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If you’re interested in exploring your entrepreneurial side and breaking free of the traditional 9-to-5, you might consider starting a small business. But it’s not something to venture into without mapping out a strategy for success first.

There’s some groundwork that needs to be laid when you’re working toward owning a business. That includes refining your concept, taking care of the legal aspects of starting a new company, and getting your finances in order.

If you’re looking for a checklist of steps to follow when you’re starting your new business, this guide can help. Keep reading for 10 steps on how to start a business.

1. Research Your Idea

At the core of every successful business is a great idea. Depending on the type of business you’re interested in starting, you may have what you believe is a winning concept for a product or service you’d like to offer.

Before you get too far along in the process of starting your new business, however, it’s important to do some market research. Specifically, you should be thinking about these questions.

•   How original or unique is this concept?

•   Are there other businesses with a similar product or service?

•   How successful are those businesses and who are the biggest competitors?

•   What’s the long-term outlook for this product or service like?

•   How much demand is there overall for what I plan to offer?

At this stage, the goal is to determine whether owning your own business is viable, based on what you envision for your products or services.

Recommended: 23 Small Business Ideas

2. Identify Your Target Customers

Part of conducting market research when starting a small business involves finding your target customers. These are the people who are most likely to buy your product or service.

Creating an avatar that embodies your ideal customer can help. As you create your avatar, try to paint as clear a picture as possible and consider things like:

•   Basic demographics, such as age or gender

•   Income and employment

•   Education level

•   Geographic location

•   Hobbies or interests

It’s also important to consider what problems your ideal customers are facing that your business can help to solve. Being able to solve problems and offer solutions is one of the keys to owning a business that has staying power.

Recommended: Business Growth Strategies

3. Draft a Business Plan

A business plan is an important document to have when starting a new business. This is essentially a roadmap or playbook of how you plan to start, run, and grow the business over time.

There are different formats business plans can take, depending on the scale of the company you’re trying to start. A traditional business plan includes an executive summary and description of the company. But it also covers things like:

•   Market research and analysis

•   Organization and management structure

•   Details about the products or services you plan to offer

•   Marketing and how you plan to promote the business

•   Estimated startup and operational costs

•   Key financial ratios, such as estimated profit and loss

Broadly speaking, your business plan should identify what your goals for the business are and how you plan to go about achieving them. Writing a business plan can help you get organized in the early stages of starting a small business and give you a reference that you can check your progress against.

4. Plan Your New Business Budget

One of the most important steps in how to set up a business involves estimating your costs. The cost to start a business has two dimensions: estimating how much money you’ll need to get the business up and running and how much you’ll have to spend on an ongoing basis to maintain it.

When calculating startup costs, consider everything you may need to spend to get off the ground. That may include things like:

•   Leasing a space if you’re starting a brick-and-mortar business

•   Utility, cellphone, and internet service deposits

•   Purchasing or leasing equipment

•   Hiring and training staff if you plan to have employees

•   Purchasing necessary business licenses and/or paying registration fees

•   Marketing and promotion costs

•   Production costs to create your products

•   Website hosting and/or ecommerce setup

Those are the bigger expenses you may need to plan for when starting a new business. Once the business is open, your small business accounting will include ongoing costs such as:

•   Rent or lease payments

•   Utilities

•   Payroll if you have employees

•   Supplies and equipment

•   Marketing and advertising costs

•   Basic living expenses

If you plan to stick with your current job while owning your own business in the early stages, then you may have steady income that can cover your living expenses. But those may not be enough to cover your business expenses until your venture begins turning a profit. For that reason, it’s important to consider the next step in the process.

5. Weigh Financing Options

When deciding how to start your own business, finances are a focal point. You need to know what you’re set to spend — and how you plan to pay for it.

Bootstrapping could be a possibility if you have a sizable amount of cash tucked away in savings that you could tap into. But that may not be a reality, in which case you’ll need to explore other options for small business financing. There are two broad categories of business financing: equity and debt.

Equity Financing Explained

With equity financing, you exchange an ownership stake in the business for funds from investors. This is typically how angel investing or venture capital investing works.

The upside of this type of business financing is that there’s nothing to pay back. This can be a real advantage as you’re attempting to achieve a positive cash flow while you get your startup off the ground. And whether the business succeeds or fails, with equity you’re not obligated to make investors whole financially. So the investor shoulders much of the risk in this financing equation.

The trade-off, however, is that each equity investor owns part of your business and as such, can have a say in how it’s run. That may not be ideal if you’d prefer to have complete control over business decision-making.

Debt Financing Explained

Debt financing is just what it sounds like: debt you take on to fund your business. For example, that can mean:

•   Small business loans

•   Small business lines of credit

•   Small business credit cards

•   Personal business loan or lines of credit

You borrow a set amount of money and agree to pay it back to a lender, typically with interest. Small business loans can be found at traditional banks and credit unions or through online lenders.

Starting a small business with debt may not be a perfect solution, but you don’t have to give up any of your ownership. And you can compare loans for small businesses or personal loan options to find one that fits your budget and offers the best repayment terms, based on your credit profile.

Recommended: How to Apply for a Small Business Loan

Small Business Grants

There’s also a third potential funding option you may consider in lieu of debt or equity financing. Small business grants can provide funding to start a new business with no repayment required. Getting small business grants can be time-consuming and competitive, however, so if you need money to start a new business quickly you may want to explore loans instead.

