By Lauren Ward |
SMB |
Comments Off on Guide to EBIDA: What It Is, How It Works & How It’s Used
Earnings before interest, depreciation, and amortization (EBIDA) is a measure of a company’s earnings that adds interest and depreciation/amortization expenses back to the net income number. It is similar to, but not as commonly used as, earnings before interest, taxes, depreciation, and amortization (EBITDA).
Here’s a closer look at EBIDA, how this metric is calculated, and how it compares to EBITDA.
What Is EBIDA?
EBIDA is a measure of the earnings of a company that adds interest (paid on debt), depreciation, and amortization expenses back to net income – the last line on the income statement. Unlike EBITDA, which adds back those items plus income taxes to net income, EBIDA does consider the effects of taxes on a company’s earnings.
How Does EBIDA Work?
EBIDA measures a company’s financial performance before the influence of accounting or financial decisions, such as how much debt (interest) the business has taken on or how much money it has invested in property, equipment, or licenses (depreciation/amortization).
While those expenses are initially subtracted from a company’s operating revenue to calculate its net income, EBIDA adds them back as another way to evaluate a company’s financial performance.
Here’s a look at specifically what EBIDA adds to net income:
• Interest This is the interest a business pays on any loans, such as any type of small business loan. It is excluded from EBIDA because it reflects the financing structure of the business, rather than the company’s core operations. Adding back interest to net income also makes it easier to compare the relative performance of two companies with different capital structures.
• Depreciation Depreciation is the process of writing off the cost of a tangible asset over the course of its useful life. Depreciation expenses will vary depending on whether a company has invested in long-term fixed assets that lose value due to wear and tear. It is excluded from EBIDA because it reflects historic investment decisions the company has made, but not its current operating performance.
• Amortization Similar to depreciation, amortization is the process of writing off the value of an intangible asset, such as a copyright, patent, or license, over its useful life. An intangible asset is amortized because its value diminishes over time due to expiration. It is excluded from EBIDA for the same reasons that depreciation is excluded.
EBIDA is not a commonly used performance metric. However, it can be helpful for comparing two different companies in the same industry because it shows earnings before the influence of accounting and financial deductions, which can vary depending on a company’s capital structure.
EBIDA is also used as a performance metric for companies that do not pay taxes, such as hospitals, religious organizations, charities, and other nonprofits. In this case, EBIDA can be used interchangeably with EBITDA.
Recommended: Business Cash Management: Tips for Managing Cash
EBIDA vs EBITDA
Both EBIDA and EBITDA are financial metrics that are sometimes used in place of net income to evaluate a company’s operational performance. With both metrics, interest on debt and the noncash accounting expenses (depreciation and amortization) are added back to net income. Unlike EBITDA, however, EBIDA does not add back income taxes.
Because it includes the tax expense in the earnings measure, EBIDA is considered to be a more conservative valuation metric than EBITDA. EBIDA removes an assumption made in EBITDA – that some of the money used to pay taxes can be used to pay down debt. EBITDA assumes this because interest payments on business loans are tax deductible. This lowers a company’s tax burden, giving it more money to pay off debt.
EBIDA, on the other hand, doesn’t assume that taxes can be lowered through interest expenses. As a result, it does not add taxes back to net income.
EBITDA is a much more commonly used performance metric than EBIDA. In fact, EBITDA and seller’s discretionary earnings (SDE) are typically the most common metrics used to value small and mid-sized businesses.
Neither EBIDA nor EBITDA are compliant with the Generally Accepted Accounting Principles (GAAP). However, EBIDA is somewhat closer to compliance than EBITDA because it does consider the effect of taxes on a company’s net income.
EBITDA
EBIDA
Widely accepted as an earnings metric
✓
X
Adds back interest, depreciation, and amortization to net income
Let’s take a look at an EBIDA example using the following financial information for Company X:
Total revenue
$1,500,000
Cost of Goods Sold (COGS)
$250,000
Depreciation
$40,000
Amortization
$30,000
Interest Expense
$125,000
Taxes
$40,000
Selling General, and Administrative Expenses (SG&A)
$125,000
To calculate EBIDA, we’ll start with net income, which is total revenue minus COGs, SG&A, depreciation/amortization, interest, taxes, and other expenses. Net income for Company X is $890,000. Next, we’ll calculate EBIDA.
EBIDA = Net income + Interest + Depreciation + Amortization
EBIDA = $890.000 + $125,000 + $40,000 + $30,000
Like EBITDA, EBIDA is a performance metric that allows analysts and investors to quickly gauge a company’s financial performance in a given reporting period. It includes the effect of taxes on net income, but it removes any costs associated with interest, depreciation, and amortization. Because of this, it can be considered a more conservative metric than EBITDA when analyzing a company. However, EBIDA is not commonly used.
