Guide to Business Loan Down Payments

If you’re thinking about getting a loan to launch or expand your business, you may want to keep in mind that small business loans often require a down payment.

While the idea of having to come up with money in order to borrow money may sound like a catch-22, down payments are a way of lessening risk for the lender. Down payments can also benefit borrowers by improving the loan terms and lowering the overall cost of the loan.

Not all business loans require a down payment, however. Whether you’ll need to put money down — and how much — will depend on a number of factors, including the loan servicer, the type of loan, how much you are looking to borrow, and your credit profile.

Here’s what you need to know about business loan down payments and how much you may need — or want — to put down in order to get the right financing for your business.

What Is a Business Loan Down Payment and When Is It Due?

A business loan down payment is cash a borrower must pay up front in order to receive the proceeds of the loan. Typically, the down payment will be a certain percentage of the loan’s principal (amount of the loan). There are many different types of small business loans, and each has unique requirements for if and how much of a down payment may be required.

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

How Do Down Payments for a Business Loan Work?

Down payments for small business loans work similarly to down payments for other types of loans. When you get a mortgage to buy a house or arrange financing to purchase a car, for example, you typically need to make a down payment. Let’s say you purchase a car for $25,000 and a 10% down payment is required. That means you have to come up with $2,500 cash to get the loan. The lender loans you the rest — $22,500, plus fees.

A down payment on a business loan means you’ll need to pay a certain percentage of the total loan amount, say 10% or 20%, up front. After you’ve made your down payment, you’ll then receive the remaining 80% or 90% of the loan, often in one lump sum.

What Are the Maximum and Minimum Business Loan Down Payment Amounts?

Down payment amounts can vary widely depending on the type of loan, the lender, and borrower’s qualifications. They can be as little as 3.5% or as high as 50%.

5 Factors That Determine the Size of a Down Payment on a Business Loan

In some cases, a business loan will have a predetermined down payment. In others, the down payment amount will vary depending on several factors. These include:

1. Credit History

Down payment requirements are often lower for borrowers with high credit scores and solid credit histories, since they represent less risk to the lender. In some cases, these borrowers may even qualify for no-down-payment offers. Borrowers with low scores will likely be required to pay a higher down payment.

Recommended: Uses for Business Loans

2. Lender Policies

Some lenders may automatically require a down payment for specific loans or loans that exceed a certain amount, while others never require money down. It can be worthwhile to shop around and compare the various options for small business loans since one lender may ask for less of a down payment than another.

3. Collateral

If the loan is a secured loan, meaning you put up collateral for it, you may not be required to make a down payment or you may need to put less down, since that collateral lowers the risk for the lender.

4. Type of Business Loan

Different types of loans have different deposit requirements. A bank term loan, for instance, will often require a 10% to 20% down payment, whereas a construction loan may require 25%-plus down. Business lines of credit and invoice financing, on the other hand, require no down payment.

Recommended: What to Know About Short-Term Business Loans

5. Business Loan Purpose

The purpose of your small business loan can also affect the size of your down payment. If you plan to use the funds in a way that is likely to increase your company’s revenues, the lender may feel comfortable with a smaller (or no) down payment.

Why Do I Need to Make a Down Payment?

Requiring a down payment is one of the tools lenders use to manage their risk. By investing your own money, you’re showing the lender that you’re serious about the loan and likely to pay it back. In other words, you’re putting “skin in the game.” In addition, should you fail to fully repay the loan, the lender will at least have that money to lessen its loss.

Down payments aren’t just good for lenders, though. They also benefit you as a borrower. By putting up a down payment, you’re able to lower the total amount of money that you will pay interest on. A down payment can also help you get a lower interest rate. Together, this can lead to a lower monthly payment and make the loan more affordable over the long term.

Are Down Payments Always Required on Business Loans?

No. Not every lender requires a down payment on a business loan. Some will offer no-money-down loans as an enticement to bring in new business, but will have strict requirements for who qualifies for those loans.

Online business loans and term loans generally do not require a down payment, though they may require collateral.

Some of the most desirable business loans on the market, however, are offered by the Small Business Association (SBA), and these typically require a 10% to 20% down payment. While it may seem like a hefty amount to plunk down, it can be well worth it since you can often get a long-term, low-interest rate loan in return.

Most larger business loans — including commercial mortgages, commercial auto loans, and equipment loans — also require down payments to get approval for funding.

Required Down Payment by Loan Type

With so many different types of business loans, it can be confusing to know which require a down payment and which do not. For some loans, a down payment is always required, but may vary based on the borrower’s profile and loan amount. For other loans, a down payment may not be required at all.

Here, we break it down by different types of loans.

Commercial Mortgage Down Payments

For many businesses, commercial real estate is one of the biggest purchases they will make. Due to the size of the purchase, most business real estate loans require a down payment. How much they will require will depend on the lender.

Commercial mortgages offered through government-sponsored programs, including the SBA and the Department of Housing and Urban Development (HUD), generally offer some of the best financing options.

If the property will serve a governmental purpose (such as a healthcare facility or public housing), your chances of scoring good terms tend to be even better.