6. Choose a Business Name

When selecting a name for your small business, consider what kind of brand reputation you want to build and what you want to be known for. You may choose your own name or something that embodies what your business is all about.

Before finalizing your choice of name, do your homework. Specifically, make sure the name isn’t trademarked or otherwise being used by any other business entity, as this could create legal headaches later. If you plan to launch a website or social media accounts for your business, you’ll also want to check to see if your business domain name and social media handles are available.

Recommended: Commercial Real Estate Loans

7. Determine Your Business Structure

Choosing a legal structure is next on the list of steps to starting a business. A legal structure is how your business will operate. The most common business structures are:

•   Sole proprietorship

•   Partnership

•   S-corporation

•   C-corporation

•   Limited liability company (LLC)

Your choice of business structure matters for a few reasons. First, it determines what kind of liability you have in situations where your business is sued. With a sole proprietorship, for example, you and the business are treated as one and the same. So if you’re sued by a customer or supplier, then your personal assets could be attached if a judgment is entered against you in civil court. An LLC, on the other hand, shields your personal assets.

Your choice of business structure can also affect taxation and how you pay taxes. Again, with a sole proprietorship, you and the business are treated as one and the same for tax purposes. Corporations, however, are taxed differently. So, depending on how much profit you anticipate the business generating, one structure may be better than another.

A third consideration has to do with getting business funding. If you plan to take out one or more business loans, then your business structure may influence what type of financing you’re able to qualify for and how much you can borrow.

Recommended: EBITDA Explained

8. Make Your Business Legal

If you have a business name and structure, the next step is making your business legal. This may include:

•   Registering your business with state and local agencies

•   Obtaining an Employer Identification Number (EIN) from the IRS and a state tax ID if needed

•   Securing any licenses or certifications required to operate

•   Filing trademark or patent applications for business names or products, if applicable

What, if any of these steps, are required for starting a small business will depend largely on where you plan to do business. Some states may require a separate tax ID to go along with your federal tax ID, while others don’t, for instance. Depending on what type of business you plan to operate, you may need a special license before you can open your doors.

If you’re unsure what you need to do to register, contacting your local chamber of commerce or your state’s business development agency can be good places to start. Keep in mind that you may need to pay certain fees to register or obtain necessary licenses when starting a small business.

Recommended: Amortization vs. Depreciation

9. Open a Business Bank Account

Once you’ve registered your business and made it legal, you can open a business bank account. Having a separate bank account can make sense when owning your own business for a few reasons.

First, this is a good way to keep business and personal expenses separate. When you’re paying your household bills and business expenses out of the same account, it can get confusing as to which funds are going where. It’s easier to keep track of business cash flow and personal cash flow when they’re in separate accounts.

Next, having a business bank account can make filing taxes easier. If you plan to deduct certain business expenses, then having all of those expenses linked to a single account can minimize headaches when filing taxes. Separate business and personal bank accounts may also be necessary if you want to avoid mingling funds because you’ve chosen something other than a sole proprietorship as a business structure.

When comparing business bank accounts, pay attention to fees you may pay, as well as minimum deposit or minimum balance requirements. Also consider whether the account offers access to merchant services if you need help with things like payroll or accounting.

10. Hire Staff and Plan Workload

Not all startups will require employees, especially in the beginning. But if yours does, it’s a good idea to figure out what areas you’ll need help in and for how many hours you want employees to work. If you’re running a coffee shop, for example, you will likely need at least one other barista to help you.

At this point, you may be able to start figuring out what tasks will need to be done each day and each week, how long they’ll take, and who can do them. In your coffee shop, someone will have to get there early to prepare the tables, make the coffee, and set up. And at the end of the day, someone will have to stay late to clean up and close down the shop.

Depending on how much project management is involved in your particular startup, you may want to use task management software to track what needs to be done and who will do it. You should already have budgeted for payroll, but it’s also important to figure out when and how often each employee will be coming in and what exactly each will be working on.

Additional Considerations

When starting a business, beyond the basics of writing a business plan and figuring out funding, several crucial factors can impact your long-term success. Paying attention to areas like accounting software, marketing strategies, and legal compliance can streamline operations and protect your business from costly mistakes.

Accounting Software

One item a new small business should consider investing in is accounting software. Proper financial management is essential for tracking expenses, monitoring cash flow, and filing taxes accurately.

Marketing Agency

A well-executed marketing strategy is key to attracting and retaining customers. If you lack in-house expertise, hiring a marketing agency can be a smart investment. Working with professionals ensures that your marketing campaigns are data-driven and optimized for performance, leading to better brand visibility and customer engagement.

Legal and Regulatory Compliance

Ensuring legal and regulatory compliance is crucial for avoiding penalties and legal issues. Depending on your business type and location, you may need permits, licenses, or registrations. Consulting with a business attorney can help you navigate contracts, intellectual property, and local business laws.

The Takeaway

After reading through this list of steps to starting a business, it can seem like a lot. But breaking down each step into smaller, actionable tasks can make the process less daunting.

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.

FAQ

What is the easiest small business to start?

The easiest small business to start typically requires low startup costs and minimal specialized skills, such as freelance services (writing, graphic design, virtual assistance), online retail, or consulting in a field of expertise. These businesses can be started from home with flexible hours.

What type of small business is most successful?