Neither EBIDA nor EBITDA is GAAP-compliant. So if you’re applying for a small business loan, you can include your company’s EBIDA or EBITDA number, but you will still also need to include its net income.
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.
With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.
FAQ
How are EBIDA and EBITDA different?
EBIDA (earnings before interest, depreciation, and amortization) differs from EBITDA (earnings before interest, taxes, depreciation, and amortization) in that it does not add income taxes back to net income. Because of this, it is a more conservative approach to analyzing a company’s financial performance. EBIDA is also not as commonly used as EBITDA.
What does the acronym EBIDA stand for?
EBIDA stands for earnings before interest, depreciation, and amortization.
What is the formula for EBIDA?
Here are two formulas for EBIDA (earnings before interest, depreciation, and amortization):
Net income + Interest + Depreciation + Amortization = EBIDA
EBIT (Operating Profit) + Depreciation + Amortization – Taxes = EBIDA
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.
If you need more working capital to grow your business, a secured business line of credit could be a good solution. Because it’s backed by collateral, such as real estate or business equipment, it can be easier to qualify for and may offer better rates and terms than other, unsecured forms of business financing.
Here’s a closer look at how secured business lines of credit work, their pros and cons, how they compare to secured business lines of credit, and how to go about getting one.
What Is a Secured Business Line of Credit?
A secured business line of credit is a flexible financing option that allows a business to borrow money when it needs it (up to a certain limit) and only pay interest on the amount they withdraw. Once you pay back the funds you’ve taken out, the full amount becomes available again.
Unlike an unsecured business line of credit, a secured credit line requires putting up collateral. This is an asset of value (such as equipment, real estate, or intellectual property) that, should you become unable to repay the loan, the lender can seize and sell to recoup its losses.
How Do Secured Business Lines of Credit Work?
A secured business line of credit works in a similar way to a credit card. You get a credit limit for your business to tap into whenever you want or need the money. You only pay interest on the funds you draw, and once you repay them, your line of credit gets renewed to its original amount.
A secured business line of credit is not available forever, however. Typically, you have to renew the credit line semi-annually or annually to get it extended.
With a secured business line of credit, you must put a business asset on the line. Because this lowers the risk for the lender, it often comes with favorable rates and terms. However, if you default on the loan, you risk losing that asset.
What Can Be Used to Secure a Business Line of Credit?
There are several types of assets you can use as collateral to secure a business line of credit. All these items give reassurance to the lender that they will be repaid in some fashion, even if you default.
Real Estate
Real estate is one of the most common types of collateral used to secure a business line of credit. The reason is that property tends to have a lot of value and hold its value over time. You can use any type of real estate that you or your business owns. However, you may want to think twice before using your primary residence as collateral for a business line of credit. Should you run into trouble repaying the debt, you could lose your home.
Cash
Cash savings in a bank account is a liquid asset, meaning it’s readily available. If you put cash up as collateral, a lender will feel confident that they won’t experience significant loss should you end up defaulting.
Equipment
Equipment or machinery owned by your business can also be used to secure a business line of credit, since these assets tend to be high in value. However, they also tend to lose value over time due to wear and tear. As a result, you may not be able to get a high line of credit with equipment as your collateral.
Intellectual Property
Intellectual property, like trademarks, patents or copyrights, can have significant value. A lender will often accept this type of intangible asset as collateral for a business line of credit.
Inventory
You may be able to use your company’s inventory as collateral for a secured business line of credit. However, it may require an appraisal in order to be accepted by the lender.
Alternatives to Secured Business Lines of Credit
A secured business line of credit can be a great way to even out gaps in your cash flow or buoy your finances. However, a credit line isn’t your only business financing option. Others include:
Business Loans
Unlike a business line of credit, a business loan provides you with a lump sum of capital that you pay back (plus interest) in regular installments. (One exception is a delayed draw term loan, which allows you to withdraw predefined amounts of a total pre-approved loan amount.)
Business loans can be secured or unsecured and may require a down payment. A loan can be a good choice when you need financing for a specific project or major acquisition or investment that will help grow your business.
With a merchant cash advance (MCA), a lender gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee. An MCA can come in handy if you’re in a pinch and need capital to cover a cash-flow shortage or short-term expense. However, MCAs tend to come with much higher interest rates than other types of business financing.
Invoice Financing
Invoice financing is when a lender gives you a cash advance on your outstanding customer invoices. Also known as accounts receivable financing, it uses your invoices as collateral. Invoice financing can be easier to get than a traditional business loan or business line of credit, but tends to come with higher interest rates.
