Guide to No-Doc or Stated Income Business Loans

To get approved for a small business loan from a bank, businesses typically need to submit a long list of documents – including resumes, personal and business tax returns going back several years, and a business plan. The approval process can take months, and the sheer amount of paperwork involved can be daunting.

Fortunately, there are a growing number of alternative lenders that offer no- or low-document business loans. These products can work well for small business owners who don’t yet have consistent income to report or who need cash quickly to cover operating expenses. However, no-doc (also referred to as stated income) loans tend to come with higher interest rates and fees and less flexible terms.

Here’s what you need to know about no-doc business loans, the pros and cons of getting a stated income loan, and the different types of no-doc and low-doc loans available on the market.

What Is a Stated Income Business Loan?

Stated income business loans are loans that don’t require you to submit extensive paperwork (such as several years of personal and business tax returns) as proof of income during the application process. This is why they are also called no-doc or low-doc business loans.

Are there truly zero doc loans available? Not typically. Any business loan from a lender (rather than a family member or friend) will usually require at least some paperwork, such as an application, proof of identity, time in business, and/or proof of sales. However, with a no- or low-doc loan, the paperwork involved will be minimal and the application will be much shorter than with a conventional business loan.

Is Stated Income the Same as No Doc?

Yes, these terms are often used interchangeably to describe a loan that doesn’t require tax returns to show proof of income.

How Do No Doc Business Loans Work?

Applying for and getting a small business loan can be a lengthy and time consuming process. For many borrowers, this is because of the paperwork involved.

Typical documentation for a standard loan includes:

•  Bank statements

•  Employer identification number (EIN)

•  Tax returns

◦  Personal and business

•  Business license

•  Business permits

•  Business registration

•  Proof of collateral

•  Financial statements

◦  Balance sheet

◦  Profit and loss statement

◦  Cash flow statement

•  Accounts receivable

•  Accounts payable

•  Debts

•  Business plan

No-doc or low-doc small business loans require a fraction of what is listed above. Since there’s less paperwork demands, the process moves much faster than with other types of small business loans. In many cases, you can fill out the application completely online. The lender will then connect to your accounting software and bank account, making it possible to get approved within minutes — and funded as soon as the next business day.

Other than the expedited application process, however, no-doc business loans typically work the same as any other type of business loan. You generally receive the principal amount up front then pay back the loan (principal plus interest) over time. Like a standard loan, everything is clearly outlined in the loan terms.

Uses of Stated Income Business Loans

No-doc loans are typically used to help with short-term funding needs. For example, they can help with:

•  Cash flow shortages: If you have a few invoices that are overdue, a no-doc loan can tide you over until you receive funds.

•  Taxes and payroll: A no-doc loan can help you meet immediate needs, such as making a tax deadline and paying your employees on time.

•  Inventory: If your business is seasonal, a no-doc loan can help you prepare for upcoming sales. It can also be useful if you experience a sudden increase in purchase orders but don’t have enough inventory to complete them.

•  Equipment: Whether you need a new computer, a company car, or heavy machinery, you can use no- or low-doc financing, such as an equipment loan, to get the tools you need for day-to-day operations.

•  Emergency expenses: Sometimes your available cash is simply not enough to handle a sudden emergency or short-term opportunity. When this happens, credit cards often can’t handle the size of the expense and a loan is often your only option.

Pros and Cons of Stated Income Business Loans

No-doc and low-doc loans can give your business access to cash quickly, sometimes within 24 to 48 hours. They are quick and easy to apply for, and generally have lower credit score requirements than traditional loans.

But there are also some drawbacks to stated income and low-doc loans. Due to the higher risk these loans represent to lenders, the loan amounts, repayment terms, and interest rates are typically not as favorable as what you would find with a traditional business loan. If you’re looking for a large, long-term loan – or cost is your top priority in choosing a lending product – you may be better off with a traditional bank or SBA term business loan.

Pros of Stated Income Business Loans Cons of Stated Income Business Loans
Easy and fast application process Not as many no-doc loans available as standard business loans
Fast loan disbursement Lower amounts
May qualify even if you don’t have excellent credit Shorter repayment periods
Loans can be used for a variety of common business expenses Interest rate may be higher than other financial products

Qualifying for a No-Doc Loan

No-doc business loan requirements vary depending on the lender and the type of loan. In some cases, a lender may require that you’ve been in business at least six months, have a credit score of 500 or higher, and an annual revenue of $200,000 or more.

Other lenders, however, may simply need to see that your business does a certain amount of credit card transactions per day or has a certain number of invoices out to clients. Unlike traditional business loans, proof of collateral is typically not needed.

Recommended: Is a Business Loan Considered Income?

Finding Stated Income Business Loans

Your best bet for finding small business loans that require little documentation is through alternative online lenders. These lenders offer a wide range of financing options, including short-term loans, lines of credit, invoice financing, and merchant cash advances.

However, because they don’t face the same regulations as banks and typically use technology to analyze underwriting criteria, applicants don’t need to provide as much documentation about income and may also be able to qualify with less-than-excellent credit.

Typical Requirements for No Doc Business Loans

With a no-doc or low-doc loan, you don’t need to submit much paperwork or a lengthy paper application to apply. The process is often done entirely online and often the only criteria you need to provide is:

•  One-page loan application

•  Age of the business

•  Business’s credit score

•  Business bank statements

•  Invoice or merchant processing statements (if applicable)

Stated Income Business Loans vs Conventional Business Loans

Stated Income / No Doc Loan

Conventional Business Loan

Fast Application Process X
Collateral needed X
Low interest rate X
Strict loan use requirements X X
Fast Disbursement X
Loan interest may be tax deductible

Low-Doc Business Loans

Below are some small business financing options that require very little paperwork in order to get approved.