Service-based small businesses, like accounting, IT support, and digital marketing, tend to be the most successful due to low overhead and consistent demand. Businesses in healthcare, home improvement, and e-commerce also perform well, as they address essential or growing market needs, leading to higher profitability and long-term stability.

Do I need a business license?

Yes, most businesses require a business license to operate legally. The need for a license depends on your industry, location, and business type. Local, state, or federal authorities may issue the required licenses, ensuring your business complies with regulations, taxation, and zoning laws. Always check specific local requirements.

When should I hire employees?

You should hire employees when your workload exceeds your capacity, hindering growth or customer satisfaction. Signs include consistently missing deadlines, turning away clients, or lacking specialized skills. Hiring can help scale your business, improve efficiency, and allow you to focus on high-value tasks that drive growth and profitability.

Photo credit: iStock/svetikd

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.

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.

SOSMB-Q324-045

EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s financial performance and is sometimes used as an alternative to net income.

Some analysts believe that EBITDA provides a more accurate measure of a company’s profits and operational efficiency than net income. Others, however, think that EBITDA can be misleading, since it ignores company expenses like debt and depreciation.

Here’s what you need to know about EBITDA, how this metric is calculated, and what it can — and can’t — tell you about your business.

What Is EBITDA?

EBITDA is an acronym that stands for earnings before interest, taxes, depreciation, and amortization. In other words, it tells you the earnings that a business has generated prior to any debt interest expenses, tax payments, and depreciation/amortization costs of the business.

EBITDA doesn’t factor these values in because they are outside of management’s operational control. By adding these values back to net income (gross business income minus all business expenses), many analysts believe that EBITA is a better measure of company performance since it is able to show earnings before the influence of accounting and financial deductions.

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

Here’s a closer look at each letter of this acronym.

Earnings

Earnings are the profit a business makes off of its core operations. It’s calculated by subtracting total expenses from total revenue. Operating expenses include rent, salaries, the cost of goods sold, and other general and administrative expenses. This number is your operating income.

Finally, non-operating expenses, including taxes, interest, depreciation, and amortization, are subtracted to arrive at net earnings or net income.

Keep in mind that with EBITDA, you add back interest, taxes, depreciation, and amortization to net income to arrive at earnings.

Interest

Interest refers to the cost a business incurs from borrowing money, such as loans or bonds. It is excluded from EBITDA because it reflects financing decisions, not the core operations of the business. This allows EBITDA to focus on the company’s operational performance before financial obligations.

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Taxes

Each locality has different tax laws which can impact which kinds of taxes you pay and how much. Depending on where a business is located, it may have a dramatically different tax burden than another company with the same amount in sales.

To better compare companies, EBITDA removes the effect of taxes on earnings by adding those expenses back into net income. Doing so makes it easier to compare the performance of two or more companies operating in different states, cities, or counties.

Depreciation

Depreciation is the process of spreading out the cost of a tangible asset over the course of its useful life. While depreciation does cost a business money (as machinery and vehicles do wear out), it’s a non-cash expense that depends on past investments the company has made and not on the current operating performance of the business. Therefore, EBITDA doesn’t factor it in.

Amortization

The difference between amortization vs depreciation is that amortization is the depreciation of intangible items, such as patents or licenses, which also have a limited useful life due to expiration. Amortization is an expense that is reported on a company’s financial statements, but, since it isn’t directly related to a business’s core operations, EBITDA doesn’t factor it in.

Recommended: What Are Common Small Business Loan Terms?

EBITDA Formula

To calculate EBITDA, there are two commonly used EBITDA formulas.

Option 1:

Start with net income (the bottom line of the income statement), and then add back the entries for taxes, interest, depreciation, and amortization.

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

Option 2:

Alternatively, you can start with operating income (also referred to as operating profit or EBIT — earnings before interest and taxes). Operating income is the amount of revenue left after deducting the direct and indirect operating costs from sales revenue. If you add depreciation and amortization to operating income, you get EBITDA.

EBITDA = Operating Income + Depreciation + Amortization

EBITDA Example

Coca-Cola Company, EBITDA example:

Notice how EBITDA is more than net income. Sometimes less honest companies try to persuade investors that they are more profitable than they are by emphasizing their EBITDA number more than their net income number.

Pros and Cons of EBITDA

Here, see how the potential advantages and disadvantages of EBITDA compare.

EBITDA can be a valuable measure of a company’s financial performance and operational efficiency. Because EBITDA adds back interest, taxes, depreciation, and amortization (expenses that don’t directly reflect a company’s decisions) to a company’s net income, it shines a light on a business’s ability to generate cash flow from its operations.

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

However, EBITDA doesn’t reflect a business’s actual net earnings. Some analysts are skeptical of EBITDA because it presents the company as if it has never paid any interest or taxes. It also excludes depreciation and amortization expenses, even though machines, tools, and other assets lose their value over time, and copyrights and patents expire. EBITDA fails to account for these costs.

EBITDA can also cover up or shift attention away from high debt levels. Indeed, it’s possible to report a strong EBITDA while stating negative profits at the bottom line.

Recommended: 15 Types of Business Loans to Consider

History of EBITDA

EBITDA came into prominence in the 1980s when many investors were doing leveraged buyouts of distressed companies that needed financial restructuring. They used EBITDA to calculate quickly whether these companies could pay back the interest on these financed deals.