Secured Business Line of Credit Application
When you apply for a business line of credit, you’ll have to determine how much credit you need. You’ll also want to check your eligibility, research and compare lenders, and gather the necessary documentation.
Where to Find a Secured Business Line of Credit
Secured business lines of credit are offered by traditional banks, credit unions, alternative online lenders, and the U.S. Small Business Administration (SBA). Rates and terms can vary widely from one lender to another, so it can be a good idea to shop around and compare offers.
Credit Requirements
You generally need to have a good credit profile for your personal and/or business credit score to qualify for a secured business line of credit. If your credit score is low, you may have a harder time receiving approval. It’s a good idea to check your personal and business credit score before applying.
Other Documents
When you submit your application for a secured business line of credit, you may be asked to submit a number of additional documents, including:
• Business name, address, phone number and email address
• Annual sales and/or revenue
• Business and personal tax returns
• Financial statements (such as your balance sheet and income statement)
A secured business line of credit can provide your startup or small business with flexible financing and, because collateral lowers the lender’s risk, may be easier to qualify for than other types of small business financing.
Using a business asset (such as real estate or equipment) as collateral, however, poses some risk to you as a borrower. Should you become unable to make payments on the credit line, you could lose a valuable asset.
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.
With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.
FAQ
Do you have to use collateral for a business line of credit?
No. An unsecured business line of credit does not require putting up any assets as collateral.
Can you get a secured business line of credit with a lower credit score?
It may be possible to get a business secured line of credit with a low credit score. However, you may receive a lower line of credit and pay higher rates than a borrower with excellent credit.
What are the advantages of unsecured business lines of credit?
The advantage of an unsecured business line of credit over a secured one is that you don’t need to provide collateral. When comparing business lines of credit to business loans, the main advantage is flexibility. Rather than getting one lump sum of capital up front, a line of credit allows you to take some money out now and more at a later time, while only paying interest on the amount you are using.
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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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.
What with maintaining cash flow, managing employees, and covering bills, there’s a lot that goes into running a small business. Time can often be of the essence when you need to pay for these costs, making a fast business loan appealing.
Traditional loans may require extensive documentation, such as a business plan, years of bank statements, and proof of collateral to get funding. And in some cases, approval and accessing funds can take weeks or more.
Taking a closer look at the different types of small business financing available can help if you’re considering whether a fast small business loan might be a good fit for you.
Types of Fast Business Loans
Fast business loans typically provide funding within a matter of days after you apply. While these loans offer quick approval and turnaround, this convenience may come with tradeoffs, such as higher interest rates and service fees.
How fast you can get your funds and the costs involved will depend on which kind of small business loan you opt for. Here are some fast business loan options you may want to consider.
The U.S. Small Business Administration (SBA) offers a variety of loan programs catering to different business types and funding needs. Although some of these loans may involve a longer application process, if you’re after quick-funding business loans, the SBA Express program could be a solution. Eligible businesses may request up to $500,000 and receive approval from the SBA in as little as 36 hours after applying.
SBA Express loans are issued by a network of SBA-approved lenders. The SBA guarantees to fund up to 50% of the loan in the event that the borrower defaults. This reduces risk to the lender and allows them to offer more flexible qualification criteria.
Having cash on hand can be important for covering both day-to-day operations and emergency expenses. Instead of applying for financing whenever costs arise, a business line of credit allows you to access cash (up to an approved limit) whenever you need it. While it may take some time to set up a business credit line, once it’s there, it’s a resource you can draw on at a moment’s notice.
Once approved by a lender, you are allocated a maximum credit line and can withdraw funds up to that threshold to pay your bills, purchase inventory, or fill in gaps for working capital. You only pay interest on the amount you borrow and, once you repay those funds, they are available to borrow again.
Equipment is integral to many businesses’ operations, whether it’s concrete mixers for a construction business or computers for an accounting firm. However, purchasing machinery and other vital equipment is often too costly for businesses to pay for out-of-pocket.
If this is your situation, equipment financing may be a route to consider. This type of small business loan may charge less interest than conventional options, since the equipment itself is typically used as a form of collateral. Repayment terms are determined by the individual lender but usually span a few years.
Getting an equipment loan is typically a faster process than obtaining traditional funding, though it can vary by lender.
Short-Term Loans
A loan’s term is the amount of time it will take for the borrower to pay the loan off completely by making regular payments. For short-term business loans, this duration can range from a few months to up to18 months.
Short-term business loans are often a faster route to cash than long-term financing options. Since the repayment terms are shorter, lenders usually view short-term business loans as less risky so their requirements may be less stringent.
Easier qualification helps speed up the process so that businesses can act quickly to maintain cash flow, buy inventory, and address other unexpected costs.
