How to Refinance a Business Loan

Just like mortgages and car loans, small business loans can often be refinanced. Refinancing a business loan can allow you to secure a lower interest rate or loan terms that better align with your company’s financial goals. But there are costs and other considerations to keep in mind.

Read on to learn more about refinancing business debt, including what refinancing a business loan means, the pros and cons of refinancing a business loan, loan options for refinancing, and steps to apply for business loan refinancing.

Key Points

•  Refinancing allows businesses to replace an existing loan with a new one at a lower interest rate, reducing monthly payments and overall borrowing costs.

•  By extending the loan term or reducing interest rates, refinancing can lower monthly payments, freeing up cash for other operational needs.

•  Refinancing can combine multiple loans into one, simplifying repayment and potentially lowering the total interest paid on debts.

•  Businesses can renegotiate loan terms, such as extending the repayment period or switching from a variable to a fixed rate for more predictable payments.

•  Refinancing may involve fees, such as prepayment penalties on the original loan or closing costs for the new loan, so it’s important to weigh these against potential savings.

What Is Business Loan Refinancing?

Business loan refinancing involves applying for a new small business loan, either with the same lender or a different one. You go through the same application as any business loan, and, once approved, you get a loan that pays off the original business loan.

Generally, the goal of refinancing is to secure a new small business loan that has better rates and/or terms, such as:

•  A lower annual percentage rate (APR)

•  Lower monthly payments

•  A longer or shorter repayment period

Whether or not a lender will offer you a loan refinance typically depends on your qualifications (such as your time in business, revenues, and credit profile), as well as how much you have paid off and how much you have left to pay on your first loan.

Pros and Cons of Refinancing a Business Loan

As with any type of small business financing, there are benefits and drawbacks to refinancing a small business loan. Here’s a look at how they stack up.

Pros

•  Lower loan costs: A lower APR or a shorter loan term can reduce the total cost of the loan.

•  Improve cash flow: Lower payments can mean more cash is available to cover operating costs, invest in new equipment, or hire more employees.

•  Pay off your loan sooner: If you refinance with a loan that has a shorter term, you’ll be able to pay off your debt faster.

•  Get a larger loan: If the new lender approves you for a larger loan amount, you could use the capital to help grow your business and potentially avoid having to take out a second loan down the line.

Cons

•  Could negatively impact credit: The new lender will need to make a hard credit pull before approving you for a loan, which can slightly lower your score in the short term.

•  Longer loan terms can lead to higher costs: While a longer term lowers monthly payments, you can end up paying more in interest over the life of the loan.

•  Might have to pay a prepayment penalty: Some lenders charge a penalty fee if you pay off your loan early. Check with your current lender to see if there is a fee and how much it would be. You’ll want to be sure any prepayment penalty doesn’t offset the savings you’d get with the new loan.

•  May need to pledge collateral: Even if your first lender didn’t require business collateral, the new lender might require you to pledge an asset (such as cash, equipment, or inventory) to secure the loan. While collateral can help lower your interest rate, you could lose the asset if you run into difficulty repaying the loan.

Recommended: What Is Working Capital?

Types of Business Loans Which Can Be Refinanced

Here’s a look at the different types of business loans that can often be refinanced.

Business Lines of Credit

With a business line of credit, you’re able to borrow what you need (up to an approved limit) when you need it, and only pay interest on what you borrow. Once you repay the funds, they are available to borrow again. A business line of credit can be secured (requiring collateral) or unsecured (no collateral required).

Equipment Loans

Equipment loans provide the funds you need to purchase equipment or machinery for your business. The equipment typically serves as collateral for the loan, making the loan relatively low risk for the lender. As a result, equipment loans often come with attractive rates and terms.

Business Credit Card Debt

Though not a traditional loan, business credit cards are one of the most common forms of small business financing. If you’ve racked up expensive credit card debt, you may be able to refinance it with a balance transfer card that has a lower rate, or take a business loan with a lower rate to pay off the balance.

Short-Term Business Loans

Short-term business loans typically provide quick access to a lump sum of cash you then repay in installments (which could be daily, weekly, or monthly) over a period of three to 18 months. They can be useful for temporary gaps in cash flow and emergency expenses.