Here are some examples of commercial mortgages and the down payments they may require.

Loan Type Down Payment That May Be Required
SBA 504 loan 10% to 20%
USDA Business & Industry loan 20% to 25%
Traditional bank loan At least 20%
Long-term online loan Collateral may be required to secure loan
Construction loan 25% to 34%

Commercial Vehicle Down Payments

If you need a vehicle to conduct business or deliver goods, you’ll likely be in the market for a small business auto loan. Some lenders specialize in providing business auto loans and fleet financing. For heavy-duty vehicles (weighing 2.5 tons or more), you will typically need to use an equipment loan.

In some cases, lenders are willing to finance a new vehicle with no down payment because the vehicle serves as collateral for the loan. Whether a downpayment is required and how much it will be often depends on the buyer’s profile.

Here are some common types of commercial vehicle loans and possible down payments they may require.

Loan Type Down Payment That May Be Required
Commercial auto loan 0% or more
Commercial truck loan 10% to 50%

General Purpose Business Loan Down Payments

There are a variety of general business loans you can use to hire staff, invest in marketing, buy inventory, or cover other business expenses. This includes traditional term loans, lines of credit, and government-sponsored lending programs.

Whether you are required to make a down payment on a general business loan will depend on the type of loan and your qualifications. Some of the most sought-after general business loans are SBA loans, which have stringent qualifications and, in most cases, require a down payment.

Here’s a look at common general business loans and the down payments they may require.

Loan Type Down Payment That May Be Required
SBA 7a loan 10% to 20%
Bank loan 10% to 20%
Bank line of credit 0% (a secured line of credit may require collateral)
Online loan 0% (may require collateral or personal guarantee)
Online line of credit 0% (may require collateral or personal guarantee)
Business acquisition loan 10% to 20%

Down Payments vs Collateral

Down payments and collateral are similar, but also have some key differences.
A down payment is a cash payment you make to the lender before you receive the loan. If you default on the loan, you forfeit your down payment.

Collateral is an asset you put up against the loan. This means you give the lender the right to take the asset if you are unable to pay the loan. Collateral could be a vehicle, piece of equipment, inventory, or real estate. Collateral allows you to keep more liquid capital in your business, but comes with the risk that you could lose the asset.

Both down payments and collateral serve the same purpose — they lower the lender’s risk.
Some loans require one or both, while some require neither. Generally, if a loan requires either a down payment or collateral, it will have a lower interest rate.

Pros and Cons of Putting the Minimum Down

If you are required to make a small down payment for a business loan, should you pay the minimum or should you make a larger down payment? Let’s look at the benefits and drawbacks of paying only the minimum.

Pros of a Minimum Down Payment Cons of a Minimum Down Payment
You don’t need to come up with as much cash to make the down payment Your monthly payments will be larger

Pros

Having any kind of down payment means you’ll need cash upfront before you even get the loan. By paying the minimum, you may find it easier to come up with the down payment, particularly if you don’t have a lot of cash on hand.

By only paying the minimum, you may also be able to come up with the down payment faster, which means you can get the loan sooner.

Cons

The smaller the down payment, the larger the balance — and the more total interest you’ll end up paying on the loan. As a result, you may end up with a larger monthly payment than you’d like.

By paying just the minimum, you may also end up paying a higher interest rate than if you offered a higher down payment.

Recommended: Business Loan Interest Rates

Should You Pay the Minimum Down Payment?

Once you establish how much you are required to have as a down payment for the business loan you’re planning to apply for, you may actually want to consider paying more. Why? The less money down you offer, generally the higher your monthly payments and higher the overall cost of the loan.

Lenders typically offer lower interest rates on business loans with higher down payments to incentivize a borrower to pay more up front. If your business can afford to make a greater contribution to the down payment, it can reduce the overall interest costs of the loan.

This can be a smart move if your business has an uneven cash flow, yet you have a lump sum available now. This can lead to lower payments when you may have less cash available.

On the other hand, if cash is tight right now, but you are confident you can pay the larger monthly payment, you might go with just the minimum required.

What if You Can’t Afford a Down Payment?

If you can’t afford the down payment on a small business loan, you’re not necessarily out of financing options.

One solution is to look for loans that have lower down payment requirements. SBA loans and loans sponsored by government entities can help businesses in a bind since they may require lower down payments than private business loans and offer competitive interest rates.

You can also look into loans that don’t require a down payment, such as online loans and lines of credit. Another option is to borrow less money, since some lenders only require a down payment if you’re borrowing a large amount of money.

If you have some time before you need financing, you can start saving up for the downpayment by transferring extra cash each month into a high-yield savings account, money market fund, or certificate of deposit. Or, you might work on paying off credit cards and debts you currently own.

Once they are paid off, the money you were using to pay balances plus interest each month can now be applied to the down payment.

If a low credit score is the reason for a high down payment, you can work on building your credit profile so you are able to qualify for lower down payments — along with improved interest rates and terms — in the future.

Small Business Loans With SoFi

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

Can you get an SBA loan for 0% down?

