May
22
2024

A Guide to Small Business Expansion Loans

By | SMB | Comments Off on A Guide to Small Business Expansion Loans

If your business is doing well, you may be thinking about taking it to the next level. And while expanding can be an exciting prospect, it typically comes with considerable costs. A small business expansion loan can give you access to the funds you need to expand without locking up cash flow or waiting until you can finance it yourself.

Traditional medium- or long-term business loans are often called business expansion loans. However, any type of financing – even a business line of credit – that allows you to grow your business can be considered a business expansion loan.

Wondering if the time is right to invest in – and expand – your small business? Read on to learn how business expansion financing works and whether it might be a good option for your company.

What Are Small Business Expansion Loans?

Small business expansion loans are designed to help successful businesses boost growth, whether it’s by hiring additional staff, expanding a physical location, or purchasing new equipment. Ideally, the additional debt leads to an increase in monthly and yearly profits.

Many small business loans are technically expansion loans. Whether it’s an SBA loan, equipment financing loan, or short-term loan from an online lender, if its purpose is to increase revenue, then it falls under the business expansion loan umbrella. Unlike startup loans, expansion loans are designed specifically for established businesses.

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

How Do Small Business Expansion Loans Work?

Here are some key things to know about business expansion loans.

Typical Terms

Expansion loans are often traditional term loans, also called installment loans. With this type of loan, you receive the full amount of the loan (principal) up front. You then pay off the principal (plus interest) over a period of years.

The length of a loan’s term will vary from one loan to the next. If you have a fixed interest rate, the repayment amount will be the same each time; if you have a variable interest rate, repayment amounts will fluctuate. Typically, loan repayments are automatically deducted from your bank account on a monthly basis.

Typical Costs

Most lenders charge a few different fees in exchange for giving you a loan.

Interest

Many things affect the interest rate you get, including the type of loan, the lender, your business’s qualifications, whether or not the loan is secured with collateral, and whether or not you sign a personal guarantee.

The simple interest rate of a loan is the amount (expressed as a percentage) that a lender will charge on the principal. An annual percentage rate (APR) incorporates simple interest as well as additional fees, and is a more accurate reflection of how much a business loan costs.

Fees

Depending on the lender and type of business loan, you may need to pay several different types of fees on top of your simple interest rate. These can include:

•  Documentation fees

•  Origination fees

•  Loan processing fees

•  Late payment fees

•  Account maintenance fees

•  Guarantee fees

•  Closing fees

•  Prepayment penalties

These fees can range from 1% of the principal to 5% or more. Since this can significantly add to the cost of the loan, it’s a good idea to explore business loans and look at each loan’s APR to understand the true cost of the loan and make sure you’re comparing products apples to apples.

What Business Expansion Loans Are Used For

There are a number of different ways you can use the funds from a small business expansion loan, so it’s important to focus on what your business needs to grow. Here are a few ways you might use an expansion loan.

Hiring

Bringing on additional staff can be an essential step for growth, especially if you started out with just one or two employees. Generally, the more people you have pitching in, the better you will be able to execute your growth strategy. A larger team could also free you up to focus more on big-picture planning.

Opening New Locations or Renovating

If your business runs out of a physical location, opening an additional site can help you expand your market presence and profits. You could use an expansion loan to purchase a commercial property or buy land to develop. Or, you might want to invest in improving or expanding your existing location so that you can operate more efficiently or accommodate more customers.

Purchasing Another Business

Buying a business can be a way to eliminate the competition. It can also be a way to expand the focus of your business. And, if you purchase an established business, it allows you to avoid some of the initial costs that go along with starting something from scratch. Plus, you inherit their existing customer base.

Launching Products or Services

One way to expand your business is to start a new product line or add to your range of services. This can help attract new customers or increase what your current customers spend with your business. You can use a loan for the development and manufacturing expenses and keep your working capital for existing costs.

Buying Equipment

Whether it’s computer software or large machinery, new business equipment can be costly. If waiting and saving up to invest in new equipment is preventing growth, then a loan might make more sense than bootstrapping. An expansion loan allows you to pay for large-scale investments over time.

Purchasing Inventory

Rapid growth can lead to problems with inventory management. If you’re experiencing a sudden increase in demand and you don’t have enough money to scale up production, you will have to turn customers away. A loan to expand your business can be a good solution.

Expanding Into a New Market

Whether you’re thinking about physically moving into a new geographical location or looking to enter the e-commerce space, expanding into a new market can translate into more customers for your products or services. It can take a large amount of funds to get a good foothold, and an expansion loan can help you cover those costs.

Recommended: Small Business Working Capital Line of Credit

Pros and Cons of Small Business Expansion Loans

As with any financial product, there are both upsides and downsides to business loans.

On the plus side, an expansion loan allows you to jumpstart your company’s growth and increase profits without having to wait until you have enough capital to do it yourself, and potentially lose out on an opportunity.

An expansion loan also allows you to get an infusion of capital without bringing in investors and diluting your equity in the business. And, because expansion loans are targeted to established businesses (which represent less risk to the lender), they often offer competitive rates and favorable terms.

On the downside, taking on debt always involves risk. If you put up an asset as collateral and end up defaulting on the loan, you could lose that asset. If you sign a personal guarantee, your personal assets, including your home, could be at risk. And while bank and SBA loans typically offer the best rates and terms for expansion loans, the application process can be extensive, and it can take several months to receive the funds.

 

Pros of Small Business Expansion Loan Cons of Small Business Expansion Loans
Expedite your business’s growth If you take out a secured loan, you are putting your assets at risk
Avoid diluting equity Extensive application process
Enables you to seize opportunities when they present themselves May be several months before you receive funds
Can be low cost If you have a strong credit and solid revenue Can be costly if your business is less than two years old or doesn’t have strong credit

When Does an Expansion Loan Make Sense?