Delays in payments from customers and clients can lead to cash flow issues. Those, in turn, can delay you when you need to act on investment and growth opportunities. Instead of standing by, many businesses can borrow against outstanding invoices owed to them through a practice called invoice financing.
In invoice financing, the lender loans you a large percentage of the face value of your unpaid invoices. As your customers settle their debts, you receive the rest of the invoice amount, minus the lender’s fees.
This quick funding option is typically better suited to businesses that sell wholesale or let customers buy goods or services on credit. Otherwise, they may not have enough invoices on hand to finance.
A merchant cash advance (MCA) can be a solution for a business that needs capital immediately to cover cash-flow shortages or short-term expenses. With an MCA, a financing company gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee. Often the way the financing is structured is that MCA provider automatically deducts a daily (or weekly) percentage of your debit and credit card sales until the advance is repaid in full.
This quick access to cash generally comes at high cost. MCA companies charge a factor rate plus fees. When the factor rate and fees are converted into an annual percentage rate (APR) and compared to other business financing options, MCAs tend to cost considerably more.
For businesses in a cash crunch, a fast business loan could be a funding solution to cover day-to-day expenses or seize an investment opportunity.
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.
With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.
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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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.
By Susan Guillory |
SMB |
Comments Off on What Trucking Business Loans Are & How They Work
If you’re in the trucking business, whether that means running a tow-truck company, a fleet of semis, or even using trucks to deliver products, your biggest expense is the vehicles that your staff drives. Without those trucks, you can’t operate. But do you have the cash you need to buy those high-dollar trucks?
A trucking business loan can help you purchase new trucks in order to start or grow your trucking business. Keep reading to learn more on what a trucking loan is, the pros and cons of trucking business loans, and other business loan options to consider for your small business.
What Is a Trucking Business Loan?
Small business loans for truckers are specifically used for purchasing a commercial truck, with the vehicle you’re purchasing acting as collateral to secure the loan. A loan backed by collateral can sometimes help you secure lower interest rates than you’d get with an unsecured loan, too.
When it comes to small business loans for trucking companies, there are a few differences in how they work compared to other types of small business loans.
Because the truck you’re buying serves as collateral, you may be asked questions about the vehicle in the loan application, including the year, make and model, and what you will use it for.
Once you’re approved, you can purchase the truck or trucks. The lender, whether that’s a bank, credit union, or online lender, will then have a lien on the truck, meaning that if you can’t pay back your loan, the lender has the right to seize the truck and sell it to cover your remaining debt.
A Word on Collateral
What is collateral, exactly? It’s a physical asset that the lender can take a lien on. This means that if you are unable to pay your loan back, the lender could seize the asset and sell it to cover the remaining debt.
In traditional loans, collateral might be a piece of equipment or real estate. With trucking loans, the truck you’re buying serves as the collateral, so you don’t have to come up with another asset for collateral.
Pros and Cons of Trucking Business Loans
Like any big decision, deciding to take out one or more trucking business loans should carefully be considered.
Pros of Trucking Business Loans
Cons of Trucking Business Loans
Get the financing you need to buy trucks, even if you don’t have the cash on hand
Can only use funds to pay for truck
Won’t need to put down additional collateral
If you can’t pay, the vehicle can be seized
Pros of Trucking Loans
If not having cash to buy trucks has stopped you, taking out a trucking business loan can ensure you have the capital you need to buy the vehicles to grow your business. And because the vehicle acts as collateral, you don’t also need to come up with cash or another asset as additional collateral for the loan.
With the vehicle acting as collateral, you may qualify for a lower rate than you would with an unsecured loan, and borrowers who aren’t as creditworthy may have an easier time qualifying.
Cons of Trucking Loans
If you’ve never taken out financing for your startup, business loans for trucking may be unfamiliar, and you may not realize the true cost of a loan. You’ll be paying interest on the life of the loan, and many lenders charge fees, which can add up.
If you aren’t able to make your monthly payments, the lender can take your truck and leave you without the vehicle you need to run your business.
It may sound great to get a loan for $100,000 to buy trucks, for example, but if you don’t have a plan to pay it back, you could find your business financially strapped. You can take the maximum repayment period possible (usually 72 months) to reduce your monthly payment, though realize your truck will depreciate over time, and you might still be paying it off when it’s time to replace the truck.
Using a Trucking Business Loan vs. Conventional Business Loan vs. Equipment Loan
Trucking business loans are just one option you have when it comes to financing a vehicle for your business. There are other loans you can also use to buy the vehicles you need, and each has its own distinct characteristics.
You already know that you can use a trucking loan to purchase a vehicle for your business. If this is the only thing you need financing for, it may be your best option.