Yes. The U.S. Small Business Administration (SBA) offers some loans, such as the disaster loan program, that don’t require a down payment. Most SBA loans (including the popular 7(a) loan), however, do require borrowers to make a down payment.

What is the down payment needed to purchase a business?

In order to purchase a business, you typically need to put down 10% to 15% of the total cost of the purchase (which includes all additional costs associated with the sale).


Photo credit: iStock/insta_photos

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.

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 .

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How Much Can a Small Business Make Before Paying Taxes?

Tax time can be stressful for small business owners. If your company hasn’t made any money yet, do you even need to file this year? Or, if you’re already turning profits, you may wonder how much you can make before you have to start paying business taxes.

The answers to these (and many other) tax questions will depend on how your business is structured, how much it has earned, and what deductions and credits you’re able to take.

Below, we break it all down to help you figure out how much you may owe in taxes for business income earned in 2024.

How to Calculate Your Small Business’ Taxable Income

Whether or not you need to file business income tax returns and how much you need to earn before you pay taxes will depend on your business structure.

Small Corporate Businesses

C corporations in the United States are subject to a flat 21% corporate tax rate under the Tax Cuts and Jobs Act. There is no minimum income you have to meet before your small corporation is taxed. Every dollar it earns (after deductions and credits are factored in) will be taxed at 21%.

Corporate tax rates also apply to limited liability companies (LLCs) who have elected to be taxed as corporations.

Unincorporated Businesses

If your business is structured as a sole proprietorship, partnership, LLC, or S corporation, it will likely be considered a “pass-through” business. That means the income it makes is “passed through” to you and is reported on your personal tax return.

This business income will be combined with any other income (such as wages from a part- or full-time job, rental income, or investment income) on your tax return.

Your filing status, potential itemized deductions, and other allowable deductions will all serve to determine your taxable income and resulting tax bracket.

A tax professional can help you consider all of these factors to estimate what your tax liability might be based upon your estimated business profit. But the following table can help you get a sense of your pass-through income tax rate in 2024:

Tax rate

Income for single filers

Income for joint filers

10% Up to $11,600 Up to $23,200
12% $11,601 to $47,150 $23,201 to $94,300
22% $47,151 to $100,525 $94,301 to $201,050
24% $100,526 to $191,950 $201,051 to $383,900
32% $191,951 to $243,725 $191,951 to $243,725
35% $243,726 to $609,350 $487,451 to $731,200
37% Over $609,350 Over $731,200

Recommended: What Is a Stated Business Income Loan?

How Much Can a Small Business Make Before Paying Taxes?

If you operate your business as a pass-through, meaning the income is taxed as part of your personal income, then the tax-free threshold (also called the standard deduction) for 2024 income is $14,600 for individuals and $ $29,200 for married couples filing jointly.

There is no tax-free threshold for corporations — you need to pay tax on every dollar the company earns. Note that small business loans are not considered taxable income.

Zero Taxable Income

If your annual income and business expenses were equal — or, if your business didn’t generate any revenues at all — you may have no income tax liability.

Here’s an example. Let’s say you started a small enterprise in 2024 that earned $5,000 in annual sales revenue. However, you also had $5,000 in annual expenses, which included buying a new computer, advertising, and office supplies. Because these two cancel each other out, no income taxes are owed.

Net Income Formula

Net income (also sometimes referred to as net earnings or net profit) is your company’s total profits after deducting all business expenses.

To find your net income, which is what’s considered taxable, you can use a simple formula:

Gross Income – Expenses = Net Income

Let’s say you made $65,000 in annual sales and total expenses were $17,000 for the year. Your net income would be:

65,000 – 17,000 = $48,000

To lower your net income (which will lower how much you pay in taxes), it’s a good idea to keep track of and categorize business expenses throughout the year. Your business expenses might include expenses related to a home office or work space, the cost of tools or supplies, car or truck expenses, advertising costs, as well legal and accounting costs.

Net income can be positive or negative. When your company has more revenues than expenses, you have a positive net income. If your self-employed tax deductions are more than your revenues, you have a negative net income, also known as a net loss. You won’t have to pay taxes on your business income if you arrive at a negative number representing a net loss.

Recommended: Net Present Value: How to Calculate NPV

Self-Employment Tax

If your business is not incorporated, you may need to file a tax return and pay the self-employment tax if your net income is $400 or more.

Self-employment tax is the equivalent of the FICA payroll taxes (Medicare and Social Security) that you would normally share with your employer if you worked for someone else. Your employer would pay half and you would pay half, but you are the employer if you own a pass-through small business, so you must pay both halves.

Qualified Business Income (QBI) Deduction

In addition to small business tax deductions, the IRS has another little gift for owners of pass-through businesses: the qualified business income, or QBI, deduction. The QBI deduction allows you to deduct up to 20% of your qualified business income on your taxes. Note that sole proprietors, S corporations, and partnerships can’t claim the QBI deduction after 2025 unless Congress extends Section 199A of the federal tax code.

Tax Credit

Another tax tip for small businesses is to look for tax credits you might qualify for. Tax credits are different from tax deductions. Tax credits directly reduce how much tax a business owes dollar for dollar. Tax deductions, on the other hand, are business expenses that decrease how much of a business’s income is taxable. Translation: Tax credits are worth more.