There are many things to consider before applying for a business loan. To decide if an expansion loan makes sense for your business, it can be wise to make sure the following statements hold true for your business.

•  Your company’s cash flow is strong and predictable. Taking out a loan to expand your business without the monthly revenue to pay for it isn’t usually a wise decision. Even if the purpose of it is to increase profits, you’ll want to make sure that your cash flow is in a healthy place before seeking out a loan. If the decision doesn’t pay off, you don’t want monthly loan payments to put your business in jeopardy.

•  You have a clear and realistic plan for expansion. What will you spend the money on and how much will it cost? Will the loan fund the entire endeavor or will you have to find additional capital elsewhere? Before taking out an expansion loan, you want to be sure you know exactly how you will use the money and how much you need. You’ll also want to make sure that your goals are realistic and achievable, based on where your business is now and the amount of time and money you will have to invest.

•  You anticipate the loan to increase your business’s profits. How much do you expect profits to increase with accumulation of debt? Will the increase last all year long, or will it be a seasonal increase? Business expansion is generally worth it whenever you have an opportunity to grow the business in a way where the costs of expansion (including the cost of the loan) will be less than the profits you make from expanding.

Recommended: Trucking Business Loans

Types of Small Business Expansion Loans

There are various business loans that can be used for the purposes of expanding your business. And, one might be a better fit than another depending on your specific growth goals. Below are some different loan products to consider.

SBA Loan

If you have strong credit, you may want to look into a loan backed by the U.S. Small Business Administration (SBA). SBA loans stand out among small business loans due to their favorable terms – low rates, high amounts, and long payback periods (up to 25 years). With the exception of microloans, most SBA loan programs are designed for established businesses. The funding can be used for many business purposes, including expansion.

Term Loan

A traditional term loan can be a good fit for a wide range of business purposes, including business expansion. With a traditional term business loan, you are lent a set amount of money upfront, which you pay back (along with interest and fees) over a set period of time. The SBA loans mentioned above fall into this category, but you can also find term loans not backed by the SBA that may be easier to qualify for.

Equipment Financing

Equipment loans are designed specifically for purchasing equipment. These loans can offer up to 100% financing, although some lenders may require a down payment of 10% to 20%. You then pay back the total amount lent, plus fees, for a set period of time. With this type of financing, the equipment you’re buying typically serves as collateral for the expansion loan, so you likely won’t have to put any of your assets on the line.
Recommended: Loans for Restaurants

Short-term Business Loans

A short-term loan is a term loan that’s repaid over a period of months, rather than years. Short-term loans are often offered by online lenders and tend to be easier to qualify for. However, the amount is often less than a medium- or long-term loan, and the rates are often higher. Because short-term loans are repaid relatively quickly, they could be good for smaller expansion projects that don’t require as much capital.

Business line of credit

If you’re interested in several expansion projects that will start at different points in time, a business line of credit might be a good fit. A business line of credit gives you a credit limit, or a maximum amount of capital you are able to draw on at any given time. You only pay interest on the amount of your credit line you’re using, unlike an expansion loan, which requires you to pay interest on the full amount you borrow.

Invoice Factoring

If your company has a lot of unpaid invoices and you want access to that money to fund expansion right now, you might consider invoice factoring. With this type of financing, you sell your invoices to a lender, who then fronts you a large majority of the invoice amount. The lender will hold a remaining percent (usually around 20%) until the invoice is paid. Once it’s paid, the rest of the funds will be released, minus the lender’s fees.

Invoice factoring can be one of the more expensive ways to borrow for expansion. But it’s also one of the more accessible financing options, since credit is not usually a factor in the approval process.

Merchant Cash Advance

Another type of short-term financing is a merchant cash advance, which allows you to take a cash advance against your business’s future credit card receipts. You typically repay the advance (plus a fee) with a portion of your daily credit and debit card sales. You don’t need perfect credit or a lengthy business history to qualify for a merchant cash advance, but this type of financing tends to come at a high cost.

Recommended: Small Business Loans for a Rental Property

Alternatives to Small Business Expansion Loans

If your personal and/or business’s credit profile is thin or poor, you may want to look into some alternative sources of funding for expansion. Here’s a look at some alternatives.

Crowdfunding

Crowdfunding involves raising small amounts of money from a large number of people via a crowdfunding platform. In some cases, you don’t need to pay the money back. There are various types of crowdfunding, including:

•  Equity crowdfunding

•  Donation-based crowdfunding

•  Debt crowdfunding

•  Reward-based crowdfunding

The drawback to crowdfunding is that it can be difficult to reach your financial goals. It can also require a lot of work and marketing to have a successful crowdfunding campaign.

Direct Private Lenders

A private lender is one that is not associated with a formal bank, which means they can offer highly individualized loan terms. However, finding a private lender that is willing to loan money to your business can be difficult.

Peer-to-Peer (P2P) Lenders

Peer-to-peer lenders often lend money to borrowers that banks are unwilling to work with. The drawback is that borrowers often have to pay much higher interest rates.

Recommended: Microloans

Angel investors

These are wealthy individuals who use their own funds to invest in a business. They are typically looking for a high rate of return and tolerate high risk. Bringing in an angel investor can help make your expansion plans become a reality, but will involve giving up equity, and possibly also some control of your business.

Recommended: Small Business Emergency Loans

The Takeaway

Business expansion loans are small business loans that provide business owners with the capital they need to make investments in their companies.

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

What are business expansion loan rates?

Rates vary widely depending on the type of loan, the lender, and your company’s qualifications.

Are there loans specifically for business expansion?

Any small business loan that provides the capital you need to expand your business is considered a business expansion loan. For example, if you were to take out an equipment financing loan to purchase an additional piece of manufacturing equipment that will help your business expand, that would be considered an expansion loan.