Working Capital Loans

A working capital loan is a type of short-term financing that can be used to cover a company’s day-to-day operating costs and to help level out cash flow. These loans can come in several forms, including term loans, lines of credit, and Small Business Administration (SBA) loans.

SBA Loans

SBA loans are partially guaranteed by the government and offered through various banks and other lenders. Refinancing an SBA small loan isn’t always easy, however. Generally, you can only refinance an SBA loan if you have a new financing need and your current SBA lender has refused to increase or modify your loan. You may, however, be able to refinance an SBA loan with a non-SBA loan.

Business Loan Refinancing Options

If you’re thinking about refinancing a business loan, you generally have three different types of lenders to choose from.

Banks

Traditional banks typically offer the lowest interest rates and most attractive terms. However, they also tend to have the strictest qualification requirements and are generally slow to fund.

Alternative Lenders

Alternative lenders, also known as online lenders, are non-bank entities that can provide fast financing (often in a day or two) and typically have more flexible eligibility requirements than banks. Online loans tend to have higher interest rates than other options, however, so you’ll want to make sure that refinancing with one of these lenders will help cut your borrowing costs.

SBA Lenders

SBA loans typically offer competitive rates and terms and can be easier to qualify for than bank loans, since they are partially guaranteed by the Small Business Administration. However, you’ll still need to meet strict criteria to refinance with an SBA loan. These loans are also typically slow to fund.

6 Steps to Refinancing Business Loans

If you’re looking to refinance an existing small business loan, here’s a simple step-by-step guide.

1. Set Your Refinancing Goal

Before you start researching your refinancing options, it’s a good idea to consider why you want to refinance. This can help streamline your search process.

Some questions to consider:

•  Do you want to lower your monthly payments?

•  Do you want a shorter loan term?

•  Do you want to lower the total cost of your loan?

You may also want to think about your long-term business financial goals and how a refinance could affect those goals positively or negatively.

Recommended: What Is Adjusted EBITDA?

2. Calculate How Much You Owe

To find a refinance that has better rates or terms than your existing loan, you’ll want to have all these facts and figures at your fingertips:

•  Current loan balance

•  How much time is left on loan term

•  Payment schedule

•  Payment amount

•  Current APY

You’ll also want to determine if your existing lender has prepayment penalties — and if so, how the cost of those penalties could impact your refinance.

Recommended: Small Business Loan Fees

3. Examine Your Business Financials and Documents

Before you begin looking at loan options, you’ll want to assess your qualifications. Lenders are typically interested in your:

•  Credit score (both business and personal)

•  Time in business

•  Annual revenue

•  Availability of collateral

Lenders may also want to review your company’s key financial documents, such as your income statement, balance sheet, and recent tax returns, so it’s a good idea to start gathering your documents. If certain aspects of your financial position — such as your business revenue or credit score — have improved since you applied for your initial loan, these are things you may want to point out when you apply for a refinance.

4. Compare Lenders

When you’re refinancing a business loan, you may have the option to apply for a refinance loan from your current lender or from a new lender. When comparing lenders and loan options, you’ll want to look at:

•  APYs (this takes fees into account and enables you to compare loans apples to apples)

•  Loan amounts

•  Loan terms

•  Qualification requirements

•  Collateral requirements

5. Determine What You Qualify For

Once you’ve set your goals, assessed your financials, and researched your loan options, you’ll want to determine which loan you are most likely to qualify for.

When you apply for a loan, the lender will conduct a hard credit pull, so you want to make sure you’re confident about your eligibility to avoid multiple applications. Some lenders and online lending tools allow you to prequalify for a loan, which only involves a soft credit pull that won’t impact your credit. This can help you compare offers and hone in on the best option.

6. Apply for Business Loan Refinancing

Once you’ve determined the best refinancing option for your needs, you’ll want to gather any documents you need, then complete and submit your business loan application.

When Is a Good Time to Refinance a Business Loan?