There are a variety of tax credits available for businesses to take advantage of, ranging from providing employees paid family and medical leave, to increasing access for people with disabilities. You can claim business tax credits by filling out the appropriate forms for the credits for which your business qualifies.

If you’re filing as a pass-through business, it’s also key to look into any and all personal tax credits you may qualify for, such as the Child Tax Credit.

Recommended: How Much Do I Have to Make to File Taxes?

How to File Income Tax With a “Doing Business As” (DBA) Name

When choosing a business structure, you may also decide to create a name for your business other than your legal name. If that’s the case, you may need to file a “doing business as” form with your city or state registering your DBA trade name, also known as a fictitious business name.

You can identify your legal name and DBA in the appropriate fields when filing tax returns. A sole proprietorship on Schedule C, for example, may need to include the name of the proprietor, the proprietor’s Social Security number, the business trade name (if applicable), and the employer identification number.

Penalties for Failing to File Corporate Tax Return

No matter how your small business is structured, if you do not file your tax return by the date it’s due, the IRS may enforce a penalty fee. This fee is typically 5% of the taxes you did not pay on time for each month or partial month that your return is late. Generally, this fee will not exceed 25% of your unpaid taxes.

The IRS may also charge interest on penalties, which increases the amount you owe until you pay your balance in full.

Recommended: GAAP vs. Tax Basis

5 Tax Breaks for Small Businesses

Here are some small business tax breaks you can explore:

1. Business Loan Interest Tax Deduction

When filing taxes, you can check whether your business qualifies for a business loan interest tax deduction. If you’ve taken out loans for business purposes, including lines of credit and mortgages on business real estate, or if you’ve used business credit cards, the interest you pay on those liabilities may be tax-deductible.

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

2. Charitable Contribution Tax Deduction

Small business owners who donate money to a qualified charitable organization may qualify for a tax deduction. To claim a deduction for charitable donations on your taxes, you must have donated to an IRS-recognized charity and received nothing in return for your gift.

3. Small Business Cell Phone Deduction

If you use a cell phone for business purposes, you may qualify for a deduction of your cell phone expenses when filing your tax returns. This can include expenses related to making domestic and international phone calls for business purposes.

4. Business Travel Tax Deduction

Small business owners who travel as part of their enterprise duties may deduct eligible travel expenses from their taxable income. This can include business-related transportation expenses, such as flights, rental cars, train fare, parking rates, and tolls.

5. Advertising and Marketing Tax Deduction

Ordinary advertising and marketing costs your business incurs may qualify for an income tax deduction. This can include expenses related to optimizing your company’s website or sponsoring an event.

The Takeaway

How much your small business can make before paying taxes will depend on whether your business is structured as a pass-through entity or a corporation. How much your business earned and spent during the year can also affect the equation. If you’re a small business owner, you may qualify for certain tax breaks that can minimize your tax burden.

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

How much money does a small business have to make before filing taxes?

If your small business is not incorporated, you may need to file a tax return and pay the self-employment tax if your net income is $400 or more.

What is a taxable income for a small business?

Taxable income for a small business can include any revenue the business collects, such as fees collected from selling goods or services. In addition to gross receipts or sales, the revenue you collect from interest, rent, royalties, and capital gains may also qualify as taxable income.

How much can a side business make before paying taxes?

Individuals who have earned at least $400 in annual side hustle income may have to report that income to the IRS on Schedule SE. Self-employment taxes may apply if you’ve had net earnings of at least $400 from self-employment during the 2024 tax year.


Photo credit: iStock/amenic181

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

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


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

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Advantages and Disadvantages of GAAP vs Tax-Basis Accounting

If you own your own business, you may be wondering whether you’re better off going with GAAP (generally accepted accounting principles) or tax-based accounting. The answer depends on the size of your business, as well as your plans for financing and future growth.

Generally speaking, GAAP is a good fit for larger companies with complicated revenue streams (it’s also mandatory for public companies), while the simpler tax-basis accounting can be advantageous for smaller businesses. However, there are some exceptions to this rule.

Here’s what you need to know about the differences between tax vs GAAP accounting and why one method may be a better fit for your business than another.

What Is GAAP?

GAAP stands for Generally Accepted Accounting Principles, and is a set of accounting procedures public companies must follow to remain compliant with the U.S. Securities and Exchange Commission (SEC). Private companies aren’t required to follow GAAP, but doing so can make applying for small business loans easier because it can speed up the underwriting process.

Essentially, GAAP is based on the principle of conservatism, which aims to correctly match revenue and expenses with a reporting period. It also seeks to prevent businesses from overstating profits and asset values in order to mislead investors and lenders. To that end, GAAP records all financial transactions, including cash, accrual, investment, expenses, taxes, and deductions, even if they do not need to be reported on your yearly tax forms. As a result, GAAP may show actual income that is different from taxable income.

Public companies are required to follow GAAP because investors, lenders, and the overall market need to be able to trust the data that companies provide. GAAP makes this possible. With GAAP, all financial statements are produced with the same methodology, so it’s not only easier to trust a company’s reports, but it’s also possible to compare one company to another, which is useful for investors.

