Examples

Now, consider these debit memo examples.

Bank Account and Credit Card Statement Debit Memos

•  Monthly account fee

•  Overdraft fee

•  Credit card interest charges

•  Annual credit card fee

Vendor Invoice Debit Memos

•  Fee for late payment

•  Reconciliation for undercharging on previous invoice

Information Found on a Credit Memorandum

In addition to showing the amount credited, a credit memo may also have the following details. If you’re keeping statements, it can be helpful to know what to look for to find a particular credit memorandum.

•  Payment terms

•  Invoice number

•  Description of item(s) purchased

•  Price paid or owed

•  Details on credit

•  Number of items on the purchase order

•  Date of purchase

•  Customer’s bank account number

•  Financial institution number

•  Shipping address

For a bank or credit card statement, you will find the date of the credit issued, a description of the credit, and the amount.

Recommended: Variable Costing Income Statement

Information Found on a Debit Memorandum

The same information can be found on a debit memorandum, though, of course, you’ll find details on the debit, rather than the credit.

•  Payment terms

•  Invoice number

•  Description of item(s) purchased

•  Price paid or owed

•  Details on debit

•  Number of items on the purchase order

•  Date of purchase

•  Customer’s bank account number

•  Financial institution number

•  Shipping address

For a bank or credit card statement, you will find the date of the debit charge, a description of the debit, and the amount.

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When Are Credit Memos and Debit Memos Used?

There are a few scenarios where you, a bank, a credit card company, or a vendor may use a credit or debit memo.

The first is to correct an error. If you were overcharged (or undercharged) on an invoice, or if the amount owed otherwise included an error in calculation, the easiest way to rectify this error is by issuing a credit or debit memo on the next invoice.

If a customer wants to return a product or get a refund, a credit memo may be issued. Note that a credit memo isn’t the same as a refund. With a refund, the original transaction is typically reversed, where with a credit memo, a separate transaction is conducted to credit the amount owed.

Another situation where a credit memo may be used is when a customer is given a discount for a purchase. Maybe you paid an invoice early and got a credit for a percentage of the invoice amount. Or maybe the product was on sale or you purchased in bulk and got a discount through a credit memo.

With a debit memo, you may be charged a fee, such as for a late payment, an overdraft, or simply a monthly fee for a bank account.

Recommended: EBITAR Explained

The Takeaway

Understanding both credit memos and debit memos can help you more easily interpret bank and credit card statements, as well as vendor invoices. This helps you better manage your business finances.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

Is a debit memo positive or negative?

A debit memo, in the case of a vendor invoice or credit card statement, increases the amount owed. In the case of a bank statement, it’s a reduction in the amount of money in the account.

Is the credit memo a refund?

A credit memo is similar to a refund, but not the same thing. Rather than reversing the initial charge, a credit is given as a separate transaction for whatever athe same amount as the original purchase.

Why is it called a credit memo?

A credit memo provides a credit, or increase, in the amount of money in an account.

Photo credit: iStock/Inside Creative House

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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