If you’ve been in business for a while and have high-interest loans from your early years, it could be a good time to refinance. But it’s not something you want to blindly rush into. To help determine if the timing is right, here are some questions you may want to consider.

Will It Save You Money?

If you can find a loan that has a lower APR or a shorter term, it can lower the overall cost of the loan to your business, even if the monthly payment doesn’t necessarily go down. Just be sure to factor in any prepayment fees from your current lender to ensure refinancing will, in fact, lower your borrowing costs.

Has Your Credit Score Improved?

If you got your original loan when your business was new and had yet to establish credit, you may have gotten saddled with a high interest rate. If you’ve established a strong business credit profile since then, it may be worth applying for a refinance.

Recommended: What Is the Minimum Credit Score for a Business Loan?

Has Your Business Grown?

Lenders typically look at more than a company’s credit score to determine loan amounts, rates, and terms. They generally consider a number of factors, including a company’s business plan, time in business, revenues, cash flow, and available collateral. If your business has grown significantly since you applied for your original loan, it could be a good time to explore refinancing.

Business Debt Refinancing vs. Debt Consolidation

It’s not uncommon for people to use these terms interchangeably, but there is a difference between refinancing and consolidating your debt.

Debt consolidation is the process of combining multiple loans into one. You use the new loan to cover your existing debt, so instead of making multiple payments, you now only pay one lender and follow one repayment schedule.

While loan consolidation might save you money, that generally isn’t the primary goal. The main goal is to simplify your payments and make your debt easier to manage. Of course, it’s ideal if the new loan has a lower APR. That way, loan consolidation can also save your business money.

Business debt refinancing, on the other hand, is the process of taking out a new loan (generally with better rates or terms) to pay off one original loan.

The Takeaway

Business loan refinancing offers a strategic way for companies to lower interest rates, reduce monthly payments, and improve cash flow. By securing more favorable terms, businesses can free up resources to invest in growth or manage day-to-day operations more effectively.

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 refinance a business loan?

Yes. You may be able to lower your borrowing costs by getting a new loan and using it to pay off your existing business loan.

How does refinancing business loans work?

To refinance a business loan, you apply for a new loan (either with the same or a different lender) that, ideally, has lower rates or better terms, and use it to pay off your existing loan.

Can you refinance a business’s debts with an SBA loan?

You may be able to use a Small Business Administration (SBA) loan to refinance a business loan, but you’ll have to meet specific eligibility criteria regarding your use of the loan, available collateral, and the existing loan’s interest rate.


Photo credit: iStock/Daenin Arnee

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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 .

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-Q424-013

Read more

Retained Earnings: Defined and Explained

Retained Earnings are the profits a business has accumulated that are not distributed as dividends to shareholders but instead are reserved for reinvestment back into the business. These funds can be used for a variety of purposes, including working capital, purchasing fixed assets, and paying off debt.

Retained earnings are an important part of any business because they provide the means to reinvest in and grow your business. Companies with healthy earnings will often try to achieve a balance between rewarding owners/shareholders while also financing business growth.

Read on to learn why retained earnings are important for every business, how to calculate retained earnings, and how these funds can be used.

Key Points

•  Retained earnings are the portion of a company’s net income that remains after dividends have been paid to shareholders.

•  Companies report their retained earnings on the shareholder’s equity section of the balance sheet at the end of each accounting period.

•  Retained earnings can be used for a variety of purposes, including hiring more staff, new product launches, share buybacks, and debt repayment.

•  The formula for calculating retained earnings (RE) is: Beginning RE + Net Income/Loss – Dividends.

•  Creditors and investors may look at a company’s retained earnings to gauge its stability and potential for growth.

What Are Retained Earnings?

By definition, retained earnings are the cumulative net earnings or profits of a company after accounting for dividend payments. In other words, retained earnings are the profit that a business generates after costs such as salaries or production have been accounted for, and once any dividends have been paid out to owners or shareholders.

Retained earnings are reported on a company’s balance sheet under owner’s/shareholder’s equity, which is a measure of what a business is worth. Retained earnings value can fluctuate from quarter to quarter and year to year depending on whether they are accumulating or being used.