Conventional Loan
You can use a conventional business loan to purchase a truck or cover any other business-related expense, including payroll, marketing, equipment, supplies, inventory, rent, and fees. If you need money to not only purchase a truck but also cover other expenses, this may be the right fit.
Equipment Loan
Another option for purchasing your business truck is an equipment loan. With an equipment loan, you can buy vehicles in addition to things like mixers, cranes, industrial ovens, and computers. If you need any other type of equipment in addition to a vehicle, consider taking out an equipment loan to buy everything at once.
Qualifying for Trucking Business Loans
If you’ve already researched how to apply for business loans, you’re well-prepared for applying for a trucking business loan. There are few differences in the process, though, other than having to fill out a few details about the vehicle you’re buying.
Each lender will have slightly different criteria to qualify for a loan, so before applying, see what these criteria are. Some may require you to have a certain credit score or time in business, whereas others may look at your annual revenues.
With some lenders, you can check to see if you prequalify without an impact on your credit score. This can give you a sense of what sort of rates you could get with a trucking loan. The collateral may help if your business is less established or your credit score isn’t great.
Below are a few scenarios where you might benefit from truck financing.
• Starting a tow truck business. If you’re starting a tow truck business, you’ll need at least one truck to get started. You can take out a loan for that truck and, as your business thrives, you can pay it back and borrow more money to expand your fleet. Keep in mind that if your business is brand new, you may be limited in your financing options and/or pay higher interest.
• Running a semi truck business. If you are an owner-operator of a semi truck business, you can also benefit from a truck loan. Working on your own, you’ll quickly make enough to repay the loan and keep profit.
• Needing a new truck to continue your business. Another situation where you might need a truck loan is if your current truck is no longer functional, either because it needs major repairs or just isn’t as efficient as it once was. If you find yourself desperately needing a vehicle, taking out a business truck loan can alleviate the stress this situation can cause.
There are several different types of loans to purchase the truck or fleet of trucks your business needs.
Short-Term Business Loans
Deciding what kind of business loan for a trucking company you need will depend on how quickly you want to pay back the loan. If you need cash fast to make the purchase but know you could pay it back in a few months, a short-term business loan is an option.
Also, note that these loans tend to have higher interest than long-term loans, so if you qualify for a conventional loan, you may get a lower interest rate and can aim to pay the loan back before the repayment period is over.
Small Business Line of Credit
A small business line of credit, or LOC, gets you access to cash when you need it, rather than distributing it all up front. Consider business lines of credit if you know you’ll be buying more trucks in the future or have other needs for capital.
SBA Loans
Whether you’re an owner-operator of a semi or have another trucking business that’s been around for at least two years, you may qualify for an SBA loan. These loans have long repayment periods and low interest rates, but the qualifications are stringent and funding times can be long.
Equipment Financing Loans
Equipment financing loans work similarly to trucking loans in that the equipment you’re buying — in this case, a truck — acts as collateral for the loan, which helps you save in interest. There are a few types of equipment financing, including heavy equipment financing, so see what your options are.
Alternatives to Trucking Loans
Alternatives to trucking loans include business credit cards, merchant cash advances, and invoice financing as a means to get the cash you need for your business. You can also consider borrowing money from family or friends if that is an option.
Now that you’ve learned just how many types of loans you have as an option to buy your business’ truck, how do you decide which is right?
Start by considering what you need the capital for and how much you need. Are you looking to just buy one truck or do you need a fleet? Do you need to purchase other business materials or just trucks? Do you need all the cash right now or do you need some now and more later? What sort of loans do you qualify for? How long do you want to repay the loan?
Once you’ve answered these questions, research lenders and their criteria for the type of loan you land on. And make sure to comparison shop with multiple lenders. Doing so could save you hundreds or even thousands of dollars over the life of the loan. Even a slight reduction in interest can make a big difference, and every penny you save is money you can reinvest in your trucking company.
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.
Get personalized small business financing quotes with SoFi's marketplace.
FAQ
Can you get a business loan to start a trucking company?
With some lenders, you may be able to take out a loan for a new business, but most conventional and SBA loans require you to have been in business for at least two years. If you are looking at a trucking loan, because the truck acts as collateral, you may qualify for more options, even if your business is new.
Can truck drivers get SBA loans?
Truck drivers who have run their own business for at least two years may qualify for certain SBA loans.
How can you start a trucking business with no money?
Finding financing for a brand-new business can be challenging, but not impossible. Some types of loans, such as short-term loans and merchant cash advances, look at factors other than time in business to qualify you. You may also consider taking out a personal loan to start your trucking business.
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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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.
If you’re a business owner with limited or no collateral for a business loan, you may find it harder to get the financing you need to support your business. Some traditional lenders, like banks and credit unions, generally require collateral to secure a business loan — in the event that borrowers are unable to pay back the funded loans.