The use of EBITDA increased during the dot-com boom, when analysts and managers used it to show that expensive assets and debt loads were obscuring a company’s actual growth numbers.

EBITDA is now commonly used to compare the financial health of companies and to evaluate businesses with different tax rates and depreciation policies.

Alternatives to EBITDA

Here are some other ways to track information instead of EBITDA.

EBT

Earnings before tax (EBT) measures how profitable a company is before you consider its tax burden. EBT is useful when comparing two companies in the same industry but that exist in different states. By removing tax liabilities, investors can use EBT to evaluate a firm’s operating performance after eliminating a variable outside of its control.

Operating Cash Flow

Operating cash flow measures how much cash is generated by a company’s normal business operations. Operating cash flow indicates whether a company can generate sufficient positive cash flow to maintain and grow its operations. If not, it may require external financing.

Recommended: Getting a Cash Flow Loan for Your Small Business

EBIT

The difference between EBIT vs EBITDA is that EBIT (earnings before interest and taxes) doesn’t add depreciation and amortization back to net income. EBIT considers these costs as necessary expenses to consider when analyzing a company.

Revenue

Revenue (also referred to as sales or income) consists of all income generated by a business’s core activities before expenses are taken out. It includes both paid and unpaid invoices.

When thinking about EBITDA vs revenue, revenue measures sales activity, while EBITDA measures how profitable the business is. Revenue is calculated by adding up income from all business operations, whereas EBITDA takes that revenue and then subtracts expenses in order to measure profit.

Net Income

Net income (also called net earnings) is how much a company makes after subtracting all expenses, including cost of goods sold, general and administrative expenses, operating expenses, depreciation and amortization, interest on debt, taxes, and other expenses. It is a useful number for investors to assess how much revenue exceeds the expenses of an organization.

The Takeaway

EBITDA is a way to quickly gauge how a business is performing with its core operations, but it excludes interest, taxes, depreciation, and amortization. EBITDA can be helpful for seeing how your business performs from year to year and how it compares to the industry averages, but it does not reflect its real income. That’s why if you’re exploring business loans or looking to attract an investor, EBITDA will likely be one of several metrics to 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.

FAQ

What makes EBITDA important?

EBITDA is a useful metric for understanding a business’s ability to generate cash flow for its owners and for judging a company’s operating performance.

How is EBITDA calculated?

The most common way to find EBITDA is by starting with net income and adding back interest, taxes, depreciation, and amortization.

What is a typical EBITDA?

There is no typical EBITDA because companies of different sizes in different industries vary widely in their financial performance. The best way to determine if your company’s EBITDA is typical is to compare it with the EBITDA of your peers — companies of similar size in the same industry and sector.

Is EBITDA a good indicator of profitability?

EBITDA can be a good indicator of profitability. However, it doesn’t account for capital expenditures, debt, or changes in working capital, so it may not fully reflect a company’s overall financial health or long-term profitability.

What is a good EBITDA?

EBITDA varies by industry, but generally, a higher EBITDA indicates strong operational profitability. A healthy EBITDA margin (EBITDA divided by revenue) is typically around 10-20%, though this will also vary depending on the industry.

Photo credit: iStock/Anchiy

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.

SOSMB-Q324-043

A balloon payment is a payoff option on a loan that allows you to make a larger-than-usual lump sum payment at the end of the loan’s term. This, in turn, can lower your earlier payments.

A balloon payment structure is sometimes offered on home mortgages, auto loans, and business loans. Is it a good deal for the borrower? Sometimes. However, balloon loans also come with some significant risks.

Read on for a closer look at how balloon loans work, when you might consider getting one, and alternative ways to reduce your loan payments.

What Is a Balloon Payment?

A balloon payment is just like its name suggests – it balloons, or inflates, at the end of the loan. With this set up, you typically make regular (often monthly) payments over the term of the loan, then pay a significantly larger sum at the end of the loan’s term.

Balloon payments are most commonly used for small business loans, though they are also available on some auto loans and mortgages.

How Does a Balloon Payment Work?

A balloon payment loan works just like any other installment loan. The only difference is that the amount of the final payment is usually substantially higher than the previous payments.

The balloon payment may simply be a weighted payment amount. In many cases, though, the installment payments go towards interest only and the balloon payment covers the entire principle. The interest you pay each month is typically a fixed amount, since the principal balance does not change.

While balloon payments allow you to reduce the size of your regular loan payments, these loans tend to come with shorter terms than traditional installment loans, which means the final, large payment may be due after a few months or years.

Balloon loans represent an increased risk to the lender, as they must trust that you’ll be able to make the final payment at the end of the loan. As a result, they can be more difficult to qualify for than traditional loans. Typically, lenders will only offer a balloon payment to individuals and businesses with excellent credit, solid cash savings, and stable income streams.

Examples of Balloon Payments

Balloon payments are common in real estate, auto financing, and business loans. Below are examples of balloon payment scenarios.

Mortgage Loans

A balloon mortgage allows you to get a lower monthly payment than you would with a traditional mortgage. For example, an interest-only mortgage loan is a type of balloon loan that allows you to defer paying down principal for five to 10 years and instead make interest-only payments.

In some cases, borrowers will try to sell the home or refinance before the balloon payment deadline. But this approach isn’t without risk. If the value of your property goes down or you experience a job loss or other financial hardship, you may not be able to sell or refinance before the balloon payment comes due. If you can’t make the payment, you risk losing your home to foreclosure.