Short-Term Business Loan

Short-term business loans are usually unsecured, which means they usually don’t require any proof of collateral. And, when you work with an online lender, you may not need to provide much more than your bank account information and proof of revenue. As with other term loans, you receive the entire loan amount in one lump sum; you then pay it back (plus interest) in regular installments, which could be monthly, semimonthly, or weekly.

Keep in mind that short-term also means lower total loan amounts and quick repayment. You’ll usually have anywhere from 18 to 36 months to pay back your loan.

Merchant Cash Advance

Business owners with mostly credit card sales can turn to a low-doc merchant cash advance (MCA) to fill in cash flow gaps. With this type of financing, you receive a lump sum of money from an MCA company, called an “advance.” In return, you give that company a small percentage of each credit card sale you make until the advance is paid off (plus fees).

You can usually apply for a merchant cash advance entirely online with very little paperwork (sometimes just a few months of your business’s credit card statements). Approved borrowers typically receive funds shortly after applying.

Invoice Financing

Invoice financing requires very little paperwork to get rolling because the proof of your creditworthiness rests with your unpaid invoices. With invoice financing, you get quick access to cash by selling unpaid customer invoices to a third-party company at a discount. Typically, you’ll get around 85% to 90% of your money upfront, with the rest (minus fees) coming after the invoice is paid.

Business Line of Credit

A no-doc business line of credit gives your business access to cash when you need it, rather than getting it all at once. You can draw funds up to an agreed-upon credit limit and only pay interest on what you draw. Once you’ve paid back the loan, you can draw from it again. While you may need to provide some minimal documentation up front — similar to a short-term loan — you won’t need to give your lender any documents when you need to make a draw.

Equipment Financing

Equipment financing can be a good, low-doc loan option if your business needs cash to finance a piece of equipment. Typically, you get a quote for the equipment you’d like to buy, and a lender then fronts you all, or a large portion, of the cost. Since the equipment you’re purchasing secures the loan, you don’t need to provide any proof of collateral. And, some lenders don’t require documentation like tax returns or financial statements for borrowers financing equipment of $250,000 or less.

Alternative Loan Options

If you’re not looking for a large amount of capital, here are some alternative funding options that can help grow your business.

Business Credit Card

While you typically do need to provide documentation to get approved for a business credit card, it’s typically a lot less than getting approved for a traditional small business loan. And if you can qualify for a 0% intro APR business credit card, you can spend for a predetermined period without interest. If you are able to pay off your balance before the end of the introductory period (which may be a year-plus), you don’t have to pay any interest at all. At the same time, you’ll be building valuable business credit along the way, which can help you get more financing later.

Crowdfunding

Starting a crowdfunding campaign for your business does take some time and effort, but it can be a good funding option for new ventures that don’t yet have the annual revenues needed to qualify for a traditional business loan. In some cases, the only thing you have to give people who invest in your business is a small reward.

Recommended: Business Income and Taxes

Peer-to-Peer Lending

Peer-to-peer (P2P) lending, also known as “crowd lending,” allows you to get loans directly from other individuals via an online P2P platform. Most P2P sites have a wide range of interest rates based on the creditworthiness of the applicant.

The Takeaway

If you’re interested in fast business financing with little hassle, then you might want to consider no-doc or low-doc business loans. These lending products are generally quick and easy to apply for, and you may be able to receive the funds within a day or two. However, it’s important to know that this type of financing tends to come with higher interest rates, lower loan amounts, and short payback periods.

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


With one simple search, see if you qualify and explore quotes for your business.

FAQ

Are no-doc business loans difficult to obtain?

Compared to other business loans on the market, no-doc (or stated income) business loans are easier and faster to get approved for.

Can stated income loans be long-term loans?

No, no doc loans are short-term loans. If you are pursuing a large or long-term loan, a more conventional business loan would be a better fit.

Are no doc and stated income loans the same?

Yes, these terms are often used interchangeably to describe a loan that doesn’t require extensive documentation for proof of income.

Can start-ups get no doc loans?

Typically, you need to be in business for at least six months to qualify for a no-doc loan.


Photo credit: iStock/Kerkez

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

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

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Explaining GAAS vs GAAP

GAAS stands for generally accepted accounting standards, whereas GAAP stands for generally accepted accounting principles. While people often use these two terms interchangeably, they are different. GAAP is used by accountants when creating financial documents. GAAS, on the other hand, is used by auditors to double-check those documents once they’re done.

Here’s what you need to know about GAAS vs GAAP, including how each one works, how they differ, and how they work together.

What Is GAAP?

GAAP is a set of accounting procedures and principles issued by the Financial Accounting Standards Board (FASB). GAAP was established to provide consistency in how financial statements are created, eliminate the potential for fraudulent or misleading financial reports, and make it easier for investors and creditors to evaluate companies and compare them apples-to-apples.

All publicly traded and regulated companies must follow GAAP when compiling their financial statements. While small businesses that don’t get audited aren’t required to use GAAP, hiring an accountant to create GAAP-compliant financial documents for your business can still be helpful. It allows you to compare your company to other companies in your industry. It can also be useful if you’re looking to attract an investor or apply for a small business loan. Without GAAP, it’s harder for lenders, investors, and other interested parties to know whether a business is performing well or poorly.

Recommended: A Guide to LIBOR vs Prime Rate

What Is GAAS?