Unsecured Business Loans Explained
An unsecured business loan is one in which the lender usually does not require collateral. Instead, the lender relies heavily upon the creditworthiness of the applicant. In contrast, with a secured loan, lenders may require collateral in the form of real estate, equipment, or another type of asset. Collateral can help lenders to offset the risk of loaning out money, but not all businesses or business owners (even established ones) have adequate funds or assets to offer as collateral.
If a business owner doesn’t have necessary collateral, he or she may opt to apply for an unsecured business loan. While unsecured business funding may not require a borrower to pledge specific business collateral, like real estate or equipment, some lenders may still ask for a personal guarantee from applicants.
A personal guarantee is a written promise to personally pay back the loan in the event that your business cannot. This differs from collateral because a personal guarantee is not linked to any specific asset, which may offer some borrowers more freedom when looking for small business loans.
However, it’s important to keep in mind that, when a business defaults on the loan repayment, the personal guarantee may allow the lender to seize personal assets, which could include checking and savings accounts, cars, and even a house.
Not all unsecured business loans require a personal guarantee or collateral. But borrowers may still find that unsecured business loan rates are higher than the interest charged on a secured loan, because the lender is taking on more risk. Even without the collateral or personal guarantee, lenders can still take legal recourse when an unsecured loan isn’t repaid. They may send outstanding accounts to debt collection or sue to ensure the money gets paid back.
Additionally, failing to repay a loan may severely impact a borrower’s credit score, which can affect the likelihood of getting approved for lender financing in the future.
Unsecured vs Secured Business Loans
The primary difference between an unsecured business loan and a secured business loan comes down to collateral. Secured business loans are those that require collateral in the form of a valuable asset, while unsecured loans do not.
While collateral is the main factor that separates these two types of loans, there are a few other differences to note:
• Secured loan amounts are typically determined by the loan-to-value ratio (LTV) of your collateral. Lenders use loan-to-value ratio to determine how much they choose to loan out based on the value of the collateral. Asset values can vary depending on the type of asset. For example, real estate that’s not considered “ready-to-go” may result in a loan amount that’s smaller than a piece of property that’s completely paid off. Lenders may also look at LTV differently, so it’s important to consult with individual lenders about how they calculate asset values.
• Collateral can be business or personal assets. These may include real estate, vehicles, jewelry, collectibles, stocks and bonds, cash savings, and assets that can be converted into cash.
• Secured loans typically have longer repayment terms. Because a secured loan poses less risk, lenders typically give longer repayment periods compared to unsecured loans.
Examples of secured loans are mortgages, secured auto loans, home equity lines of credit, and commercial equity lines of credit (CELOC). Examples of unsecured loans include student loans, unsecured personal loans, and business signature loans.
When comparing secured and unsecured loans, secured loans can offer some potential benefits for borrowers with valuable assets, but they also come with some potential complications — including:
• Risk of losing any pledged collateral (if the borrower defaults on repayment)
• Longer repayment terms mean you’re paying the loan for a longer period of time compared with unsecured business loans that typically have shorter terms
• Some secured loans may actually offer less financing than you’re looking for, because they’re based on the value of collateral, not just on the financial history of your business or your personal creditworthiness.
• Loan applications can take weeks or months to process if the lender requests to appraise the value of the collateral and how it’s tracked.
Some business owners may pursue unsecured business loans, but there are pros and cons to be aware of. The following pros and cons might be helpful when deciding if unsecured business financing is right for you:
Pros of Unsecured Business Loans
• Faster potential turnaround time: No matter what type of business loan you’re seeking, lenders will likely conduct a thorough check on your qualifications. But an unsecured business loan typically requires less time to approve (since lenders do not need to vet and verify collateral). With a secured business loan, lenders generally need to assess the value and legitimacy of collateral, which can require more time. For borrowers who need financing to come quickly, an unsecured loan may hold appeal.
• Lenders can’t seize property (without a court order): One of the risks of a secured business loan is having valuable assets seized if you default on the loan. With an unsecured business loan, lenders cannot seize business or personal property (without a court order), because no collateral has been pledged to the lender.
• Unsecured loans may be discharged if you file for bankruptcy: In the unfortunate event that your business has to file for bankruptcy, an unsecured business loan may be discharged, meaning you may not be liable for a business debt. Most unsecured loans are considered non-priority debt under various laws and, in some cases, may be discharged in bankruptcy. In contrast, discharging a secured loan in bankruptcy may not prevent a creditor from seizing the collateral.
• Lenders may have fewer restrictions on how you use funds: Unsecured business loans may give you more flexibility on how you can use the funds compared with secured business loans. Borrowers cannot, of course, use business loan funds for illegal purposes.