If you run a very small business, you might not even account for retained earnings and simply consider them part of working capital. However, it can be worth generating a separate statement of retained earnings. This can be a key financial statement to have on hand, especially if you’re going to apply for a small business loan. Potential investors may also be interested in looking at your retained earnings.

Calculating Retained Earnings

In small business accounting, the retained earnings formula starts with the beginning-of-period retained earnings amount. That is carried over from the prior period’s retained earnings figure. Net income (or net loss), located at the bottom of the income statement, is then added to the first figure. Dividends, both the cash and stock types, must be removed to arrive at the end-of-period retained earnings amount.

Here is the retained earnings formula:

RE = Beginning Period RE + Net Income/Loss – Cash Dividends – Stock Dividends

At the end of each accounting period, retained earnings are reported on the shareholder’s equity section of the balance sheet. In the next accounting cycle, the retained earnings ending balance from the previous accounting period will now become the retained earnings beginning balance.

It’s possible for this balance to be negative. This could happen if the current period’s net loss is greater than the retained earnings beginning balance, or if a distribution of dividends exceeds the retained earnings balance.

Any factors that impact net income (such as changes in sales revenue, cost of goods sold, depreciation, and other operating expenses) will directly affect the retained earnings balance.

Recommended: How to Calculate Cash Flow

How Do You Use Retained Earnings?

Retained earnings can be used for a variety of purposes. Here’s a look at some of the options.

Paying Off Debt

Many businesses get their funding through different types of small business loans. Ultimately, those obligations must be paid back, and retained earnings are often used to do that. Repaying debt early can also save on interest costs, boosting profits and future retained earnings. (Keep in mind, however, that some lenders may charge a prepayment penalty.)

Mergers and Acquisitions

Retained earnings can also be used to grow a business by funding a merger, business acquisition, or partnership that could open up the company to new opportunities.

Growth and Expansion

Retained earnings may be reinvested into the company in order to:

•  Launch a new product/variant

•  Increase production capacity of the existing products

•  Hire more staff

•  Buy new equipment and machines

•  Invest in research and development

This reinvestment into the company aims to achieve even more earnings in the future.

Share Buybacks

If a company’s owner or management does not believe it can earn a sufficient return on investment from its retained earnings, it might conduct share buybacks. This involves paying shareholders the market value per share and reabsorbing that portion of the company’s ownership.

Pros and Cons of Retained Earnings

Retained earnings have both advantages and disadvantages. Here’s a look at how they stack up.

Pros of Retained Earnings

•  They are an inexpensive source of funds, since (unlike loans) there are no interest payments or fees.

•  There are no conditions on how you can spend the money.

•  They can increase your future retained earnings if reinvested wisely.

•  They can be used to repay high-interest loans, as well as short-term debt to reduce accounts payable.

Cons of Retained Earnings

•  The amount of retained earnings rises and falls depending on profit trends and dividend payouts.

•  If shareholders believe you are not using the money effectively, they may feel cheated out of dividend income.

•  Owners and managers may decide to spend the funds simply because the money is there and potentially waste it.

•  High retained earnings could cause owners/managers to make risky investments.

Recommended: What Is Accounts Receivable Financing?

Are Retained Earnings a Debit or Credit?

The normal balance in the retained earnings account is a credit. This number indicates that a company has, over its lifetime, generated a profit. However, the amount of the retained earnings balance could be relatively low even for a financially healthy company, since dividends are paid out from this account. Consequently, the amount of the credit balance does not necessarily indicate the relative success of a business.

When the balance in the retained earnings account is negative, this indicates that a business has incurred losses. This can happen during the startup years of a business, when it may incur sustained losses before it has accumulated enough customers and released enough products to bring in a reasonable profit.

Retained Earnings vs Dividends vs Revenue

Retained earnings, dividends, and revenue are all important ways to measure a company’s financial health. Each, however, looks at a different component of a company’s finances.

Dividends, whether distributed in the form of cash or stock, reduce retained earnings. If a company is focused on growth, it might not pay dividends or pay very small dividends and instead use the retained earnings to invest in new equipment, research and development, marketing, and/or acquisitions to boost growth. If this is the case, the company will have high retained earnings.