GAAS is a set of systematic guidelines used by auditors (not accountants) when checking the accuracy of financial statements disclosed by GAAP-compliant companies. The Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) created GAAS.

GAAS helps to ensure the consistency and verifiability of auditors’ actions and helps make sure that auditors don’t miss any material information. The use of GAAS also means that auditing is of the highest quality and that reports from different auditors are comparable.

Recommended: What Is FFO?

How Does GAAS Work?

The Securities and Exchange Commission (SEC) requires that the financial statements of public companies be examined by external, independent auditors. These auditors are tasked with determining whether those financial statements follow GAAP. GAAS lays out the auditing standards and guidelines that auditors must follow.

What Are GAAS Standards?

There are 10 GAAS standards auditors must follow, divided into three categories:

General Standards

1.   The auditor must be trained and qualified to do the audit.

2.   The auditor should be objective and not allow their personal opinion to sway their findings.

3.   The auditor must be professional during the audit and during the writing of the report.

Standards of Field Work

1.   The auditor should plan the work that must be done and properly supervise any assistants during the audit.

2.   The auditor must thoroughly understand the business or entity that is being audited so as to understand the risk of fraud or error during the reporting of financial statements; furthermore, the auditor should also plan future audits, if needed, based on their findings.

3.   The auditor must acquire sufficient evidence during the audit process so that they can form an opinion on their findings (whether everything is copacetic, there has been error, or there has been deliberate fraud).

Standards of Reporting

1.   The auditor must determine and state in their report whether the financial statements they reviewed were written following GAAP regulations.

2.   The auditor must state when, and under what circumstances, GAAP principles and regulations were not followed.

3.   The auditor must state whenever financial disclosures are not adequate.

4.   The auditor must state their opinion regarding any financial disclosures they review. If they are unable to reach an opinion, then they must state their reasons. Lastly, when an auditor’s name is linked to an audit, they must state what degree of responsibility they are taking to the veracity of their findings.

Comparing GAAP to GAAS

GAAP and GAAS have some similarities, as well as some key differences.

Similarities

1.   Both are designed to make sure a company’s financial statements are complete, consistent, and comparable. While they are used by different professions, the mindset behind them is the same.

2.   Both consist of 10 rules or principles. The guidelines are different, but the behavior that is expected of either accountants or auditors is summed up in 10 key concepts.

3.   Both were created to instill trust and confidence in a company’s financial records. Thanks to GAAP and GAAS, investors, lenders, and other third parties know they can trust the financial information released by GAAP-compliant companies.

Differences

1.   They are used by different professions. GAAP is used by accountants; GAAS is used by auditors.

2.   They have different functions. The primary function of GAAP is to assist firms in making their financial statements. The main job of GAAS is to help auditors properly audit companies.

3.   They are used at different stages. GAAP is used first, when companies are preparing financial statements. GAAS is later, after those documents have been prepared.

GAAS

GAAP

Guides accountants when preparing financial statements: X
Guides auditors when auditing companies: X
Is a set of guidelines and standards used primarily within the U.S.:
Consists of 10 principles or concepts:
Is used when preparing financial documents: X
Is used when reviewing financial documents: X

Pros and Cons of GAAS

Here, in chart form, are the upsides and downsides of GAAS.

Pros of GAAS Cons of GAAS
Ensures compliance with GAAP Auditing fees can be expensive for companies
Gives investors confidence because they know public companies are audited by independent auditors Time-consuming process

The Takeaway

The difference between GAAP vs. GAAS revolves around who is doing the work. If an accountant is preparing financial statements, then GAAP is being followed. If the veracity of the financial documents is under review, then GAAS is being observed.

Publicly traded companies must follow GAAP principles and be audited by someone following GAAS standards. Both act as checkpoints that companies must get through before they can be publicly traded. Small businesses aren’t required to follow GAAP regulations. However, doing so can make it easier for outsiders to evaluate your business, such as when you are seeking approval for certain types of business loans.

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


Large or small, grow your business with financing that’s a fit for you. Search business financing quotes today.

FAQ

Who uses GAAS?

Auditors use GAAS (generally accepted auditing standards) to review financial statements issued by a company that follows GAAP (generally accepted accounting principles).

How are GAAP and GAAS connected?

GAAP (generally accepted accounting principles) are the guidelines used by accountants when preparing financial statements for publicly traded companies or private companies that wish to use GAAP. GAAS (generally accepted auditing standards) are the guidelines used by auditors when reviewing the financial statements of public companies to make sure GAAP guidelines have been followed.

What does GAAS stand for?

GAAS stands for generally accepted auditing standards.


Photo credit: iStock/Poike

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.

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

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Loaning Money to Your Own LLC

You can loan money to your own company, but there are tax implications and other situations to be aware of.

If your business is structured as a limited liability company, or LLC , it means you aren’t personally liable for any of the company’s debts. You are, however, free to loan your own money to the company (and as much as you’d like) to help it meet its daily operating expenses or generate new business.

In some cases, this type of loan may be preferable to borrowing money from a bank or other source. However, there are several things to keep in mind when loaning money to your LLC, including the tax implications and what happens if your LLC can’t pay the money back.

Here’s what you need to know about loaning money to your LLC.

Can You Loan Money to Your LLC: The Short Answer

Yes, you can loan money to your LLC. The only hitch is that you’ll need to have the proper paperwork drafted to acknowledge what the business owes you and how it will repay the loan. In addition, your LLC will need to make regular payments, and you’ll have to charge at least a nominal interest rate to make the transaction legal.

Can You Loan Money to Your LLC: The Long Answer

While you can loan money to your LLC, there are several things to keep in mind before moving forward.