Where do you find loans for business expansion?

Small business owners can find business expansion loans through traditional brick-and-mortar banks, credit unions, and online lenders.

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.

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May
18
2024
NPV Formula: How to Calculate Net Present Value

Net Present Value: How to Calculate NPV

By | Growing Wealth, invest, Investing, SMB | Comments Off on Net Present Value: How to Calculate NPV

Net present value or NPV represents the difference between the present value of cash inflows and outflows over a set period of time. Knowing how to calculate NPV can be useful when trying to determine whether an investment — either business or personal — will eventually pay off.

In capital budgeting, calculating the net present value can help with estimating the profitability of an investment or expansion project. Meanwhile, investors use the net present value calculation to gauge an investment’s potential rate of return based on the present value of its future cash flows and a discount rate, based on the cost of borrowing or financing.

Key Points

•   Net Present Value (NPV) measures the difference between the present value of cash inflows and outflows over time.

•   Calculating NPV helps determine the profitability of investments or projects by considering future cash flows and a discount rate.

•   The NPV formula incorporates the time value of money, emphasizing that money now is worth more than the same amount in the future.

•   A positive NPV indicates that the earnings from an investment are expected to exceed the cost.

•   NPV is used in capital budgeting to assess the return on project investments before committing funds.

What Is Net Present Value (NPV)?

Net present value is a measure of the value of all future cash flows over the life of an investment, discounted to the present after factoring in inflows, outflows, and inflation, which can erode the value of money over time.

When applying the net present value formula, you’re looking at whether revenues are greater than costs or vice versa to determine whether an investment or project is likely to yield a gain or a loss.

As mentioned, net present value is often used in capital budgeting. Businesses and governments can use capital budgeting methods to determine how much of a return they’re likely to see on a project before funding it. The NPV formula takes into account the time value of money, a concept which suggests that a sum of money received now is worth more than that same sum received at a future date.

How to Calculate NPV

Calculating net present value is a fairly simple operation.

If you want to calculate net present value using the NPV formula, you’d first need to know the expected positive and negative cash flows for an investment or project. You’d also need to know the discount rate. From there, you could complete your calculations in this order:

•   List future cash flows for each year you expect to receive them.

•   Calculate the present value for each cash flow.

•   Add all present values for future cash flows together.

•   Subtract cash outflows from the present value sum of future cash flows.

You’ll need to know the present value calculation to complete the second step.

NPV Formula

Here’s what the NPV formula looks like:

PV = FV/(1 + k)N

In this formula, k is the discount rate and n is the number of time periods.

Again, net present value calculations follow a distinct formula. A positive NPV means earnings from the investment should outpace the cost. Negative NPV, on the other hand, means you’re more likely to lose money on the investment.

The application of the formula depends on the number of expected cash flows for an investment or project.

Example of NPV with a Single Cash Flow Investment

If you’re evaluating potential investments with a single cash flow, then you could use this formula to calculate NPV:

NPV = Cash flow / (1 + i)t – initial investment

In this formula, i represents the required return or discount rate for the investment while t equals the number of time periods involved. The discount rate is an interest rate used to discount future cash flows for a financial instrument.

Weighted average cost of capital (WACC) usually serves as the discount rate for calculating NPV. The WACC measures a company’s cost of borrowing or financing.

Example of NPV with Multiple Cash Flows

If you’re evaluating projects or potential investments with multiple cash flows, you’ll use a different net present value formula. Here’s what the NPV formula looks like in that scenario:

NPV = Today’s value of expected cash flows – Today’s value of invested cash

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Tools to Help Calculate NPV

If you want to simplify your calculations you could look for an online net present value calculator. Or you could use the NPV function in spreadsheet software, such as Microsoft Excel or something similar. The NPV function helps calculate net present value for an investment based on the discount rate and a series of future cash flows, both positive and negative.

To use this function, you’d simply create a new Excel spreadsheet, then navigate to the “Formulas” tab. Here, you’d choose “Financial”, then from the dropdown menu select “NPV”. This will bring up the function where you can enter the rate and each value you want to calculate.

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What Does NPV Show You?

The NPV formula should tell you at a glance whether you’re likely to make money from an investment, lose money or break-even. This can help when comparing multiple investments to decide where to put your money when you have a limited amount of capital to work with.

It works the same way in capital budgeting. Say a fast-food chain is trying to decide whether to expand into a new market which entails opening up 10 more locations. They could calculate the net present value for each location, based on expected cash flows, to determine whether moving ahead with the project is a financially sound business decision.

What Is a Good NPV?

Generally speaking, a net present value greater than zero is good. This means that the investment or expansion project is likely to yield a gain. When the net present value is below zero, you have negative NPV which means the project or investment is likely to result in a loss.

The higher the number produced by a net present value calculation, the better. But it’s important to remember that the results produced by applying the NPV formula are only as reliable as the data points used in the calculation.

Inaccurate cash flow projections could result in skewed numbers which may produce a net present value estimate that’s above or below the actual returns you’re likely to realize.

Comparing NPV

Here are some ways that NPV stacks up to other types of calculations.

NPV vs Present Value

NPV and present value may sound similar but they measure different things. Present value or PV is the present value of all future cash inflows over a set period of time. Companies use this calculation to estimate values for future revenues or liabilities. When you calculate present value, you’re trying to measure the value of future cash flows today.

Net present value, on the other hand, is the sum of the present values for both cash inflows and cash outflows. With the NPV formula, you’re trying to determine how profitable an investment might be, based on the initial investment required and expected rate of return.

NPV vs IRR

Analysts use IRR or internal rate of return to evaluate proposed capital expenditures. The IRR calculation determines the percentage rate of return at which a project’s cash flows result in a net present value of zero. Like NPV, internal rate of return is also a part of capital budgeting.