No matter what type of business loan a small business owner may apply for, lenders tend to prefer GAAP over other accounting methods because it shows all assets and liabilities, allowing a more complete picture of a company’s financial health.

Recommended: Minimum Business Income Required for Taxes

What Is Tax-Basis Accounting?

Tax-basis accounting can in some ways be thought of as small business accounting, since it is the method most used by certified public accountants (CPAs). To be GAAP-compliant can be costly, so many small businesses in the U.S. opt for tax-basis reporting instead.

Tax accounting follows the same methods and principles that businesses use to file their federal income tax returns, and is focused on tracking your taxable income as it builds throughout the year. Unlike GAAP, tax-basis accounting (and tax law) recognizes accelerated gross income and doesn’t allow taxpayers to deduct expenses until the amounts are known and other requirements have been met.

Tax-basis accounting is not as difficult to prepare as GAAP, and can be done in a fraction of the time. Choosing this method of accounting also helps simplify tax filing, since the majority of the work has already been done.

However, if you are choosing between GAAP basis vs. tax basis accounting, be aware that many lenders prefer borrowers to use the GAAP method, so you could potentially find it more challenging to get a small business loan if your business records use tax-basis reporting.

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

Comparing Tax-Basis vs GAAP

To determine which accounting method is the right fit for your business, it helps to understand the similarities and differences between tax-basis and GAAP reporting.

Similarities

Both tax-basis and GAAP accounting are ways to record the financial transactions of a business. Both provide a standardized presentation of a business’s financial performance and positioning, such as income statements and balance sheets, and can help with decision making and financial planning. In addition, both allow accrual basis accounting (though tax-basis also allows other options).

Differences

GAAP and tax-basis reporting have some fundamental differences. One of the biggest is that GAAP is designed to show earnings in the period earned, rather than when cash is received or expended. This is often what investors and lenders want to see, and what owners want to show.

From a tax perspective, however, business owners generally want to show as much loss as possible, maximizing deductions and deferring income in order to reduce taxable income (and the taxes that will be due). Thus, those are the aims of tax-based accounting.

Recommended: Business Loan Interest and Tax Implications

GAAP vs Tax-Basis Reporting

 

GAAP Tax-Basis
Income statement Companies list expenses, revenue(s), and net income Companies list income, taxable income, and deductions (non-taxable items are disclosed via footnotes)
Basis Accrual basis accounting is the only option Can use cash, accrual, or modified basis accounting
Depreciation of Fixed Assets Tangible assets are depreciated using a method that equally distributes the expense with the period of time in which it was used (often the straight line method) Tangible assets are often depreciated using the accelerated method, which allows for higher depreciation write-off during an asset’s first years

Pros and Cons of Tax-Basis Accounting

 

Pros of Tax-Basis Accounting Cons of Tax-Basis Accounting
Simpler and less costly than GAAP Investors and lenders prefer businesses to use GAAP
Allows you to track your taxable income throughout the year Does not reliably report all liabilities and assets
Simplifies tax filing If you grow and need to switch to GAAP, the transition may be difficult

How to Know Which Is Best for Your Business

When deciding whether to use GAAP vs. tax-basis accounting, there are a few things to consider. If your business needs to issue financial statements to investors, you may want to go with GAAP, since it is guided by industry standards, provides greater consistency in the reporting, and is not subject to changes in tax rules.

Using GAAP can also be helpful If you are newly in business, since it can give you a clear view of how money is being used in different areas of your business. GAAP accounting can also be an asset if you are in the market for a small business loan.

If, on the other hand, you run a small, fairly established business and have no need to issue financial statements, you may be better off with the simpler tax-basis accounting method. You likely don’t need an accounting of every single financial transaction that your business makes during the year, and would be better off focusing on what is needed to successfully file taxes at the end of each year.

Recommended: Negative Working Capital

The Takeaway

Tax-based accounting has fewer rules than GAAP. It also makes it easier to see where you stand at any given point of the year with taxable income, and simplifies tax filing.

However, if you are looking to attract an investor, now or at some point in the future, it may be worthwhile to go with GAAP accounting, which offers a more accurate picture of your company’s assets and liabilities. Going with GAAP can also serve you well if you are in the market for any type of small business loan, as lenders typically prefer to look at GAAP-compliant financial statements.

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

What does tax basis mean in accounting?

Tax-basis accounting means a company’s financial statements are prepared in the same manner as is required for federal tax documents.

Do tax accountants use GAAP?

Not typically. Tax accountants usually help businesses with tax-basis financial statements and tax filing. Their expertise typically lies in how a business (or individual) can take advantage of all the deductions and tax breaks for which they qualify.

Is the tax basis of accounting accrual?

Tax-basis accounting can be cash basis (when you record income and expenses after the company exchanges money with a consumer or pays off an expense) or accrual (when you record revenues and expenses when they occur, rather than when the money exchange occurs).


Photo credit: iStock/Rockaa

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

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


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

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How to Write a 5-Year Business Plan

Having a business plan can help you focus on where you want to go with your company and what it will take to get there.