Separate Entity

You should only lend money to your LLC once it is legally established as an LLC and your state recognizes it as such (choosing a business structure like an LLC needs to be done well in advance of the loan). Once the state accepts the LLC formation paperwork, the company exists as an entity that is legally separate from its owners (called members).

Under the law, the LLC can do many of the things that an individual does, including entering into contracts, hiring employees, and taking out loans. One advantage of an LLC vs. a sole proprietorship is that owners can enter into arms-length transactions with the company (meaning each party is acting independently).

State laws, by default, allow members to loan money to their own LLCs. However, an operating agreement signed by the members can prohibit or limit this practice, so it’s important to read your LLC operating agreement carefully before making a loan to your LLC.

Equity vs Debt

When members of an LLC put money into the company that does not have to be paid back, the investment is considered an equity contribution. An equity contribution increases the member’s ownership interest in the company. When the company becomes profitable, that member will get a greater share of the profits.

If a member contributes money that the LLC has to pay back, it does not affect the ownership structure of the company. It is treated as a loan and falls under the category of funding through debt.

Recommended: Million Dollar Business Loan

Lending Your Money Correctly

To make your loan to your LLC official and legal, you’ll need to draw up a formal loan agreement that includes:

•  Who the creditor is

•  Who the debtor is

•  Exact loan amount

•  Repayment schedule

•  Interest amount

•  Consequences of defaulting

•  How payments should be submitted

It can be a good idea to have an attorney prepare the loan agreement so all the required conditions are included. Once you make the loan, you’ll need to make sure that the company repays the debt and upholds the terms of agreement.

Tax Considerations of Lending Money to Your LLC

When you receive payments from your LLC, they will be split between principal and interest. The Internal Revenue Service (IRS) considers any interest paid to you as taxable income, even if it’s interest on a loan you made to your own company. The principal amount your LLC pays back, however, is not counted as taxable income because you already paid tax on it the year you had that income.

On the LLC’s side, the IRS treats a loan from an LLC member the same as it treats other types of small business loans. The loan itself is not considered taxable income to your LLC, since the money will be repaid. However, the interest your LLC pays you on the loan is a tax-deductible business expense. Repayment of the principal is not tax deductible.

Can You Recover a Loan From Your LLC in Case of Bankruptcy?

The answer depends on your LLC’s existing debts and what was agreed to in the loan agreement. In a bankruptcy proceeding, lenders with secured loans get first priority.

Any of your LLC’s assets that have already been spoken for by a lender would be liquidated to pay those debts first. If all of the LLC’s assets are not already spoken for, you might be able to seize them to recover the loan if such action was stipulated in your loan agreement under what would happen as a result of unmet payments.

Without anything clearly outlined, other members may question your right to those assets, especially if it was clear when you made the loan that your LLC might go out of business. It could be argued in court that you only made the loan so that you could gain access to those assets afterwards. Business bankruptcies can get ugly, which is why you need everything in writing.

Can You Charge Interest on a Loan to Your LLC?

Yes, you can (and should) charge interest on a loan to your LLC. When loaning money to your own company, it’s best to draw up a formal loan agreement and have an attorney review it. You should charge an interest rate that’s in line with market rates and come up with reasonable loan terms.

Keep in mind that interest paid to you (even if it’s a loan you made) is considered taxable income by the IRS.

Pros and Cons of Loaning Money to Your LLC

Loaning money to your own LLC avoids the time and effort involved in applying and getting approved for a business loan from an outside lender. Depending on the interest rate you set, it could also be less costly to your LLC than getting a traditional business loan. Extending a loan to your LLC also shows potential investors that you have faith in the company’s future.

However, loaning your own money to your LLC also involves time and paperwork, and you may need to consult an attorney to make sure the loan agreement is legally sound, which can add to the expense.

And, while loan interest payments are tax-deductible to your business, you lose this benefit if you make the loan yourself, since you will have to report these interest payments (and pay tax on them) on your personal taxes.

You’ll also want to keep in mind that lending money to your LLC involves risk. If the company were to go belly up, you might not get your money back.

Pros of Loaning Money to Your LLC Cons of Loaning Money to Your LLC
Fast influx of money for the company Requires drawing up detailed paperwork
Loans have a tax benefit for the LLC that a contribution doesn’t provide You may need to hire an attorney (which adds to cost)
Credit score and cash flow will not be scrutinized by a bank Interest payments must be reported on your personal tax return, which can negate the tax benefits of a business loan
Shows investors you have faith in your business You could lose your money if the company hits hard times

Recommended: NOI vs. EBITDA

4 Other Ways of Raising Funds for Your LLC

If you decide against loaning your own money to your LLC, there are other funding options you can consider.

Term Loan

A term loan is a small business loan given to businesses by a bank, credit union, or online lender. Interest rates are typically fixed, meaning your monthly payments will not change throughout the course of the loan. Business term loans can be used for nearly every business expense.

Business Line of Credit

A business line of credit is great for businesses who want consistent access to funds. They work similarly to a credit card, where a lender gives you a maximum amount to draw on. You only pay interest on what you use, and can use the line again as you pay it down.

Equipment Financing

Equipment financing is a type of small business financing where the equipment serves as collateral for the loan.

Small Business Grants

Small business grants are money given to your company that do not need to be repaid. While they tend to be competitive, it can be worth your time and effort to secure this type of funding.

The Takeaway

Loaning money to your own LLC can be a viable source of funding for your business, but you’ll need a binding legal contract between you and the LLC stipulating the terms of the loan, otherwise the IRS can deny the validity of the loan.