However, if you plan only to live in a home for a few years or you’re planning to flip the property, a balloon mortgage might be worth considering. You could then use the proceeds from the sale of the home to make the balloon payment.

Recommended: How Does a Balloon Mortgage Work?

Auto Loans

Though not common, balloon payments are sometimes offered by auto lenders. Like other balloon loans, this type of auto financing allows you to pay less at the beginning, then make a much larger final payment.

A balloon auto loan might be helpful for someone who has an urgent need to purchase a vehicle (perhaps to earn money), but may not have the current income to support higher monthly payments. Once the borrower has a steady income, they would be able to make the balloon payment.

Just as with other types of balloon loans, however, this type of car loan comes with risks. If your income doesn’t increase, you may not be able to pay the lump sum when it comes due. If you skip your balloon payment, your lender could repossess your vehicle, send you to collections, or both. Either way, you risk damaging your credit, which could make it difficult for you to get financing in the future.

Business Loans

A balloon business loan can be an attractive option to a business with a short-term financial need or that is looking to purchase commercial real estate. It enables you to get the capital you need to grow your business while you wait for that big payday from a customer.

For example, a balloon business loan might work better than other types of small business loans if you’re looking to purchase new office, warehouse, or retail space before selling your old space, since the delayed payment set up can give you time to sell the old property.

Of course, balloon loans pose the same risks to businesses as to consumers. If your company doesn’t have a guaranteed source of income, it can be dicey to take on a small business loan that demands a large lump sum payment. While refinancing may be an option to get out of a balloon payment, there’s no guarantee that a lender will grant you a new loan.

If you’re unable to make your balloon payment, the lender may begin legal action to collect their money, which can include seizing business or personal assets. And they may report negative information to credit reporting agencies, causing damage to your business credit and possibly your personal credit, as well.

Recommended: What Are the Different Types of Debt?

Advantages and Disadvantages of Balloon Payments

As with all types of financing, balloon payments come with pros and cons. Here’s a look at how they stack up.

Advantages of Balloon Payments

One of the biggest advantages of balloon payments is the lower initial payment amounts. During the fixed period, monthly payments are generally smaller than they would be for a traditional installment loan, which could be helpful if you have limited income or low annual business revenue.

Smaller upfront payment requirements can also allow you to borrow more than you would otherwise be able to manage. Also, if you own a business, the lower payments can free up capital for other uses that could pay off by the time the balloon payment is due. A delayed large payment could also mesh well if you expect your salary or business revenues to increase over time.

Recommended: Recommended: What Is Loan Modification?

Disadvantages of Balloon Payments

If you use a balloon loan to purchase an asset, such as a home or a car, you may build little to no equity in that asset despite making consistent payments. This is especially true if your installment payments are interest only. Lack of equity can make it difficult to refinance the loan.

These loans also tend to be riskier than traditional loans — both for individuals and businesses. If you can’t come up with the balloon payment at the end, you may need to refinance, potentially at a higher annual percentage rate (APR). If you aren’t able to refinance, you could end up defaulting on the loan.

How to Avoid a Balloon Payment

To avoid balloon payments, consider choosing traditional fixed-rate or fully amortizing loans. These options spread payments evenly over the loan term, eliminating large end-of-term balances.

If you’re already in a balloon payment loan, refinancing before the balloon is due can help you convert the loan into a more manageable payment plan. Additionally, making extra payments toward the principal throughout the loan term can reduce the amount owed at the end.

4 Ways to Get Rid of a Balloon Payment

If you aren’t ready to make a balloon payment when it comes due, you may have some options. Here are four ways to potentially get rid of a balloon payment.

1. Extend the Loan

If you need more time to come up with the balloon payment, you may be able to negotiate an extension with your lender.

Similar to refinancing, an extension changes the terms of your original loan. With an extension, however, you typically don’t receive an entirely new deal. You’ll just be changing the date of the balloon payment. Keep in mind that there may be fees involved and you can typically only get a short-term extension.

2. Sell the Asset

If you used the balloon loan to buy an asset, such as a property or a car, you may be able to sell that asset to come up with the cash needed for the balloon payment.

3. Pay the Principal Upfront

One effective way to get rid of or reduce a balloon payment is to increase your installment payments so that they include some of (or more of) the principal. This can also lower your interest costs. Just check to make sure there aren’t any prepayment penalties or fees.

4. Refinance the Loan

Another way to avoid making a balloon payment is to refinance the loan with a different lender before it’s due. You could then use the proceeds from the new loan to make the balloon payment. Moving forward, you would make payments on your new loan.

Recommended: Debt Instruments Explained

Balloon Payment vs Adjustable-Rate Mortgage (ARM)

You’re likely considering a balloon mortgage because you want the luxury of lower payments. However, you might be able to achieve a similar result with an adjustable-rate mortgage (ARM).

With an ARM, you typically pay a predetermined APR for a period of one to five years. Usually, this rate is lower than what you would get with a comparable fixed-rate mortgage. Unlike balloon loans, though, the entire balance of an ARM doesn’t come due at once.

Instead, the interest rate and payments adjust throughout the loan term. After the guaranteed rate period ends, the interest rate is recalculated based on current market conditions, which means it could end up being higher or lower than the initial rate. Depending on the loan agreement, the APR may adjust multiple times over the course of the loan.