How far into the future should you be planning? It can be helpful to have a short-term plan for one year, as well as a three-year business plan. But in this article, we’ll look out just a little further to create a business plan for the next five years.

We’ll also look at examples of some of the sections you should include to help you in writing your five-year business plan.

Why Create a Five-Year Business Plan?

Having a business plan can help you see the big picture for your business. It helps you identify your strategy. Why are you in business? What do you want to accomplish?

It can also help you define your marketing approach. You’ll have to do some research into who your clients are for your business plan, and by putting your energy here, you’ll be able to improve your understanding of your audience and how to reach them.

If you’re looking into how to get a small business loan or how to look for investors, you may see that some lenders and investors require a business plan from applicants. Why? They want to see that you’ve carefully thought through your business strategy and have a detailed plan for the money you’re seeking.

So why a five-year business plan? Five years is a good period of time, since it lets you consider both the short-term (the next 12 months) and look forward to the longer term, as well as set goals that you can work toward over time.

Now let’s look at what you need to include in your plan, including some examples.

Recommended: Structure a 3 Year Business Plan

Sections to Include in Your Business Plan

Not sure how to write a five-year business plan? We’ll go through it, step by step.

Your own plan might vary slightly. For instance, you might decide to include your “Management Team” and “Products and Services” as subsections under “Company Description.” But these are the sections that might typically be included in some form in a five-year business plan.

•  Executive Summary: A brief overview of your business and its goals.

•  Company Description: What does your firm do? Where does it operate and how does it fulfill its goals?

•  Management Team: Who runs your company? What relevant background do they have?

•  Products and Services: What exactly does your company produce/provide and how much?

•  Target Audience: Who do you expect to buy your products and/or services? Are there new audiences you want to reach, too?

•  Competitive Analysis: Who are your competitors and how do you compare?

•  Market Analysis: How well is your company meeting the needs of your clients and keeping up with the industry?

•  Marketing and Sales Plan: What is your plan for getting your company out there, expanding awareness of your products/services, and increasing your sales?

•  Financials and Budget: What is your company’s budget and what financial information (like profit and loss statements) can you provide?

While your needs may vary, these sections can give you a sense of the basics you’ll likely want to cover.

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

Seven Steps to Creating a Five-Year Business Plan

The five-year business plan sections above are meant to give you an overview of what goes into many business plans. You might choose to modify one element or add another, depending on your business needs.

Now let’s walk through how to create a five-year business plan, illustrating what those sections are. We’ll also include five-year business plan examples using a fictitious tour company, Bella Tours.

1. Prepare Your Executive Summary

This is the first impression readers may get of your company, so you want it to be appealing and engaging. Your executive summary should be a high-level overview of your business plan. It might include just a little info on your mission statement, company history, what makes your company different, and your company goals.

Your executive summary might just be a page or two long. Remember: You’re going for high-level understanding, not nitty-gritty details. And even though we’re listing it first and it should come first in your finished business plan, you may want to consider actually writing this section last, because you might have achieved a better understanding of what needs to go into it at the end of the process.

Example of a Mission Statement

Bella Tours provides hands-on curated experiences for travelers in Calabria, Italy. Customers have the unique opportunity to meet locals and experience local culture on the tours, and Bella tours is the only company to provide this service in the region.

2. Consider Your Strategic Plan

In the sample five-year business plan we’re building for Bella Tours, we’ll next consider what we want to happen over the next five years. We also need to determine why we’ve chosen these goals and how we’ll meet them. Much of this information will go in your executive summary, though some may be relevant elsewhere, too.

Example of a Strategic Plan

Over the next five years, Bella Tours wants to expand its offerings. Our goal is to build partnerships with three to five homestay companies and add four new tour offerings per year. By partnering with homestay companies that offer excursions on their sites, we will expand our reach beyond that of our website. Additional tours will provide something new for repeat clients.

3. Describe Your Business

In your five-year plan for business strategy, you’ll also need to go more in-depth about what your business is and who’s involved. If you’re looking for investors, they will probably want to see that your team has deep experience in your industry.

This section (or an adjacent section) should also contain details on all products and services you offer.

Example of Management Team Description

Bella Tours is run by CEO Isabelle Rose, a published travel author who has lived in Calabria for 10 years. She brings a wealth of knowledge of the tourism industry to the company.

4. Analyze Your Market

Now it’s time to look at your client base. Who will buy your products or services? Where do they live? What kind of education or jobs do they have? How do they make decisions about what to buy? What other products or services do they buy?
Example of a Market Analysis Statement

Bella Tours customers are primarily solo travelers aged 30-40 or couples aged 60-75. They are college-educated and affluent. Many are retirees, and most travel in Italy for several weeks at a time. Our customers tend to be repeat consumers of our tours (58%), which is above the average return rate for similar tours in our state (25%).

5. Outline How You Will Handle Marketing

Now you’ll need to provide a marketing plan as part of your five-year business plan. This will address the channels you use for marketing as well as a budget for each.