You’ll also want to keep in mind that by loaning your own funds to your LLC, you lose some of the tax advantages of business financing. And, should the company file for bankruptcy, you could lose your money. You may decide that an outside loan is a smarter choice for your LLC.

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


Large or small, grow your business with financing that’s a fit for you. Search business financing quotes today.

FAQ

Can you loan personal money to an LLC?

Yes, but you’ll need to create a formal loan agreement between you and your LLC.

What are your options for funding an LLC?

There are many options to fund an LLC apart from lending or contributing your own money. These include a bank or SBA loan, an online loan, a business line of credit, a merchant cash advance, invoice financing, an equipment loan, peer-to-peer to lending, crowdfunding, or outside investors.

Can you borrow from your own LLC?

Yes. If there are other members of the LLC, however, each must approve the loan. You’ll also need to document the loan as a legally enforceable promissory note. Otherwise, the IRS may see the money as a taxable dividend or distribution.

Do you have to charge interest on a loan to your company?

If you’re drawing up a formal loan agreement, it is best to treat the loan accordingly by charging a fair interest rate and setting reasonable loan terms.

Can you fund your LLC with personal money?

Yes, you can fund your LLC with personal money as a donation to your company or you can loan your LLC money and draw up a formal loan agreement. In the case of a loan, the LLC would be responsible for paying you back.


Photo credit: iStock/fizkes

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

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

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

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

This article is not intended to be legal advice. Please consult an attorney for advice.

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Is the Interest on Your Business Loan Tax Deductible?

If you’ve taken out a loan to start or build your business (or you’re thinking about doing so), the interest you pay on that loan will likely be tax-deductible as a business expense.

This includes interest charged on all types of loans, including term loans, short-term loans, lines of credit, mortgages on business real estate, and even personal loans, provided the funds are used for business purposes.

There are a few caveats, however. To be eligible, you’ll need to meet some criteria as defined by the Internal Revenue Service (IRS). Here’s everything you need to know to write off loan interest as a business expense.

Deducting Business Interest: The Short Answer

If you’ve been wondering whether or not business loan interest is tax-deductible, the short answer is — yes. If the loan is being used for business purposes, you can likely deduct 100% of the interest you pay to the lender.

Recommended: Comparing Personal Loans vs Business Loans

Deducting Business Interest: The Long Answer

While business loan interest is tax-deductible, there are some requirements that a loan has to meet first.

Who you take the loan out from, what you spend the money on, when you spend it, and how your business is structured all factor in when determining whether or not you can get a tax break on that interest, as well as how much of the interest you can deduct.

It’s important to know the IRS guidelines and follow them if you are doing your own tax filing or have a trusted accountant who can assist you.

Who Qualifies for a Business Interest Tax Deduction

The IRS has some criteria for allowing you to get a tax deduction on your business loan interest, which include:

•  You must be legally liable for the debt. That means that you (through your business) and no other party are responsible for paying back the loan.

•  Both you and the lender intend the debt to be repaid. It needs to be a true small business loan (not a gift of cash) with repayment terms that you have agreed to and are spelled out in a legal document.

•  You and the lender must have a true debtor-creditor relationship. If you borrow money from a relative or friend and use it for business purposes, it can be very tricky to deduct any interest you pay them. To do so, the loan needs to be set up like any other business loan. That means signing a promissory note, paying a reasonable interest rate, following a repayment schedule, and keeping records of every transaction.

When Is It Deductible?

The interest on a business loan is only deductible if you actually spend the money for legitimate business expenses. If you take out a loan and the funds sit in your account, you can’t deduct any of the interest, even if you’re paying off the principal and interest of your loan every month.

Money that is left in the bank and goes unspent is considered an investment and not an expense, which is why that interest isn’t tax-deductible.

And keep in mind: What you spend the loan proceeds on has to be for your business. You can’t use a business loan to put in a new pool at your house or cover other personal expenses and then deduct the interest.
The key is to categorize expenses for your business so you can easily see where you spent the loan proceeds and can prove, if asked by the IRS, that you spent the funds on business-related expenses.

When Isn’t It Deductible?

There are some situations in which your loan interest is not tax-deductible. You typically cannot deduct:

•  Interest on a personal loan if it’s used for personal expenses or to pay debts your business doesn’t owe

•  Interest that is being paid by a second loan (though interest payments on the second loan are tax-deductible)

•  Any fines or penalties paid to your lender

•  Interest that must be capitalized, which is interest added to the principal balance of a loan or mortgage (this interest expense needs to be depreciated along with the other costs of the asset)

•  Interest on overdue taxes (unless you are a C-corporation)

Different Deductions for Different Loans

Here’s a look at how tax deductions apply to different types of small business loans.

Term Loans

If you have a term loan, the interest can generally be deducted in the corresponding year that payments were made. This means if you take out a term loan with a three-year repayment period, you will deduct the interest paid in each of three consecutive tax years, with the amount deducted reflecting the amount you paid in interest each year.

You should get a notification from your lender on how much you have paid in interest for the year. You can also find this information on your amortization schedule.

Short-Term Loans

Short-term business loans have much shorter repayment periods than traditional term loans, typically three months to a year. Even in this short period, though, you pay interest.

Some short-term loans use a factor rate rather than annual percentage rate, since the repayment period may not be an entire year. Either way, you can typically write off the interest or fee you pay on the loan.

Business LOC

With a business line of credit, you don’t get a lump sum of cash like you do with a loan. Instead, a line of credit (LOC) gives you access to cash up to a pre-approved maximum. You can take out however much you need up to the limit, repay it, and then borrow it again.