Both NPV and IRR measure potential profitability but in different ways. When calculating the net present value of an investment, you’re estimating returns in dollars. With an internal rate of return, you’re estimating the percentage return an investment or project should generate.

Depending on whether you’re trying to target a specific dollar amount or percentage amount for returns, you may apply one or both formulas when evaluating an investment.

NPV vs ROI

Net present value measures expected cash flows for potential investments. You’re looking at future discounted cash flows to determine whether an investment makes sense financially.

Return on investment, or ROI, measures the efficiency of an investment, in terms of the rate of return that the investment is likely to produce. With ROI, you’re looking at the cash flows you’re likely to gain from an investment. To find ROI, you’d add up the total revenues less the total costs involved, then divide that figure by the total costs.

NPV vs Payback Period

The payback period is the period of time required for a return on investment to equal the initial investment. Payback period calculations don’t account for the time value of money. Instead, they look at how long it will take for you to realize a return from an investment that’s equal to the dollar amount that you invested.

Calculating the payback period helps determine how long to hold onto an investment. You might use this method if you’re trying to compare multiple investments to see which one is a better fit for your personal investing timeline. But if you want to get a sense of the total return you’re likely to realize, then you’d still want to apply the net present value formula.

Benefits and Drawbacks of NPV

Net present value can help analyze and evaluate business projects or personal investments. You can easily see at a glance what you could stand to gain — or lose — from making a particular investment. But the NPV formula does have some limitations that are important to be aware of.

Benefits of NPV

Net present value’s main advantage is that it takes the time value of money into consideration. By looking at discounted cash flows you can get a better understanding of the viability of an investment, based on what you’ll get out of it versus what you’ll put in.

This can help with decision-making when choosing investments for your portfolio or making strategic capital investments in a business. Net present value calculations can also help companies with projecting future value based on the investments they make today.

Drawbacks of NPV

The biggest disadvantage or flow associated with net present value is that results depend on the quality of the information that’s being used. If your projections for future cash flows are off, that can produce inaccurate results when using the net present value formula.

NPV can also overlook some hidden costs involved in an investment or project which may detract from total returns. It also doesn’t take into account the margin of safety, or the difference between an investment’s price and its value.

Finally, it’s difficult to use net present value to evaluate projects or investments that are different in size or nature, as the input values are likely to be very different.

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How Investors Can Use NPV

You can use NPV to evaluate stocks and other securities, including alternative investments, based on your time frame and projected profits. With stocks, for example, net present value can give you an idea of whether a company is a good buy or not by calculating NPV per share.

To do that, you’d divide the company’s net present value by the number of outstanding shares in the company to get this number. If the net value per share is higher than the stock’s current market price, then the stock could be considered a good buy. On the other hand, if the net value per share is below the stock’s current market price that suggests you might lose money if you decide to buy in.

The Takeaway

As discussed, Net present value, or NPV, represents the difference between the present value of cash inflows and outflows over a set period of time. Understanding the net present value formula can help with making smarter investment decisions.

As with any tool, most investors use NPV along with other financial ratios and forms of analysis before deciding whether to purchase any asset. If you have questions about how NPV can be used as a part of an investment strategy, it may be worthwhile to consult with a financial professional.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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FAQ

Is a higher NPV better?

A higher NPV isn’t necessarily a good thing or means that an investment is better than another investment. But in general, a good NPV is a number that’s higher than zero.

What is the basic NPV investment rule?

The basic NPV investment rule is that projects or investments should only be pursued if they’ll lead to gains or productive gains.

Is NPV the same as profit?

NPV is not the same thing as profit, although a positive NPV is indicative of profit, while negative NPV is related to a loss.

Is a NPV of 0 acceptable?

An NPV of zero means that a project or investment isn’t expected to produce significant gains or losses. Whether that’s acceptable or not is up to the individual making the investment decision.

When should NPV not be used?

NPV might not be helpful or useful for comparing investments of drastically different sizes, or projects of different sizes.

Is Excel NPV accurate?

Excel’s NPV calculations should be accurate, but they’re only as accurate as the data that’s entered to make the calculation. So, it could be inaccurate, and it’s a good idea to double-check the calculation.

Photo credit: iStock/Sanja Radin

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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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Apr
24
2024

Guide to Microloans & Their Uses

By | SMB | Comments Off on Guide to Microloans & Their Uses

For many small business owners, the process of accessing capital for starting or supporting a newer business can be daunting. Many banks don’t lend to newer businesses because they see it as risky or perhaps there’s limited profit to be gained. This can leave potential borrowers with limited options for funding, which might be required for working capital and other startup costs.

Thankfully, with the growing trend toward microlending, small business owners can obtain loans, typically up to $50,000, to help them with small business financing. While microloans are small, they are often exactly what small business owners need to cover essential costs associated with launching their business.

There are a number of ways for business owners to apply for microloans, including through Small Business Association (SBA) loans, nonprofits, and alternative lenders, but it’s important to understand the different types and how they work to help ensure that you choose the one that best aligns with your business needs.

What Is a Microloan?

There’s no precise microloan definition, but a microloan is typically financing of up to $50,000 that is targeted to small businesses with fewer than five employees.

Community-based microlenders may offer SBA loans or non-SBA loans to small business owners, entrepreneurs, and nonprofit child care centers. Such microlending may provide financing to the smallest of businesses, including new firms that may not qualify for bank loans.

The average SBA microloan is about $13,000, according to the SBA. Microloans for small businesses are typically offered by nonprofits, government agencies, or individual lenders to be used for a variety of business expenses. Microloan programs can differ with focus on specific types of businesses, such as female entrepreneurs, underserved communities, or veterans. Some microloans specify that funds be used for specific purposes.