• Unsecured loans may have higher interest rates: The risk involved in providing an unsecured business loan can be significantly higher for lenders. Consequently, unsecured loans typically have higher interest rates for borrowers than the rates on a secured loan.
• Eligibility requirements: Without collateral, lenders may rely more heavily upon other eligibility requirements — factors like a loan applicant’s credit score, financial history, and business revenue. If you have poor credit or lack sufficient revenue, a lender may deny your application for an unsecured business loan.
• Smaller loan amounts: Due to the increased risk that comes with no collateral, lenders may not offer large loan amounts. With a collateralized loan, lenders are more protected and may offer more funding.
• Personal guarantee may be required: Even though an unsecured business loan doesn’t require specific collateral, lenders may want a personal guarantee so they know the loan will be paid in the event of default. When you sign a personal guarantee, you are still responsible for paying back the loan even if your business dissolves, and lenders can still legally pursue a borrower’s personal assets, even if they aren’t noted as collateral.
Financing a business with unsecured business loans offers a number of options for different types of small businesses. Check out the following unsecured loan types to learn more about your options:
Short-Term Loan
What is it? Short-term business loans give borrowers a sum of money upfront, which is then repaid with interest over a time set by the lender. Short-term unsecured business loans typically have terms of 18 months or less.
Why choose it? If you need a fast business loan that’s unsecured and you can repay fairly quickly, a short-term loan may help. Short-term loans may also be easier to get with poor credit, no credit, or minimal business history.
Keep in mind: Unsecured, short-term loans usually have much higher interest rates than other loan options because lenders are taking on more risk. Borrowing amounts may also be lower.
Loan With Personal Guarantee
What is it? Unsecured business loans with a personal guarantee are those in which the borrower signs a legal promise to repay the loan if the business defaults on the loan.
Why choose it? Loans with a personal guarantee can help borrowers get financing when they don’t have a well-established business, collateral, or creditworthiness to qualify for other forms of business financing on their own.
Keep in mind: There are limited and unlimited personal guarantees. Limited guarantees give lenders the ability to collect a certain amount of money or a specific percentage of the outstanding balance. Unlimited personal guarantees mean that the borrower is responsible for the entire balance of the loan and the lender can legally pursue payment for the outstanding balance.
Business Line of Credit
What is it? A small business line of credit with no personal guarantee is a type of short-term loan that can help with managing cash flow. Borrowers receive a set credit limit and use funds up to that limit, with interest paid on the money that gets withdrawn. Some lines of credit are revolving (aka able to be replenished), while others terminate when the balance is paid off.
Why choose it? If your business experiences seasonal fluctuations, a cyclical sales cycle, or has emergency expenses, a business line of credit can be helpful in supplementing cash flow. It’s typically easier to qualify for a business line of credit, because funding amounts are generally smaller and limited to shorter terms.
Keep in mind: Starting a business line of credit may have additional fees and costs to be aware of. In some cases, lines of credit offer smaller borrowing limits than a long-term loan.
Invoice Factoring
What is it? Getting business funding without personal credit may be challenging, but options like invoice factoring may be an additional option. Businesses receive a sum of cash when a factoring company purchases unpaid invoices at a discount. Funds can be used toward working capital and other smaller expenses. The factoring company takes ownership of the invoices, so they are responsible for collecting payment directly from customers. Technically, invoice factoring is not a loan but rather a cash advance based on invoices.
Why choose it? Invoice factoring can assist businesses that offer products and services with irregular billing cycles and B2B companies that deal regularly in customer invoices. Factoring companies offer a percentage of the value on outstanding invoices, giving the business faster access to cash.
Keep in mind: The cost of unsecured business financing via invoice factoring can be quite high. It may include additional fees and a variable APR if there are late payments from customers. Businesses also lose control over collections, so it’s important to make sure that factoring companies use ethical collections processes.
Peer-to-Peer Lending
What is it? With peer-to-peer (P2P) business lending, borrowers receive funding directly from other individuals, thus eliminating the need for a financial institution to act as a go-between. Borrowers and private investors connect using online platforms, and funding can happen quickly.
Why choose it? For small businesses and entrepreneurs that need cash quickly with competitive rates, P2P loans are one possible option.
Keep in mind: Loaned amounts are typically smaller than traditional loan offerings, and you may need excellent credit to qualify for larger loan amounts.
Merchant Cash Advance
What is it? A merchant cash advance (MCA) gives cash up front in return for repayment taken as a percentage of the borrower’s credit card sales. Automatic withdrawals are often set up for daily or weekly payments to make the repayment process quick and timely.
Why choose it? If you need quick access to cash for working capital or emergency expenses or your credit is poor and you are in search of a business loan with no collateral, merchant cash advances may help.