An ARM can give you lower monthly payments, at least for the fixed period of the loan, but comes with risks. If interest rates rise, you’ll likely end up paying more in interest over the life of the loan than you would have if you had taken out a fixed-rate mortgage. However, the lower initial monthly payment may be worth it if you’re stretching to afford the home and feel confident that your income is on the rise.

Recommended: What Is a Commercial Bridge Loan?

Other Ways to Reduce Monthly Loan Payments

Getting a balloon payment is not the only way to lower your initial payments on a loan. Here are some other strategies you may want to consider.

Large Down Payment

The larger your down payment on a loan, the less you will need to borrow, and the less you borrow, generally the lower your monthly payment will be. A bigger down payment can also result in a lower APR, which could further lower your monthly payments.

Refinancing

You may be able to lower your payments on an existing loan by refinancing, which involves swapping your existing loan for a new one with more favorable terms. If you can get a new loan with a lower APR, your monthly payments will decrease, as will the total cost of your loan.

Longer Loan Term

Another way to pay less each month on a loan is to choose a longer term. If you already have a loan, you may be able to requalify for refinancing that extends your loan repayment term. Just be aware that a longer loan term means accumulating more interest charges over time. APRs on long-term loans can also be higher. As a result, this approach will typically increase the total cost of your loan.

Recommended: Long-Term Small Business Loans 2024

The Takeaway

Balloon loans allow borrowers to have lower payments at the beginning of a loan in exchange for a larger (balloon) payment at the end of the loan’s term.

Whether you’re a consumer or a business owner, it’s important to remember that balloon loans aren’t actually more affordable — they simply spread the total cost out in a different way.

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.

FAQ

How exactly do balloon payments work?

A balloon payment loan works in a similar way to other types of installment loans. You receive the proceeds of the loan up front then make payments according to a fixed schedule. The only difference is that the initial payments are lower than what you would pay with a traditional installment loan, and the final (balloon) payment is higher.

Are balloon payments a good idea generally?

Balloon loans tend to be risky due to the large payments that are due at the end of the loan term. However, this type of financing might be useful for some borrowers, such as a business that has an immediate financing need and a predictable future income.

Why would you want a balloon payment?

You may want a balloon payment because it allows for lower monthly payments throughout the loan term, which can improve short-term cash flow. It’s beneficial if you expect a future increase in income or a lump sum (e.g., from a sale or investment), allowing you to manage finances now and pay off the balance later.

Photo credit: iStock/skodonnell

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.

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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As a small business owner, you may have taken out a loan or line of credit. You may also have charged expenses on business credit cards. Having multiple payments to make on all these debts can complicate your small business financing and negatively impact your cash flow.

Small business debt consolidation allows you to combine your debts into one loan that you pay off at one (ideally lower) fixed rate and with only one payment per month. This can potentially shorten your repayment periods, reduce your monthly payments, or both. However, business debt consolidation isn’t right for all small businesses. Here’s what you need to know.

What Is Business Debt Consolidation?

Business debt consolidation, also called commercial debt consolidation, refers to a loan you can use to pay off other loans, lines of credit, and/or credit cards. Once you receive the business debt consolidation loan funds, you use the proceeds to pay the balances you owe on your small business loans and other business debts. You then only make payments on the new loan.

A business consolidation loan, just like other types of business financing, charges interest. It may also require you to pay an origination fee, which some lenders charge to process the loan application. Even considering these costs, though, it may end up totaling less overall than what you would pay across the board for your multiple debts. It can also simplify your payments.

Recommended: How Does Debt Consolidation Work?

Pros and Cons of Debt Consolidation Loans

There are a variety of factors to keep in mind when you’re considering taking out a debt consolidation loan.

Pros of Debt Consolidation Loans:

•  A debt consolidation loan can make your loan payments simpler to manage.

•  Ideally, a debt consolidation loan will allow you to lower the interest rate you’re paying on your business debts.

•  Paying back your consolidation loan promptly each month may help you build a positive personal or business credit history over time.

•  A lower monthly payment can help free up cash that you can use to cover day-to-day operating expenses.

Cons of Debt Consolidation Loans:

•  When you apply for a new loan, it can have a temporary negative impact on your credit.

•  Before taking out a loan for consolidation, you need to make sure the lender allows the funds to be used for that purpose.

•  Some of the loans you’re trying to pay off may have prepayment penalties, and there may be an origination fee attached to your consolidation loan.

•  You could end up with a longer repayment term. While that can lower your monthly payment, you can end up paying more in interest over the course of the loan.

Recommended: Business Acquisition Loans

Is Business Debt Consolidation the Same as Refinancing?

If you’ve been researching how to refinance a business loan, you might wonder if debt consolidation is the same thing. It’s not. Refinancing a business loan is typically done to pay off one single debt and secure a lower interest rate. Debt consolidation, however, is designed to help you roll all your debts into one monthly payment, ideally at a lower rate. And some may consider it primarily as a tool to streamline their business finances.

Will a Business Debt Consolidation Loan Help My Credit?

Applying for a debt consolidation loan will trigger a hard credit inquiry, which can have a temporary negative impact on your credit. Over time, however, you may see an improvement in your (or your business’s) credit score, since your credit reports will reflect that you paid off your outstanding debts. And, with only one monthly payment due, it may be easier for you to make your payment on time.

Recommended: What Are the Different Types of Debt?