Microloan uses may include:

•  Working capital

•  Inventory or supplies

•  Furniture or fixtures

•  Machinery or equipment

•  Initial startup expenses

In addition to lending money, some microloan programs offer assistance with things like marketing, financial counseling, training, and technical assistance to support budding entrepreneurs. For new business owners, this support can be valuable to help them responsibly use capital and plan for the future of their business.

Recommended: Typical Small Business Loan Fees

Common Microloan Rates and Terms

Microloan interest rates and terms vary from lender to lender and depend on the type of loan program and the individual borrower’s qualifications. However, they are generally offered as monthly installment loans with fixed interest rates. Terms can vary from a few months to six or seven years. Some lenders may offer longer terms.

Factors that may contribute to loan repayment terms include:

•  Loan amount

•  How funds will be used

•  Specific lender requirements

•  Needs of the borrower

 

Microloan features Typical microloan terms
Amount Up to $50,000
Interest rates Varied
Repayment terms A few months to seven years

While there are other loan products that small business owners may be able to access, microloans may be a more predictable and sustainable lending option compared to merchant cash advances, which typically have high borrowing costs and less regulatory oversight.

Recommended: Loans for Business Expansion

4 Types of Microloans

To find the right microloan for your business, it helps to understand the different types of microlenders. What is microlending? It’s when community-based organizations offer financing to small businesses and startups with fewer than five employees. Many lenders offer microloans of up to $50K in addition to other loan programs, while some lenders specialize in microlending to specific communities.

Below, you’ll find information on different kinds of microlenders and generally how a microloan works for each type.

1. SBA Microloans

The SBA’s Microloan program provides direct, government-backed loans to intermediary microlenders who can then offer borrowers necessary funding and training to start and run a small business. Loans can be up to $50K with some programs specific to women, veterans, and other underserved communities.

Terms and conditions are negotiated directly with the intermediary lender, not the SBA, but general SBA microloan interest rates and terms are:

 

SBA loan features Typical SBA loan terms
Max loan term 6 years
Interest rates Varied

For more information on where to find a local SBA intermediary lender or get more information about microloans, contact your local SBA District Office.

2. Peer-to-Peer (P2P) Microlenders

Peer-to-peer (P2P) business lending allows borrowers to access capital directly from other individuals (investors), without a financial institution acting as a “middle man.” Using online platforms to connect, borrowers can often find funding quickly from lenders who want to invest.

For small business owners with little or bad credit, P2P lending may be a useful resource for accessing microloans. Many investors don’t require the same level of qualifications that a bank or credit union does (like collateral or good credit), but it’s still important to research P2P lenders and their terms and conditions to ensure they meet your business needs and financial outlook.

Recommended: Peer-to-Peer Business Loans

3. Mission-Driven Microlenders

Many microloans are offered by mission-driven lenders who desire to support specific communities and people groups with economic and entrepreneurial opportunities. These microlenders can be nonprofits or Community Development Financial Institutions also known as CDFIs. A few examples of CDFIs include:

•  Community Development Banks

•  Community Development Credit Unions

•  Community Development Loan Funds

•  Community Development Venture Capital Funds

Some microlenders actually maintain CDFI certification, which tells borrowers that an institution is committed to the principles of CDFI. The U.S. Department of the Treasury offers a complete list of CDFIs for borrowers who prefer to apply with microlenders who have CDFI certification.

Recommended: Online Business Loans

4. Online and Alternative Lenders

Alternative small business loans are those offered by individuals or lenders that aren’t a traditional bank. Alternative microlenders may include:

•  Crowdfunding sites

•  Online small business lenders

•  Angel investors

•  Venture capitalists

•  Friends and family

If you’ve been in business for several years and need working capital, small business loans may be right for you. Such financing can come from online lenders and major banks.

Recommended: Peer-to-Peer Business Loans

Pros and Cons of Microlending

For small business owners, microloans may be a vital part of their business success. Yet, even with the advantages, there are some potential risks to be aware of before applying for microloans.

Pros of Microloans

Here are some of the pros of microlending:

•  More flexible borrower qualifications

•  Additional services (training, marketing, counseling)

•  Fast turnaround time on application and access to funding

Cons of Microloans

Here are some of the cons of microlending:

•  Smaller loan amounts

•  Some microloans have limits on how funds can be spent

•  Potentially higher interest rates than a traditional bank

How to Get a Microloan in 4 Steps

Before you apply for a microloan, it’s important to research microlenders and have a thorough understanding of your business financials and goals. The following basic steps may help you prepare to apply for a microloan:

1. Creating a Business Plan

A business plan is helpful when planning for your future and may even be required by some microlenders. Taking time to make a formal business plan may help you assess your needs as you seek out funding. A traditional business plan can include an executive summary of your business goals and mission statement as a small business owner.

2. Determining Eligibility

Microlenders may have their own eligibility requirements depending on the loan program and lender, but in general, small businesses should meet the following criteria:

•  Be the sole business owner or co-owner of a for-profit small business

•  Have no recent bankruptcies, late payments, outstanding tax liens, or foreclosures

•  Have the ability to repay the loan with current income/revenue

•  Proof of good payment history with creditors

•  Have a clear, strong business plan for the future

•  Meet any special demographic requirements (e.g. veteran, minority, low-income), when applicable

There may be startup business loans for business owners with bad credit, but lenders may charge higher rates to compensate for the higher credit risk.

3. Choosing a Microlender

After conducting research based on your business plan and needs, it’s time to choose a microlender. Narrow your search to find a microlender that’s right for you. This may be a nonprofit, community-based organization that offers SBA microloans or a private lender that offers non-SBA microloans.