A more mature company, on the other hand, may not have many options for investing surplus cash and might prefer to pay dividends. In this case, a company will have low retained earnings.

Revenue refers to the total earnings a company generates through its core operations before removing any expenses.

Recommended: Business Acquisition Loans

The Takeaway

Retained earnings are the amount of net income a company has accumulated over time after it has paid out dividends to its shareholders. There are a number of ways a business can use retained earnings. When a company is focused on growth, it may choose to use all or most of the retained earnings to fund expansion activities. Businesses in later stages might opt to use the money to pay additional dividends.

Retained earnings can also be used to determine whether a business is truly profitable. Lenders, creditors, and investors will often look at a company’s retained earnings, along with its revenue, to gain insights into the firm’s financial performance and potential for growth.

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

What are some examples of retained earnings?

Retained earnings are the amount of net income a company has left after it has paid dividends to owners/shareholders. It’s calculated by adding net income to retained earnings at the beginning of the account period, then subtracting dividends.

For example, if a company starts the accounting period with $20,000 of retained earnings, then brings in $30,000 in net income and pays out $15,000 in dividends, this would be the calculation:

$20,000 + $30,000 – $15,000 = $35,000

In this example, the company has retained earnings of $35,000 for this accounting period.

How are retained earnings calculated?

The formula for calculating retained earnings is as follows:

Retained Earnings (RE) = Beginning Period RE + Net Income/Loss – Dividends Paid

Are retained earnings assets or liabilities?

Neither. Though retained earnings can be used to purchase assets, they are not considered a business asset. Retained earnings are reported on the balance sheet under the owner’s/shareholder’s equity section at the end of each accounting period.


Photo credit: iStock/Valerii Evlakhov

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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-Q424-010

Read more

Business Insurance: 6 Types to Consider

Business insurance keeps your business protected from the unexpected, whether that’s a lawsuit or a natural disaster. It also limits the liability you have for contingencies, such as someone slipping and falling on your business property. But, different types of business insurance protect your company in different ways.

Keep reading to learn more on how business insurance can protect your company, different types of business insurance, how to choose the right business insurance for your business, and how to pay for business insurance.

Key Points

•  Business insurance safeguards against financial losses from unexpected events like accidents, lawsuits, or property damage, ensuring continuity.

•  The six types of business insurance include workers’ compensation, liability insurance, commercial vehicle insurance, property insurance, errors and omissions insurance, and data breach insurance.

•  Certain types of insurance, such as workers’ compensation or liability insurance, are legally required for businesses in many regions.

•  Having insurance boosts client trust, as it demonstrates that your business is prepared to handle risks, making you a more reliable partner.

•  Ways to pay for business insurance include business savings, small business loans, credit cards, payment plans, and revenue from sales.

What Is Business Insurance?

While there are different types of business insurance, they all generally do one thing: protect your company. Paying a monthly or yearly premium for insurance can provide you with peace of mind, knowing that if your business property should experience loss or damage, those expenses will be covered by your insurance policy.

6 Types of Business Insurance for Companies to Consider

While there are many types of business insurance, we’re going to take an in-depth look at the following six types:

•  Workers’ compensation

•  Liability insurance

•  Commercial vehicle insurance

•  Property insurance

•  Errors and omissions

•  Data breach insurance

1. Workers’ Compensation

If you have employees, you may be required to have workers’ compensation coverage. If you have an employee who is injured in a work-related accident, this policy will cover medical expenses, rehab and retraining costs, and disability payments while your injured employee isn’t at work.

Depending on how many workers you employ, workers’ compensation coverage is required in every state except Texas. Check your state’s requirements for more details.

Costs also vary depending on your payroll and state, but as a point of reference, many businesses spend an average of $540 annually.

Pros and Cons of Workers’ Compensation

The main pro of having workers’ compensation coverage is that you won’t have to pay out of pocket for on-the-job injuries. And if your business is in a physically active industry, such as manufacturing, the risk for these types of injuries may be high.

The major drawback applies to businesses that aren’t in physically demanding industries, because they’ll likely still be required to carry it for each employee, and this can add to payroll costs.