To deduct interest on a line of credit, you must look at the statements on your business LOC account to see how much you borrowed in a given year and how much of what you paid back was interest.

Personal Loans

Personal loans generally can’t be used for business expenses, but if your lender allows it, the interest on the loan would then be tax-deductible. If you use part of the funds for business expenses and part for personal expenses, however, it could get complicated. You would need to separate out the interest paid on the portion that went toward business expenses, since only that portion of the interest can be deducted for the year.

Merchant Cash Advances

A merchant cash advance is not technically a loan, but an advance on future sales. Because you don’t pay interest on a merchant cash advance, you don’t have any interest that you can write off.

Business Acquisition Loans

If you take out a loan to purchase another business, the interest you pay may or may not be tax-deductible. If you plan to operate the business, the loan interest will likely be tax-deductible.

If you don’t plan to be involved in operations, however, the IRS sees this as an investment, and the tax rules are more complicated. In this scenario, it can be a good idea to consult a tax professional to determine whether or not this interest is tax-deductible.

Debt Refinancing Loans

Refinancing a business loan can be a smart idea if it allows you to pay a lower interest rate on your balance. Just know that when you use one loan to pay off another, you can’t deduct the interest you’re paying off with the second loan. Once you start paying interest on the second loan, however, you can typically deduct those interest payments.

Non-Profit Loans

Not-for-profit organizations are exempt from federal income taxes, so interest paid on non-profit business loans, which are geared specifically for businesses that have a 501(c)(3) status, would not need to be deducted.

Is There Any Reason Not to Deduct Business Loan Interest From Taxes?

No. Deducting what you pay in loan interest allows you to reduce your business’s taxable income, which, in turn, means your company will owe less in taxes. The result: Higher profits.

There are limits, however, on how much interest you can deduct in any given year. You can’t deduct more than 30% of your adjusted taxable income, for example. There are some other limits imposed by the IRS, but they generally don’t apply to small businesses. Your accountant can tell you if any other caps are applicable to your situation.

Other Deductions to Keep in Mind

Business loan interest is just one of many business expenses you can deduct on your taxes. Here are some other deductions you may be able to take.

Office Supplies

You can typically deduct every pen, printer cartridge, and office supply you buy for your business. For an item to be deductible, it generally needs to be considered essential to running a functional office.

Travel Expenses

If you travel for business, whether that’s to visit a client across the country or attend a trade show, these costs can be tax deductions. This includes airfare, rental cars, gas, tolls, hotels, and meals.

Vehicle Expenses

If you use one or more vehicles for your business, whether that’s for delivering products or visiting clients, all expenses related to the vehicle can be tax deductions as long as you keep track of the mileage.

Meal Expenses

If you take clients (or potential clients) out for a meal to discuss business, these costs may be 50% tax-deductible. In order to be eligible, food costs typically need to be reasonable — extravagant meals likely won’t qualify.

Payroll Tax and Employee Benefits

As long as they’re not for you or other business partners, employee salaries and benefits are generally considered write-offs for small businesses. This category typically includes employee wages, paid time off, commissions, and bonuses, as well as employer-sponsored life insurance or retirement account contributions.

Home Office

If you run your business out of your home, you may be able to deduct expenses related to creating and maintaining that workspace. To qualify for the home office deduction, you generally need to utilize part of your home regularly and exclusively for business.

Rent

If you pay rent for an office, warehouse, retail space, or other type of business property, that monthly rent expense may be fully tax-deductible. Keep in mind that if you deduct rent as a business expense, you will not likely be able to take the home office deduction, as well.

The Takeaway

If a loan is being used for business purposes, then the interest you pay to the lender is typically tax-deductible. There are a few requirements, however: You must be legally liable for the debt, you and the lender need to have a true lender-debtor relationship, and the funds from the loan need to be spent on your business during that tax year (not sitting in the bank).

There are some situations that can be a little trickier than others, so it can be a good idea to consult an accountant who fully understands tax law, as well as the details of your business and finances.

If you’re interested in getting a loan to grow your business — while also getting some tax relief — there are many different types of loans you can consider.

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


Large or small, grow your business with financing that’s a fit for you. Search business financing quotes today.

FAQ

How much interest can you write off on a business loan?

You can write off the interest you paid on a loan during a given year, up to 30% of your adjusted taxable income. There are some other limits imposed by the IRS, but they generally don’t apply to small businesses.

Is a small business loan taxable?

You won’t be taxed on the funds you receive on a business loan because you will pay this money back. However, the interest you pay on the loan may be tax-deductible.

How do I report interest paid on a business loan?

Where you report interest depends on what business structure you have. For sole proprietors and single-member LLCs, you’ll report it on Schedule C of Form 1040. For partnerships and multi-member LLCs, you will report it on Form 1065. For corporations, you’ll need to report it on Form 1120 or 1120-S.

Do business loans count as income?

No, the IRS does not consider business loans income because they are repaid. Therefore, loan proceeds are not taxed.


Photo credit: iStock/Pekic

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.

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

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A Guide to Liquor Store Loans

Liquor stores can generate good profit margins and are considered largely recession-proof. But they also come with considerable expenses — such as inventory, payroll, rent, and security systems. Fortunately, there are a number of loan options that can help you get you the funding you need to start or grow your wine and spirits business.

Which type of liquor store loan will work best for you will depend on how much money you want to borrow, how you want to use the funds, and how soon you need the money. Here’s what you need to know to find, and apply for, a liquor store loan.

What Are Liquor Store Loans?

There is no formal designation for liquor store business loans. However, there are a number of small business loans that liquor store owners can use to purchase inventory, do renovations, pay employees, buy real estate, invest in marketing, and more.