4. Gathering Documents and Information

Lenders may have different document requirements, so have the following ready to provide with your application or upon request:

•  Government-issued ID

•  Proof of income

•  Business and personal financial statements

•  How you’ll use the microloan

•  A detailed business plan

•  Proof of collateral, if applicable

•  A list of references who can vouch for you personally and professionally

Gathering the above documents and information can streamline the application process when applying for small business loans. You may not qualify for a microloan if you lack proof of identity or proof you’re a small business owner.

Lenders Who Offer Microloans

As mentioned earlier, nonprofits, government agencies, and individual lenders may offer microloans to small business owners.

The SBA provides funding to community-based nonprofits that offer microloans to eligible businesses. States may offer microloans under the State Small Business Credit Initiative (SSBCI), and the U.S. Department of Agriculture has a microloan program for small or nontraditional farm operations.

Private lenders may offer top small business loans for startups, including microloans to entrepreneurs.

Alternatives to Microloans

Here are other financing options you may consider:

Working Capital Loan

A working capital loan is any loan product that covers everyday expenses like payroll, monthly bills, and repairs. Many small businesses rely on working capital loans to manage cash flow fluctuations.

Business Line of Credit

A business line of credit is a short-term loan option that gives borrowers access to cash up to a set credit limit determined by the lender. Interest is paid on the money withdrawn from the credit line. Some lines of credit are revolving, while others end once you use and pay off the full loan amount.

Equipment Financing

An equipment loan is used to purchase business equipment. The length of the loan is typically equal to the expected life span of the equipment. The equipment acts as collateral for the loan. Rates may vary depending on the type of equipment, industry, and qualifications.

Top Small Business Loans

Entrepreneurs may be eligible for microloan funding. In some cases, a microloan may not be sufficient. For instance, a microloan may not be right for you if you need more than $50K.

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

How does a microloan work?

A microloan typically works like any other small business loan that has to be repaid over a set term. A microloan can provide small business owners with up to $50,000 in fast funding.

Who is eligible for a microloan?

Small business owners with fewer than five employees may be eligible for a microloan. Entrepreneurs may also be eligible for a microloan.

What is the benefit of a microloan?

The benefit of a microloan is it may provide small business owners with up to $50,000 to meet critical business needs. Community-based nonprofits may offer microloans to entrepreneurs and new small business owners who may be ineligible for traditional financing.

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.

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.

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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Apr
24
2024

Guide to Peer-to-Peer Lending for Business

By | SMB | Comments Off on Guide to Peer-to-Peer Lending for Business

For some small business owners, securing capital is crucial. However, getting a bank loan can be challenging for startups or ventures not yet showing much revenue.

Peer-to-peer (P2P) lending is an option for those who want to look beyond traditional banks or credit unions. Keep reading to learn more on what peer-to-peer lending is, how it works, how to qualify for a peer-to-peer loan, and more.

What Is Peer-to-Peer Business Lending?

With P2P lending, a business receives a loan directly from an investor or a group of investors. It eliminates the bank as a middleman, making it easier for borrowers and lenders to connect via online platforms.

For many borrowers, this is a viable form of financing as it offers faster approval and financing at desirable interest rates, even for borrowers with less than perfect credit. For investors, it can be an opportunity to support businesses they believe in.

As with any form of financing, there are pluses and minuses to consider for this form of loan crowdfunding.

Recommended: Learning About Microloans

How Does P2P Business Lending Work?

Peer-to-peer business lending is an alternative form of financing that allows borrowers to directly connect with investors via online platforms. This can be helpful for borrowers who may not qualify for a bank loan, those who desire a faster loan turnaround, or those looking for competitive interest rates.

How does P2P Lending work?

Peer-to-peer lending for businesses follows this basic process:

1.   A borrower’s credit is assessed with a soft or hard credit pull via the P2P lending platform to begin the process of establishing eligibility. These platforms have different qualifications regarding credit ratings, with some more strict than others.

2.   Based on their credit history and score (among other factors), applicants will be assigned a “loan grade” to help lenders and investors choose the applicant that presents the least amount of risk. The loan grade will typically dictate what interest rates and loan terms you receive.

3.   Borrowers make a listing for their loan, complete with what the loan will be used for, why they’re a smart investment, and other introductory information that helps lenders and investors make a decision.

4.   Lenders then have the opportunity to bid on listings, including the amount they can lend and interest rates offered.

5.   When the business’ listing ends, all qualified bids from lenders combine to form a single loan, which is then deposited directly into the borrower’s account for immediate use.

The P2P lending platforms typically make money by charging fees to both investors and borrowers, like origination or closing fees. When comparing a bank loan to a P2P loan, it’s important for borrowers to consider these fees and interest rates to ensure they’re receiving the right loan for their needs.

Recommended: Unsecured Business Line of Credit for Startups

Typical P2P Rates, Terms, and Amounts

Rates, terms, and loan amounts for peer-to-peer business loans can vary greatly depending on the applicant’s qualifications, investor criteria, and the P2P platform being used. Generally, the platform will determine the interest rate for borrowers based on their qualifications.

Pros and Cons of P2P Business Loans for Borrowers

Peer-to-peer business lending offers both borrowers and investors numerous benefits, but there are also risks involved. Understanding some pros and cons can help you make an educated decision when looking at peer to peer lending for small businesses.

Pros

•  Quick loan application process and funding times.

•  Competitive interest rates for well-qualified borrowers.

•  Access to funding for those who may not qualify with traditional lenders.

•  More personal process as lenders can get to know the borrower’s story based on their profile.

•  Many loans are unsecured.

Cons

•  Limited regulations on peer-to-peer business lending could make this riskier than loans with traditional lenders. Some are not backed by FDIC, as banks are.

•  Some P2P lenders offer small loan amounts, leaving borrowers to seek additional funding elsewhere.

•  Interest rates can vary greatly depending on the borrower’s qualifications.

Common P2P Business Loan Uses

One of the advantages of P2P business lending is that funds can be used for numerous purposes, making it a viable option for many small business owners.