Recommended: How to Categorize Expenses for a Small Business

2. Liability Insurance

The next kind of insurance to consider is liability. There are several types of liability insurance, including workers’ compensation. Two other types of liability insurance include:

•  General liability insurance: General liability insurance, also called public liability insurance, protects you in the event of someone being injured on your commercial property. If a customer fell and broke her hand in your store, your general liability insurance would cover any legal fees if she sued you, as well as her medical expenses. The average cost of general liability coverage is about $500 a year for small businesses.

•  Product liability coverage: If you sell products, you might want to consider product liability coverage, which will protect you from paying out of pocket for any legal fees related to issues with your product, such as defects or malfunctions. Product liability may be included in general liability coverage. Bought separately, if you break out the cost, the rule of thumb is $0.25 per every $100 of product sales.

Pros and Cons of Liability Insurance

Some companies require their vendors to have liability insurance. If you work with companies that do (or want to), having liability coverage can ensure you have more business opportunities.

On the other side of the equation, costs for liability coverage can vary widely depending on the kind of coverage you’re seeking, how long you’ve been in business, your industry, and other factors. That can make it difficult to budget for the insurance ahead of time.

Recommended: 10 Steps for Starting a Small Business

3. Commercial Vehicle Insurance

If you use a vehicle for your business, you’re required to have commercial vehicle insurance, just the way you need to have auto insurance for your personal car or truck. This will cover not only you, but also any employees you have who will drive the company vehicles.

It’s important to note that having a personal car insurance policy will not cover your commercial vehicles.

While the costs for commercial vehicle insurance vary depending on your coverage and how many vehicles you need to insure, for a policy limit of $1 million, the average cost is about $1,700 a year.

Pros and Cons of Commercial Vehicle Insurance

If you have commercial vehicles, commercial vehicle insurance is required. The main benefit is having peace of mind should you or an employee get into an accident. You’ll have coverage for medical expenses incurred from the accident, as well as for repair costs for the vehicle.

The main drawback is the expense. And if you or an employee does get into an accident, your premium could rise, cutting even deeper into your profits.

Recommended: Accounts Payable vs. Receivable

4. Property Insurance

Whether you run a business located in commercial real estate or out of your home, having property insurance can cover damages to your property or loss of your property. This may include damage or loss caused by theft or natural disasters (but note that earthquake or flood coverage typically needs to be purchased as a separate policy).

Even if you run your business out of your home, you may want to consider property insurance, possibly through a homeowner’s policy. Expect to pay around $800 a year for commercial property insurance.

Pros and Cons of Property Insurance

What would happen if your office caught fire and you lost all of your computer equipment? Without insurance, you would be stuck paying to replace the equipment. Property insurance means that, should the worst happen, you probably won’t have to go into debt to get back up and running after a disaster.

The drawback is that property insurance doesn’t cover everything. If, for example, an employee trips and drops his laptop and breaks it, this may not be covered. And if you live in areas prone to earthquakes, you may not be able to file a claim for earthquake damages with a standard policy.

Recommended: 8 Ways to Get Equipment Financing with Bad Credit

5. Errors and Omissions Insurance

If you’re in certain industries, like medicine, consulting, real estate, or law, one of the types of business insurance you may be required to carry is errors and omissions (E&O) insurance, also called professional liability insurance.

This coverage can protect you in the event that you’re sued for malpractice, even if you weren’t negligent. Here’s an example: Let’s say you’re a project management consultant and your client misinterpreted the project plan, and as a result incurred extra costs and delayed the project. The client sues you for those costs, but with E&O coverage, those costs would be covered.

Costs may vary, but some policies can be found for under $800 a year.

Pros and Cons of Errors and Omissions

The major benefit of E&O insurance is protecting yourself. If a client or patient sues you, having E&O coverage will help ensure that you don’t go broke trying to cover legal expenses.

On the other hand, it can be confusing to know what you’re getting with an errors and omissions policy. That’s why it’s imperative to read your policy documents carefully to make sure you understand exactly what’s covered.