These include the SBA 7(a) loan, short- or long-term loans from banks and online lenders, business lines of credit, commercial mortgages, and merchant cash advances. If you also own (or you’re looking to purchase) a bar, there are even loans for bar owners.

How Do Liquor Store Loans Work?

Liquor store loans work like any other kind of small business loan. Typically, they provide you with a lump sum of cash that can be used for a variety of purposes. You borrow the money at an agreed-upon interest rate and repay it over time until the loan is paid off, which could be anywhere from a few months to 25 years.

When a lender is assessing if you are eligible for a liquor store loan and how much they are willing to lend to your business, they typically consider several different factors, including your revenues, time in business, plan for using the borrowed funds, available collateral, along with your business and personal credit scores.

Recommended: Free Credit Score Monitoring

Types of Liquor Store Financing

Knowing what type of small business loan you need is the first step to getting a loan for your liquor store. These options can help your business cover common expenses, expand a business, or acquire an existing store.

Business Term Loans

Small business term loans let you borrow a set amount of money that’s paid back with interest on a predetermined schedule, which could be months or many years. They are available from banks, credit unions, and online lenders.

One of the best term loan options for a liquor store loan is an SBA loan, such as the 7(a) program. These loans are backed by the U.S. Small Business Administration (SBA) and come with favorable terms — low rates, high amounts, and long payback periods. But, you’ll need excellent credit to qualify. You may also need to prove that you have a liquor license or that you will be able to get one.

If you don’t qualify for an SBA term loan, you may want to look into a short- or long-term loan from an online lender. These tend to be quicker and easier to qualify for than SBA and traditional bank loans, but typically come with higher interest rates and fees.

Equipment Financing

If you want to purchase equipment for your store, such as a point-of-sale system, display fixtures, or a computer, you may want to look into an equipment loan. With this type of small business financing, you typically get a quote for the equipment or asset you’d like to buy, and a lender will front you a significant portion of the cost. The asset you purchase with the loan acts as collateral for the loan.

Business Line of Credit

Not all loans for liquor stores provide a lump sum of cash up front. With a business line of credit, you’re given access to cash up to a pre-approved maximum. You can take out however much you need up to the limit, repay it, and then borrow it again. This can help relieve temporary cash flow issues or help you seize an unexpected opportunity. You only pay interest on the amount you use.

Commercial Real Estate Financing

Rather than lease retail space, you might decide to purchase property for your liquor store. Or, if you already own your liquor store, you may be looking to refinance your existing mortgage. For either of these scenarios, you’ll want to consider a commercial real estate loan. Because the property you’re buying (or refinancing) serves as collateral for the loan, you may be able to get low interest and a long repayment term.

Merchant Cash Advance

A merchant cash advance (MCA) isn’t technically a loan, but rather an advance on future liquor sales. With an MCA, you sell your future revenue at a discount to a merchant cash advance company. To collect their money, the advance provider will usually deduct a percentage of your daily credit and debit card sales. This can be a quick way to access a lump sum of cash, but tends to be more costly than other types of financing.

Business Acquisition Loans

If you’re looking to buy an existing liquor store or acquire a competitor, a business acquisition loan may be a good option. This is a loan that’s given to a small business specifically to acquire another business. You may be able to qualify for a good rate if the target liquor store’s assets provide enough collateral to cover the loan. You’ll want to keep in mind, however, that you can only use a business acquisition loan for a short window of time and only for the agreed upon purpose.

4 Steps to Getting a Liquor Store Loan

To get the best and most affordable financing for your liquor store, you’ll want to start exploring and comparing your small business loan options. Here are the steps involved.

1. Finding Out What Kind of Loan You Want

We’ve explored all types of business loans you can use for your liquor store, so now it’s time to narrow it down. A good first step is to look at your personal and business credit, as well as your annual revenues, to determine what type of financing you might qualify for. If your credit and financials are strong, you may be able to get a low-interest SBA term loan, which can be used for a variety of purposes.

If your finances aren’t strong, you might consider an online term loan or a merchant cash advance. If you have a very specific use for the funds, such as purchasing equipment or buying a retail space, you may want to look into getting a targeted loan, like an equipment loan or a commercial real estate loan.

2. Determining How Much of a Loan You Need

Once you know how you want to use the loan, you’ll want to create a budget to get a sense of how much you will need to achieve your goal. As you run the numbers, it can be a good idea to add some extra padding to your budget to account for unanticipated setbacks or expenses.

When considering loan size, you’ll also want to make sure you can afford to make the monthly loan payments. Borrowing a million dollars to overhaul your business may sound fabulous, but what happens when that large payment is due? Not being able to make your payments puts you at risk of defaulting on the loan and could jeopardize your liquor store.

3. Gathering Documents

When you apply for your loan, the lender will want some documents about your business. These may include:

•  Tax returns

•  Financial statements (such as profit and loss statements and bank account statements for the business and business owners)

•  Corporation or LLC paperwork

•  Business plan or proposal for how you plan to use the loan

•  Owner’s photo ID

It can be a good idea to gather these documents now so that you’re ready to go when you start applying for a small business loan.

4. Applying for Your Loan

Some applications, like those from an SBA lender, may be lengthy and complicated, while online lenders tend to have shorter applications. If you’ve already gathered what you need beforehand, however, applying should go pretty smoothly.

When filling out a business loan application, you’ll want to be sure to include everything the lender asked for and in the correct format. This can reduce any unnecessary back and forth between you and the lender and help make sure you get a decision as quickly as possible.