These costs may include, for example, social media software subscriptions, a marketing employee’s salary, or a consulting fee to retain a marketing firm to manage social media, design fees, and advertising.

Example of a Marketing Plan

Bella Tours uses the following channels to reach our audience:

•  Social media (Facebook, Instagram)

•  Social media ads

•  Content marketing

•  Email marketing

•  Pay-per-click ads

6. Budget Costs and Revenues

Now it’s time for dollars and cents. If you’re seeking financing or investment, the bank or investors will want to know that you know how to calculate cash flow, forecast sales, and account for expenses to grow your business.

You’ll want to include your income statement, balance sheet, and cash flow statement, as well as budgets for operations, overhead, sales and marketing, and other business expenses. You can also include sales forecasts here.

Example of a Marketing Budget

Bella Tours’ annual marketing budget consists of:

•  Social media management (outside firm): $12,000

•  Marketing software: $300

•  Advertising: $5,000

Recommended: What Is a Business Liability?

7. Review Regularly

Now that you’ve created your five-year business plan, put it to good use. If you need to apply for funding, review it carefully before sharing with lenders or investors.

If you’ve created it for your own internal purposes, be sure to look at your business plan at least every quarter so you can ensure you’re tracking toward achieving your business goals.

Realize that your business plan may change over time. If company objectives change, be sure these changes are reflected in your plan.

Recommended: What to Know About Short-Term Business Loans

The Takeaway

Using these five-year business plan examples, you should be able to create a stellar business plan. Use that plan to continually push your business ahead.

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

Why write a business plan?

You might be required to submit a business plan when applying for a loan or seeking investors. Or you might create a business plan just to help you establish your strategy and goals.

What should you include in a five-year business plan?

A five-year business plan should include information about your company and its leadership, your target audience, your products and services, your company goals, and your budget and financial information.

How do I describe my business?

For your business plan, your business description should outline what your company does, what its mission statement is, and who your leaders are.

How do I write an executive summary?

An executive summary for your business plan should provide a high-level overview of what your company does and what its objectives are.


Photo credit: iStock/MicroStockHub

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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Guide to Off-Balance-Sheet Financing

Off-balance sheet financing is an accounting strategy that involves excluding certain liabilities from a business’s balance sheet. This can help keep a company’s ratios (like debt-to-equity) low and make it easier to attract an investor or get financing.

Is it legal? Yes, as long as you follow certain rules and regulations. If, on the other hand, you use off-balance-sheet financing to mislead investors, lenders, or regulators about your company’s financial picture, you can get into legal (as well as financial) hot water. Read on to learn how off-balance sheet financing works, as well as its benefits and risks.

What Is Off-Balance Sheet Financing?

Off-balance sheet financing is a way to keep certain debts and liabilities (and sometimes assets) off of a company’s balance sheet. This can lower a company’s debt-to-income and other ratios, and make it look more attractive to lenders and investors.

Another reason why a company might turn to off-balance sheet financing is to make sure their leverage ratios don’t breach agreements they already have with lenders (called covenants) regarding negative debt.

While it may seem potentially shady, off-balance sheet financing is a legal practice, provided you follow rules established by the generally accepted accounting principles (GAAP) and disclose off-balance sheet financing in the footnotes of your financial statements.

How Does Off-Balance-Sheet Financing Work?

Off-balance sheet financing involves financing an asset without adding liabilities to the balance sheet. To accomplish this, a company may move certain assets, liabilities, or transactions away from their balance sheet and onto other entities, such as a subsidiary, special purpose vehicle (SPV), or partner. Doing so can make the company appear more attractive to an investor or allow them to qualify for better rates and terms on a small business loan.

Off-Balance Sheet Item Examples

Here’s an off-balance-sheet financing example: Let’s say Company A is already heavily financed but wants to purchase high-dollar manufacturing equipment. By having one of its subsidiary companies (Company B) make the purchase, the debts and assets remain on Company B’s balance sheet. Even though Company A authorized the purchase and will be the one using the equipment, it will be Company B’s balance sheet and debt-to-income ratio that are affected.

Another way Company A could use off-balance sheet financing is to enter a long-term lease to obtain the equipment. This avoids financing the equipment and adding a new liability to its balance sheet.

Off-Balance Sheet Financing Methods

Here’s a look at some of the ways that companies use off-balance sheet financing.

•  Operating lease: With this arrangement, a company rents or leases a piece of equipment instead of buying it outright. At the end of the lease period, the company then purchases that equipment at a low price. This strategy allows a business to only record lease payments as an operating expense on the income statement instead of listing the asset and liability on its balance sheet.

•  Leaseback agreement: With a leaseback, a company can sell an asset to another company (usually one it has a financial connection to) and lease it back as needed. This allows them to use the asset yet keep it off its balance sheet.

•  Accounts receivables: Companies that have unpaid invoices, can sell them to another company (called a factor company) at a discounted value. This allows the company to avoid recording a large (and possibly uncollectible) asset on its balance sheet. The factor company takes over the responsibility (and risk) of collecting payments from the customers. When the factor company receives payments, they give it to the original company, minus their fee.