When to Consider Consolidating Debt

YYou should consider a debt consolidation loan if you need to simplify your monthly payments or if you’re looking to save money on the total cost of all your debts.

To see if you’ll save money, you’ll need to add up all your outstanding debt (the total balance you owe) and then add up the interest you pay each year on the loans. Divide the second number by the first and multiply the result by 100 to get a sense of the overall interest rate you’re paying on these loans. Now, add up your monthly payments for all of these different debts.

If you’re looking for a debt consolidation loan, you probably want to find a rate that’s lower than the average of those different interest rates and with a monthly payment that is less than the total you’ve been paying each month.

Debt Consolidation Example

Let’s say you have one debt on which you still owe $20,000 and another on which you owe $30,000. If you’re paying $3,000 in interest per year on the first and $4,500 on the second, you would divide 7,500 by 50,000 and get 0.15. This translates to an interest rate of 15.00%. In this situation, it would make sense to look for a loan with an interest rate lower than 15.00%.

Recommended: Business Loans for Rental Property

How to Consolidate Business Debt

To consolidate business debt, start by gathering details about all existing loans, including balances, interest rates, and payment schedules. Next, explore business consolidation loans offering favorable terms through banks, credit unions, and online lenders.

Apply for a consolidation loan that covers your total debt, ensuring lower interest rates and manageable monthly payments. Once approved, use the loan to pay off existing debts, then make consistent payments on the new consolidated loan. This streamlines debt management, improves cash flow, and may reduce overall interest expenses, helping stabilize business finances.

Recommended: 6 Step Guide to Getting a Small Business Loan

Lenders Offering Business Debt Consolidation Loans

There are business debt consolidation companies that focus specifically on debt consolidation. But you may be able to use a small business loan for consolidating debt even if it isn’t designated solely for that purpose. If you qualify for a more traditional type of financing, such as a bank loan, you may get the best possible rates available. Just be sure to read the loan’s fine print to ensure that consolidating debt isn’t prohibited.

Here are some financing options to consolidate your debt.

Bank Business Loan

Traditional bank loans typically offer the most competitive rates and terms. However, they can be difficult to qualify for and often require several years in business, excellent credit, and a certain minimum annual revenue. If you’re interested in exploring a business debt consolidation loan from a bank, the bank you already have a relationship with might be a good place to start.

Alternative Business Loan

If you don’t qualify for financing your debt consolidation with a bank, consider alternative lenders, as they tend to have more flexible qualification requirements. Some online lenders will work with businesses that have as little as six months of business history and less-than-excellent credit, and may not have a specific minimum for annual revenue.

Personal Loan

In the event that your business doesn’t qualify for financing or your business debt is on personal credit cards, you might want to consider taking out a personal loan to consolidate your business debt. Just keep in mind that many lenders don’t allow you to use a personal loan for business purposes. You’ll want to check into any restrictions on how you can use the proceeds of the personal loan before applying.

How to Qualify for Business Debt Consolidation Loans

Before filling out an application for a business loan, you’ll want to make sure you qualify for that particular loan. Requirements vary, depending on the lender. You may need to have a certain number of years of business history, a minimum personal or business credit score, and a certain minimum amount of annual revenue. Lenders may also look at your debt-to-income ratio (DTI), which is how much of your small business’s monthly earnings go to repaying your existing debts.

Even if you don’t have high revenues or a great credit score, there are lending options that you may qualify for. But be aware that you’ll likely pay a premium in interest and/or fees to access these options. You’ll want to be sure that the rate you qualify for is lower than what you’re paying on your current debts.

Why Take Out a Debt Consolidation Business Loan?

Consolidating your business debt with a new business loan could help you reduce your monthly payments, lower your overall borrowing costs, and possibly pay your loan back more quickly. The higher the interest rate you’re paying on your existing business debts, the more money a debt consolidation loan can potentially help you save. Making one monthly payment for your debt, rather than many, can also simplify your business finances.

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.

FAQ

Can you consolidate business debt?

Yes, you can consolidate business debt by combining multiple loans into a single loan. This simplifies payment schedules, often lowers interest rates, and makes debt management more efficient.

What are the disadvantages of business debt consolidation loans?

Consolidating your business debts could lead to a longer repayment term, in some instances. While this may result in lower payments, it also means you will be accruing interest over a long period. Even if the interest rate is lower, you could end up paying more in interest over the course of the loan. In addition, you may have to pay additional fees (such as prepayment and transaction fees), which could eat into the savings you’re looking to get by consolidating your loans.

What is small business debt consolidation?

Small business debt consolidation allows you to roll all of your existing business debts into one loan, ideally with a lower interest rate. You use the funds from a business debt consolidation loan to pay off your smaller loans and/or credit card balances and then only have to make one payment per month.

What is commercial debt consolidation?

Commercial debt consolidation is another name for business debt consolidation. It enables you to take out a new loan to pay off smaller loans and credit card balances so you only have one loan and one payment to make each month.

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.

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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Earnings before interest, depreciation, and amortization (EBIDA) is a measure of a company’s earnings that adds interest, depreciation, and amortization expenses back to the net income number. It is similar to, but not as commonly used as, earnings before interest, taxes, depreciation, and amortization (EBITDA).

Here’s a closer look at EBIDA, how this metric is calculated, and how it compares to EBITDA.

What Is EBIDA?