While peer-to-peer business loans may be sought by businesses that don’t qualify for a loan at a traditional bank or lender, almost anyone can apply for P2P loans. Common uses for P2P loan uses include:

•  Peer to peer lending for startup funds

•  Short-term business loans for smaller or urgent purchases

•  Equipment purchases

•  Inventory purchases

•  Cashflow

•  Business renovation and expansion

•  Consolidating with a small business debt consolidation loan or refinancing business debt

5 Tips on Qualifying for a P2P Loan

Before applying for peer-to-peer business lending, check out these valuable tips to help you prepare and hopefully qualify:

1. Collect Documents Before Applying

You may need to provide items like:

•  Tax returns

•  Bank statements

•  Business tax returns

•  A business plan

•  Identifying documents

•  Personal story to share with investors reviewing your P2P inquiry

•  Documents regarding income and outstanding debts

2. Check Your Credit Score

Check both your personal and business credit. Knowing your credit score will help you determine which P2P loans you’re eligible for. If your credit rating is low, you can take steps to improve it, such as paying down debt and paying bills on time.

3. Check Your Eligibility

Most P2P lenders will have basic requirements to apply, such as proof of citizenship, age, residence, and bank account information.

4. Determine What You Can Afford

Assess your business needs and finances to determine how much money you need to borrow and if you can responsibly pay back the loan.

5. See About Pre-Qualifying

P2P lenders who offer pre-qualification typically do so via a soft credit pull (which does not affect your credit score) to check if you meet basic eligibility requirements before applying.

How to Apply for a P2P Business Loan

As with any loan, you’ll want to take steps to make sure you are eligible for the P2P loans you’re applying for. After you’ve determined eligibility, take the following steps to apply for business financing:

Determine the Loan Amount

After assessing your financials to see what you can afford and what you need, determine your loan amount. You may also be able to use this amount when seeking pre-qualification or joining a P2P platform.

Compare Peer-to-Peer Lending Platforms

Research different loan products offered on P2P lending platforms. Take note of the different loan amounts, interest rates, qualifications, and restrictions. Remember that P2P loans are typically for smaller amounts, which means loan terms may be short.

Apply Through a Peer-to-Peer Lending Platforms

Different platforms will have different requirements for approval. However, most will likely assess your credit score and history. From there, they may assign you a “grade” that lets investors know how risky of a borrower you are. Most P2P platforms will also provide you with an interest rate for your loan request. If you approve the rate, you can move on to securing funding.

Set Up Your Peer-to-Peer Loan Listing

If you’re approved to join the P2P platform, the next step is to create a loan listing, or loan request. The process for setting up your loan listing will differ from one P2P platform to the next. In general, you’ll likely have to provide information regarding what your business is, how much money you need, and for what reason.

Investors will then have the chance to review your loan request. Depending on the listing, there may be several investors who each lend a small amount or there could be one or two investors who lend a large amount. Once the bidding period is over, the funds are combined into one loan and made accessible to you.

Alternatives to Peer-to-Peer Business Loans

Peer-to-peer business lending offers loans for a variety of business purposes, but if you need additional funding, consider these other financing options:

Restaurant Loans

Restaurant loans serve the needs of restaurant owners looking to start, renovate, or expand a restaurant business.

Commercial Real Estate Loans

Commercial real estate loans are granted to business entities (individual or group) for a commercial property or land that is solely for business use.

Franchise Financing

If you’re preparing to open a franchise, a franchising loan can help with the expenses, including the franchise license, franchise fees, and necessary startup capital associated with starting a business. In addition to general lenders, there are also franchise companies who specialize in offering loans specifically for franchise owners.

Equipment Financing

Equipment loans are used to purchase equipment necessary for business operation. Loan terms are typically equal to the expected life span of the equipment, and the equipment acts as collateral for the loan. Interest rates can vary depending on the industry, type of equipment, and qualifications.

Microloans

Microloans are those given for smaller amounts, generally $50,000 or less to support small businesses without access to other types of funding. They are often offered by nonprofits, government agencies, or individual lenders to be used for a variety of business expenses and often focus on specific types of borrowers, such as female entrepreneurs, underserved communities, or veterans.

Working Capital Loan

A working capital loan is used to cover everyday expenses like payroll, monthly bills, and repairs. Many small businesses rely on working capital loans to manage short-term cash flow fluctuations due to seasonality, economic changes, or when expanding their business.

Business Line of Credit

A business line of credit is a short-term loan option that gives borrowers access to a set amount of credit, which is determined by the lender, to be used for business expenses like repairs, emergencies, or working capital. Some lines of credit are revolving, while others end once you pay off the loan amount.

SBA Loans

SBA loans are short- or long-term business loans ideal for helping with starting or expanding a business. They are guaranteed by the US Small Business Administration (SBA), making them less risky for lenders. SBA loans have competitive rates and terms for well-qualified borrowers.

Recommended: Business Loans vs. Personal Loans: Which Is Right for You?

Compare P2P Lenders

Peer-to-peer business lending offers borrowers flexibility when choosing the right loan for their particular needs. Whether you’re just getting started or you’ve been in business for years, P2P business lending can help you get the capital you need in a timely manner.

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.

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.

SOSB0224013

Read more
Apr
23
2024
Opening a Business Bank Account

Opening a Business Bank Account: How Business Bank Accounts Work

By | Budgeting & Goals, money, SMB | Comments Off on Opening a Business Bank Account: How Business Bank Accounts Work

Business bank accounts can help owners keep professional transactions separate from personal banking and aid in their business cash management. These accounts often come with special conditions and requirements, and they may have various fees.

Here, we’ll take a closer look at these accounts, their pros and cons, and what it takes to open one. Read on to dive into the details about business bank accounts.

What Is a Business Bank Account?