•  Partnerships: Creating a partnership is another way to improve a company’s balance sheet. By doing this, the business doesn’t have to show the partner company’s liabilities on its balance sheet, even if it has a controlling interest in the company.

•  Special purpose vehicles (SPVs): Large companies may create a subsidiary, called an SPV, to reduce their financial risk. Because the SPV has its own balance sheet, the company can move assets or liabilities onto the SPV’s balance sheet. The SPV may also have a higher credit rating, allowing the company to get financing with better rates and terms.

Pros and Cons of Off-Balance Sheet Financing

Off-balance sheet financing can be appealing if your company wants to get different types of business loans that might otherwise be hard to qualify for. However, it also comes with some drawbacks.

Pros

Off-balance sheet financing is technically legal and permissible, so long as you follow all GAAP protocols. In addition, it can help a company get approved for credit when it otherwise would not be able to. If your business is already highly leveraged and wants to move forward with a large capital investment, off-balance sheet financing can make it happen. Likewise, it may help a company acquire additional investors.

Off-balance sheet financing can also happen naturally without any intention to cloud a company’s records. Leases, for example, are a valid strategy to keep a company’s overall debts down while enabling it to continue with its day-to-day operations.

Recommended: Types of Small Business Loan Fees

Cons

There are also a number of disadvantages and risks involved in off-balance sheet financing. For one, the practice is generally frowned upon by both investors and lenders. Even if the business follows every rule in the book, off-balance sheet-financing methods can suggest to outsiders that there is something to hide.

Using off-balance sheet financing can also put your company at risk. After all, things like debt-to-income ratios exist for a reason. When companies take on more debt than they can comfortably handle, they often have no choice but to default on their debts.

Pros of Off-Balance Sheet Financing Cons of Off-Balance Sheet Financing
May help a company look more attractive to investors Has contributed to financial collapses (such as Enron’s)
Can help a company get approved for financing with competitive rates and terms Generally frowned upon by investors and lenders
Technically a legal practice and accepted by GAAP Can falsely improve the appearance of a company’s financials

Reporting Requirements for Off-Balance Sheet Financing

The Securities and Exchange Commission (SEC) requires public companies to list off-balance sheet financing in the notes of all of their financial statements. This provides more transparency to investors.

It’s also important to note that in 2016 the Financial Accounting Standards Board (FASB) changed the rules around lease accounting. Companies are now required to list on their balance sheets any assets and liabilities that are a result of leases greater than 12 months. Businesses must record both finance and operating leases on their balance sheets.

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

Is Off-Balance Sheet Financing Legal?

Yes. While off-balance sheet financing is generally frowned upon, it is not illegal as long as a company makes proper notes and records. To police it to the degree that would be needed to stop off-balance sheet financing would make it difficult for businesses to engage in deals like leasing and partnerships.

Enron’s Notorious Off-Balance Sheet Financing Practices

Enron’s demise stands out as one of the most infamous examples of off-balance sheet financing. Enron essentially used SPVs to keep large amounts of debt and losses it had amassed hidden from lenders and investors. The SPVs were reported in the notes on Enron’s financial documents, but not many investors thought to look for them, and those that did failed to fully understand the precariousness of Enron’s situation.

When Enron’s stock started to go down, the value of the SPVs also went down. Because Enron was financially liable for the SPVs, the company became unable to repay its debts and ultimately ended up filing for bankruptcy.

Can You Tell if a Business Is Using Off-Balance Sheet Financing?

Generally, yes. Businesses are required to include information about any off-balance sheet financing in the footnotes of their financial statements. However, you have to know what to look for to fully understand a company’s liabilities.

As an investor, it’s a good idea to review all of a company’s financial statements thoroughly (including the footnotes) and to keep an eye out for keywords that may signal the use of off-balance sheet financing, such as “partnerships”, “rental,” or “lease expenses.” If you see any of those terms, it’s a good idea to investigate further to make sure that these expenses and deals are appropriate.

Recommended: How to Value a Business: Seven Valuation Methods

The Takeaway

Off-balance sheet financing is a way to make a company’s financial situation seem better than it really is. Nevertheless, it is legal. And certain methods of off-balance sheet financing, like leasing, are common and may be necessary.

The practice of keeping certain assets and liabilities off your balance sheet, however, can be risky. It’s important to know that even if you engage in GAAP-compliant methods of off–balance sheet financing, this strategy can make it harder to get a full and realistic picture of your company’s total financial commitments.

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

Is off-balance sheet financing illegal?

No. As long as off-balance sheet financing is done in keeping with generally accepted accounting principles (GAAP) rules and is disclosed in the notes of your financial statements, it is legal.

What are considered off-balance sheet items?

Off-balance sheet items include:

•  Leaseback agreements

•  Operating leases

•  Accounts receivables

How are balance sheet and off-balance sheet financing different?

A balance sheet lists a company’s assets, liabilities, and shareholder equity at a specific point in time. On-balance sheet financing is when a business accounts for an asset or liability on the balance sheet. Off-balance sheet financing is when a business leaves an asset or liability off the balance sheet and accounts for it somewhere else.


Photo credit: iStock/mediaphotos

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

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


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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