Once everything is in order, how you’ll actually apply for the small business loan will depend on the lender. An online lender may allow you to link your bank accounts through its website, whereas a bank may require you to apply at a branch or over the phone.

Turnaround time will also vary depending on the lender. Online lenders may let you know right away if you’re approved and funding may only take a matter or days or weeks to receive. With SBA loans, the application, approval, and funding process can take several months.

Uses for Business Loans for Liquor Stores

There are many things you can do with liquor store financing. Here are some ways you might spend the proceeds from a liquor store loan.

Expansion

Maybe business is booming and you’re ready to renovate or expand your store. Or, perhaps you’re interested in opening a second location or purchasing a competitor’s store. If you don’t have the cash to move forward on your plan, a liquor store loan can turn your vision into a reality. The idea is that the investment will help you bring in more revenue, which you can use to quickly pay back your loan.

Emergencies

When faced with an unexpected event, such as a major storm, a pandemic, or significant disruption in your supply chain, would you have enough cash to cover basic operating expenses for a few weeks or possibly months? Small business financing, such as a business line of credit, can help provide a cushion in case of an emergency.

Payroll

Your employees are key to the success of your liquor store. Getting a loan to cover payroll, such as a short-term business loan, business line or credit, or merchant cash advance, can help ensure that your team gets paid on time, even when cash flow is tight. This can help keep your workers happy and motivated to sell.

Technology Upgrades

Investing in new technology, such as a new point-of-sale system, cloud-based business management system, or an e-commerce site, can help streamline operations and enhance customer experience. A liquor store loan can help you take advantage of cutting edge technology that saves you time and helps boost profits.

Inventory

Another use for liquor store loans is to purchase inventory, which is likely your largest expense. A liquor store loan can allow you to stock up before peak seasons, take advantage of a great deal on a large purchase when it arises, and keep up with rising demand for certain products.

Pros and Cons of Owning a Liquor Stores

Owning a liquor store can be an appealing venture for entrepreneurs interested in the retail industry. However, like any business, it comes with its own set of advantages and disadvantages. Here’s a look at how they stack up.

Pros of Owning a Liquor Store Cons of Owning a Liquor Store
Recession-resistant Strict industry regulations
High profit margins High startup costs
Loyal customer base Responsibility to sell alcohol safely
Wide range of products to sell Theft risk
Inventory has stable shelf life Seasonal sales fluctuations

Pros

Some of the benefits of owning a liquor store include:

•  Steady demand: Liquor is a consumable product with consistent demand. Regardless of economic conditions, people tend to purchase alcohol, making it a recession-resistant industry.

•  Profit margins: Liquor stores often have high-profit margins due to the markup on alcoholic beverages. By strategically pricing products and managing inventory, owners can maximize profitability.

•  Repeat customers: Once customers find a store that offers a wide selection, competitive prices, and excellent service, they tend to return, ensuring a steady stream of repeat business.

•  Diverse product range: Liquor stores offer a wide range of products, including various spirits, wines, beers, and mixers. This allows you to cater to a range of customer preferences and target niche markets, increasing your revenue potential.

•  Long shelf life: With many other retail businesses, such as groceries or fashion, overstocking can be a concern, since food can perish and styles tend to change quickly. With liquor stores, however, products tend to last a long time and, though new products come in, not many go out of fashion.

Cons

•  Licensing and regulations: Opening a liquor store involves obtaining specific licenses and permits, which can vary by jurisdiction. Navigating the complex regulatory landscape can be time-consuming and require compliance with strict guidelines.

•  High startup costs: Alcohol tends to be expensive, even at wholesale prices. In addition, you’ll need to pay for rent, utilities, payroll, insurance, and more. Liquor licenses can also be costly.

•  Social responsibility: Owning a liquor store comes with the responsibility of selling alcohol responsibly. Adhering to age verification laws, preventing sales to intoxicated individuals, and promoting responsible consumption can be demanding but essential for maintaining a positive reputation and avoiding legal issues.

•  Seasonal fluctuations: Liquor sales often experience seasonal fluctuations, with peaks during holidays and special occasions. Managing inventory and cash flow during slower periods requires careful planning to maintain profitability.

•  Security risks: Because alcohol is regulated and can be hard to obtain, it’s often targeted by thieves. These can be people looking to resell stolen liquor or underage kids looking for fun. To avoid shrinkage and keep up your profits, you’ll need to closely monitor your store.

The Takeaway

There are many types of loans available to you as a liquor store owner. The best rates and terms will typically come from the SBA 7(a) program if you qualify.

If you don’t have stellar credit or haven’t been in business for at least two years, you may want to consider an online term loan, a merchant cash advance, an equipment loan, or a business line of credit.

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


With one simple search, see if you qualify and explore quotes for your business.

FAQ

Are liquor stores eligible for SBA loans?

Yes, liquor stores can use SBA loans, such as the 7(a) or 504, as working capital to purchase equipment or buy real estate.

Can banks take liquor as collateral for a loan?

Liquor cannot be used as collateral for a loan. In some cases, however, a liquor license may be used to secure a loan.

How profitable can owning a liquor store be?

Liquor stores are known for having potential for moderate to high profit margins. Some stores see profit margins of 20% to 30%.

How much money do you need to open a liquor store?

The average cost to open a liquor store in the U.S. ranges between $50,000 and $100,000.

How big of a loan can you get to open a liquor store?

How big a loan you can get to open a liquor store will depend on the lender and your qualifications as a borrower. The maximum SBA loan offered for a liquor store is $5 million. SBA Express loans go up to $500,000.


Photo credit: iStock/CandyRetriever

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

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

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