There are three main types of business banking accounts: checking accounts for everyday use, savings accounts for intermediate and long-term savings, and merchant accounts for accepting debit and credit card payments. In this article, you’ll learn about business checking and savings accounts, available from both online and brick-and-mortar banks.

What Is a Business Checking Account?

A business checking account works much the same way a personal checking account does. You use it to deposit payments and make withdrawals, usually an unlimited amount. Like personal checking accounts, business checking accounts typically pay low to no interest on your balance.

What Is a Business Savings Account?

A business savings account will pay more interest than a checking account, so it can be a good place to park cash on an interim basis. You will likely be limited on how many transactions you can make per month without a penalty (typically six), and there may be a monthly minimum balance to maintain. Many business owners find using both a business checking and savings account can meet their banking needs.

How Long Does Opening a Business Bank Account Take?

If you open up a bank account — whether it’s checking, savings, or both — the time commitment needed is usually similar to that of opening a personal checking and savings account. It will likely take just a matter of minutes if you have the necessary information on hand.

•   You will need to provide some details about yourself, your business, and any additional business owners involved in your enterprise.

•   You’ll deposit funds.

•  Keep in mind it can take up to seven business days for final approval before you can actually access funds.


💡 Quick Tip: Banish bank fees. Open a new bank account with SoFi and you’ll pay no overdraft, minimum balance, or any monthly fees.

What Is Needed to Open a Business Bank Account?

Whether you open your bank account online or in person, you’ll need documentation of several personal and business details. Different banks may have their own verification requirements, depending on the type of business you own and the type of account you’re looking to open.

Here is a general list of what you might need to open a bank account for your business:

•   Your name, birthdate, and Social Security number

•   Mailing address and all contact information

•   What percentage you own of the business (anyone who owns 25% of the business or more will likely have to disclose personal details and identification)

•   A government-issued photo ID, such as driver’s license or passport

•   Business name and DBA (“doing business as” name) or trade name, if applicable

•   Business address and employer identification number (EIN) (Note: sometimes Social Security numbers suffice)

•   Industry/type of business

Depending on the type of business you own, you may be asked for the following documents:

•   Sole proprietorships may need the business name registration certificate and the business license.

•   Partnerships may need the partnership agreement, business name registration certificate, business license, and the state certificate of partnership.

•   Limited Liability Companies (LLCs) may need the articles of organization, LLC operating agreement, and business license.

•   Corporations may need articles of incorporation, corporate bylaws, and business licenses.

Recommended: Business Cash Management: Tips for Managing Cash

What to Look for in a Business Banking Account

Traditional banks, online banks, and credit unions all offer business bank accounts. All have different fee structures and provide different services. There are many fees and restrictions to consider when choosing a business banking account. But consider this overarching factor: online accounts are usually best for businesses that don’t need to make bank deposits.

Here’s what to compare when you’re looking for an account:

•   Monthly fees, such as account maintenance

•   Any minimum balance requirements

•   No-fee transactions

•   ATM access (for deposits and withdrawals)

•   Transfer, wiring, and payment capabilities

•   Incidental fees (such as, stop payment, overdraft, and nonsufficient funds)

•   Online and mobile banking tools

•   Additional features, such as invoicing, bill pay, or integrations with other business tools (especially tax reporting software)

Benefits of Opening a Business Banking Account

A business account can be a smart tool for a variety of reasons. Business owners may need to keep their personal and business accounts separate for tax and liability reasons. A business bank account also helps you establish a banking relationship that you can draw on in the future for lending or other services that may help your business grow. You will also establish a financial record that can come in handy when it comes time to file taxes and help your concern establish a good credit rating.

Recommended: How to Open a Business Checking Account

Cons of Opening a Business Banking Account

There are very few cases when a business banking account is a bad idea. Some very small sole proprietors may find they don’t need the extra fees and bookkeeping involved. But for most business owners, a separate account can be an efficient tool.

That said, one of the potential drawbacks of a business account is the cost of bank fees. High fees that you may not have anticipated can eat into your business profits. Some fees to look out for include:

•   Monthly fees

•   Transaction fees

•   Monthly balance transfer fees

•   Cash deposit fees

•   ATM fees

•   Wire transfer fees.

These fees add up fast. Be sure to check thoroughly what fees are involved and compare from one financial institution to another.

Pros of a Business Bank Account

 Cons of a Business Bank Account
Keeps professional finances separate from personal May involve additional fees
Establishes a business relationship with a financial institution May involve more bookkeeping
Creates a financial record that can be useful for tax or credit-rating purposes

Choosing a Business Bank Account

Now that you’ve looked at fees, here are some other considerations as you choose your business bank account:

•   Banking online: Business bank accounts with online-only banks can be great for virtual businesses or any business that is not handling daily cash transactions. Many online banks do not require a monthly minimum balance.

•   Network: If you’re banking in person, be sure there is a conveniently located branch near your business. Also, find out how many no-fee ATMs are available in your area.

•   Electronic services: Check if online bill pay, electronic fund transfers, and other electronic services that can support your business are available for low or no fees.

•   Electronic payments: Does your bank accept Zelle and Venmo? If so, are there additional fees involved? How long will it take for transactions to post? Electronic payments are increasingly becoming the lifeblood of many businesses.

•   Software compatibility: Is the bank account you’re considering compatible with the bookkeeping software you use? That can make life easier when you need to track or get access to cash flow, outstanding receivables, and other items each month.

Other support: Does the bank offer small business loans, lines of credit, business credit cards, and other financial support for entrepreneurs that you may need in the future?

The Takeaway

While we’re on the topic of bank accounts, have you reviewed your personal accounts lately?

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.50% APY on SoFi Checking and Savings.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 8/27/2024. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.

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.

Our account fee policy is subject to change at any time.

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Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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