EBIDA is a measure of the earnings of a company that adds interest (paid on debt), depreciation, and amortization expenses back to net income – the last line on the income statement. Unlike EBITDA, which adds back those items plus income taxes to net income, EBIDA does consider the effects of taxes on a company’s earnings.

How Does EBIDA Work?

EBIDA measures a company’s financial performance before the influence of accounting or financial decisions, such as how much debt (interest) the business has taken on or how much money it has invested in property, equipment, or licenses (depreciation/amortization).

While those expenses are initially subtracted from a company’s operating revenue to calculate its net income, EBIDA adds them back as another way to evaluate a company’s financial performance.

Here’s a look at what EBIDA specifically adds to net income:

•  Interest: This is the interest a business pays on any loans, such as any type of small business loan. It is excluded from EBIDA because it reflects the financing structure of the business, rather than the company’s core operations. Adding back interest to net income also makes it easier to compare the relative performance of two companies with different capital structures.

•  Depreciation: Depreciation is the process of writing off the cost of a tangible asset over the course of its useful life. Depreciation expenses will vary depending on whether a company has invested in long-term fixed assets that lose value due to wear and tear. It is excluded from EBIDA because it reflects historic investment decisions the company has made, but not its current operating performance.

•  Amortization: Similar to depreciation, amortization is the process of writing off the value of an intangible asset, such as a copyright, patent, or license, over its useful life. An intangible asset is amortized because its value diminishes over time due to expiration. It is excluded from EBIDA for the same reasons that depreciation is excluded.

Recommended: 15 Types of Business Loans to Consider

EBIDA Formula

As with EBITDA, there is more than one formula for calculating EBIDA.

Formula 1:

Net income + Interest + Depreciation + Amortization = EBIDA

Formula 2:

EBIT (Operating Profit) + Depreciation + Amortization – Taxes = EBIDA

What Is EBIDA Used For?

EBIDA is not a commonly used performance metric. However, it can be helpful for comparing two different companies in the same industry because it shows earnings before the influence of accounting and financial deductions, which can vary depending on a company’s capital structure.

EBIDA is also used as a performance metric for companies that do not pay taxes, such as hospitals, religious organizations, charities, and other nonprofits. In this case, EBIDA can be used interchangeably with EBITDA.

Recommended: Business Cash Management: Tips for Managing Cash

EBIDA vs EBITDA

Both EBIDA and EBITDA are financial metrics that are sometimes used in place of net income to evaluate a company’s operational performance. With both metrics, interest on debt and the noncash accounting expenses (depreciation and amortization) are added back to net income. Unlike EBITDA, however, EBIDA does not add back income taxes.

Because it includes the tax expense in the earnings measure, EBIDA is considered to be a more conservative valuation metric than EBITDA. EBIDA removes an assumption made in EBITDA – that some of the money used to pay taxes can be used to pay down debt. EBITDA assumes this because interest payments on business loans are tax deductible. This lowers a company’s tax burden, giving it more money to pay off debt.

EBIDA, on the other hand, doesn’t assume that taxes can be lowered through interest expenses. As a result, it does not add taxes back to net income.

EBITDA is a much more commonly used performance metric than EBIDA. In fact, EBITDA and seller’s discretionary earnings (SDE) are typically the most common metrics used to value small and mid-sized businesses.

Neither EBIDA nor EBITDA are compliant with the Generally Accepted Accounting Principles (GAAP). However, EBIDA is somewhat closer to compliance than EBITDA because it does consider the effect of taxes on a company’s net income.

Recommended: Tax Credits vs Tax Deductions: What’s the Difference?

Pros and Cons of EBIDA

Recommended: EBITDA vs Gross Profit

EBIDA Example

Let’s take a look at an EBIDA example using the following financial information for Company X:

To calculate EBIDA, we’ll start with net income, which is total revenue minus COGs, SG&A, depreciation/amortization, interest, taxes, and other expenses. Net income for Company X is $890,000. Next, we’ll calculate EBIDA.

EBIDA = Net income + Interest + Depreciation + Amortization
EBIDA = $890.000 + $125,000 + $40,000 + $30,000

EBIDA = $1,085.000

Recommended: Traditional Income Statements, Explained

The Takeaway

Like EBITDA, EBIDA is a performance metric that allows analysts and investors to quickly gauge a company’s financial performance in a given reporting period. It includes the effect of taxes on net income, but it removes any costs associated with interest, depreciation, and amortization. Because of this, it can be considered a more conservative metric than EBITDA when analyzing a company. However, EBIDA is not commonly used.

Neither EBIDA nor EBITDA is GAAP-compliant. So if you’re applying for a small business loan, you can include your company’s EBIDA or EBITDA number, but you will still also need to include its net income.

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

FAQ

How are EBIDA and EBITDA different?

EBIDA (earnings before interest, depreciation, and amortization) differs from EBITDA (earnings before interest, taxes, depreciation, and amortization) in that it does not add income taxes back to net income. Because of this, it is a more conservative approach to analyzing a company’s financial performance. EBIDA is also not as commonly used as EBITDA.

What does the acronym EBIDA stand for?

EBIDA stands for earnings before interest, depreciation, and amortization.

What is the formula for EBIDA?

Here are two formulas for EBIDA (earnings before interest, depreciation, and amortization):
Net income + Interest + Depreciation + Amortization = EBIDA
EBIT (Operating Profit) + Depreciation + Amortization – Taxes = EBIDA

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

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

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.

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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