Keep in mind: You pay for the convenience of merchant cash advances, making them one of the most expensive unsecured business loan options — which means borrowers need to be extra careful about the lenders they work with.
Since unsecured business funding doesn’t rely on collateral, many lenders will need adequate proof that a borrower is able to repay their loan. Whether you’re seeking a loan from a bank or an alternative loan provider, it could be helpful to review these steps when preparing to apply:
1. Determine How Much Funding You Need
The amount of funding you need plays a role in the type of unsecured business financing you apply for. If you simply need quick cash to cover a repair or emergency expense, you may consider a business line of credit or a short-term loan. In contrast, if you need enough to cover larger expenses over a period of time, you may seek an unsecured loan with a personal guarantee.
Here are some factors you may want to keep in mind when deciding how much cash is needed:
• What is the loan going to pay for? Is it absolutely necessary?
• How often will you be able to make payments?
• What is your ideal loan term?
• What is your budget?
• Do you have other sources of funding?
2. Understand What Your Business Qualifies For
Each lender or funding company will have their own eligibility requirements that can also vary, depending on the type of financing you apply for. Before applying, make sure that you meet general eligibility requirements for unsecured business funding.
Without collateral, some lenders may need more proof that you are capable of repaying the loan. The following factors may contribute to your eligibility:
• Personal and business credit history
• Minimum amount of time in business
• Business finances/revenue
• Monthly cash flow
• Business bank accounts
3. Decide Which Type of Unsecured Business Funding Is Right for You
You can now assess which type of unsecured business funding aligns with your needs and qualifications (and it may not be a loan). Some options include:
• Short-term loans
• Loan with a personal guarantee
• Business line of credit
• Invoice factoring
• Merchant cash advance
• P2P lending
4. Compare Lenders and Financing Options
Many lenders offer some type of unsecured business loan, including banks, credit unions, P2P platforms, and commercial lenders. Their loan products may differ, so it’s important to review their fees, interest rates, loan terms, qualifications, and any other conditions associated with the specific type of financing you’re pursuing.
5. Prepare Documentation
Before completing an application for an unsecured business loan, gather all necessary documentation. This may include:
• Business financial records
• Personal and business credit reports
• Cash flow projections
• Business plan
• Identifying information, which may include citizenship
• Business legal documents
• Business and personal tax returns
6. Submit an Application
After you’ve chosen a lender or financing company and gathered the necessary documents, follow the company’s instructions to apply. You may want to check with them to determine the average turnaround time — following up, as necessary, on the application.
Alternatives to Unsecured Business Loans
If you have collateral to offer, or simply desire alternatives to an unsecured loan, the following loan options may be helpful:
Restaurant Loans
Restaurant loans are useful for financing costs associated with starting or expanding a restaurant business. Many different types of lenders offer restaurant loans, including traditional banks, alternative lenders, or P2P lenders.
Franchise Financing
A franchising loan can help with the expenses associated with starting or expanding a franchise business. Traditional lenders may offer franchise financing, but there are also franchise companies who specialize in providing loans to franchise owners.
Equipment Financing
Equipment loans help businesses purchase business-related equipment. Loan terms are typically equal to the expected life span of the equipment and equipment acts as collateral for the loan. Interest rates can vary depending on the industry, type of equipment, and borrower qualifications.
Personal Business Loans
A personal business loan may be useful if you don’t qualify for other types of loans. Borrowers can use the funds for personal and business expenses, offering more financial flexibility. Not all lenders wish to make personal loans for business purposes. You can check with any lender you’re considering before you apply to make sure there are no restrictions against business use.
Inventory Financing
Inventory financing is a type of short-term loan that relies on the inventory as collateral for the loan. Inventory is paid for up front.
Microloans
Microloans may help support small business owners who do not have access to larger sources of funding. They are generally offered by nonprofits, government agencies, or private lenders and can be used for a variety of business-related expenses.
Commercial Real Estate Loans
Commercial real estate loans (CREs) are specifically for the purchase, refinance, or renovation of a commercial property. “Commercial” refers to the property as one that produces income for the business. These types of properties can include offices, retail storefronts, and warehouses.
An unsecured business loan can be an option for business owners who don’t want to pledge collateral when applying for financing. Higher interest rates often come with unsecured loans.
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.
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FAQ
How much money can I get with an unsecured loan?
Some lenders may offer small business loans up to $5 million without a collateral requirement. You may need good credit to qualify for large loan amounts.
Does the SBA offer unsecured loans?
Some U.S. Small Business Administration (SBA) loan intermediaries may offer unsecured loans, but SBA loans generally require collateral and a personal guarantee of the business owner. SBA loan lenders can set their own lending and credit requirements.
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