6. Data Breach Insurance

How much thought have you given to data breaches at your company? You may assume that only large corporations suffer from problems like these, but in fact, 43% of data breaches happen in small businesses. If you store sensitive data on the cloud or on any kind of electronic device, this might be a type of insurance to consider.

Data breach insurance (or cyber insurance, which may be a little more inclusive and expensive) may lower your risk of experiencing a breach by offering credit card monitoring services. If you experience a breach, some insurance policies will send a notification to your customers to alert them, cover costs to find the cause of the data breach, pay for a public relations consultant to restore your reputation, and/or cover legal costs if you’re sued as a result of the breach.

Policies can vary quite a bit in what services they provide and what they pay for, so it’s important to read the fine print of any insurance policy you’re contemplating buying.

Cyber insurance costs average $1,740 a year.

Pros and Cons of Data Breach Insurance

Recovering from a data breach could take months, if not years, and many companies have suffered from negative reputations as a result. Should you be the victim of a breach, you need to ensure that things can go back to business as usual as soon as possible, and data breach insurance can help you get there.

The downside of data breach insurance is that your company might never experience a breach, and you might feel like the investment is wasted money. But then again, the purpose of insurance is to cover an accidental and to provide reassurance that if it happens, you’re going to be okay.

Recommended: 6 Step Guide to Getting a Small Business Loan

How to Pay for Business Insurance

Paying for business insurance can be managed through various methods depending on your financial situation and business needs. Here are some options:

•  Business savings: Using funds from your company’s savings is a straightforward way to pay for insurance premiums. This avoids debt but requires careful cash flow management.

•  Small business loan: Many small business loans allow you to use funds for operational expenses like insurance. This helps cover costs upfront but requires repayment with interest.

•  Credit card: Some businesses use credit cards for short-term payment of insurance premiums. While convenient, it can be costly due to high interest rates if balances aren’t paid off quickly.

•  Payment plans: Some insurance providers offer monthly or quarterly payment plans. This spreads the cost over time, making premiums more manageable for businesses with tighter cash flow.

•  Revenue from sales: Using revenue from day-to-day operations can cover insurance premiums, ensuring you’re funding insurance from your business’s ongoing earnings.

Recommended: 15 Types of Business Loans to Consider

The Takeaway

Six major types of business insurance include workers’ compensation, liability insurance, commercial vehicle insurance, property insurance, errors and omissions insurance, and data breach insurance. Start with the policies that you’re required to have for your business, then consider whether you might need any of the others as protection against a worst-case scenario.

You can pay for your insurance policy with funds from the company or external financing, such as credit cards or a small business loan.

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

Is business insurance tax-deductible?

Yes, business insurance is typically tax-deductible as an ordinary and necessary business expense. Premiums for coverage like liability, property, and workers’ compensation insurance can often be deducted, reducing taxable income. Always consult a tax professional for guidance.

Can I change my business insurance coverage as my company grows?

Yes, you can adjust your business insurance coverage as your company grows. Expanding operations, hiring employees, or acquiring assets may require updates to policies like liability, property, or workers’ compensation to ensure adequate protection. Regular reviews with your insurer ensure coverage aligns with your evolving business needs.

What happens if a business operates without insurance?

Operating without business insurance exposes a company to significant financial and legal risks. Uninsured businesses must pay out-of-pocket for damages, lawsuits, or accidents, which can result in severe financial strain or bankruptcy. Additionally, it may violate legal or contractual obligations, leading to fines, penalties, or lost business opportunities.

How often should I review my business insurance policies?

You should review your business insurance policies annually or whenever significant changes occur in your business, such as growth, new employees, or added services. Regular reviews ensure your coverage remains adequate and aligns with evolving risks, helping protect your business from potential liabilities and financial losses.


Photo credit: iStock/courtneyk

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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-Q424-012

Read more

Debt Financing: Definition and Examples

Debt financing is when you borrow money to finance your business and then pay it back to the lender (plus interest) over time. It differs from equity financing, which involves bringing in investors who provide financing in exchange for an ownership stake in your company.

Examples of debt financing include traditional bank loans, credit cards, government loans, lines of credit, and bond issues. Read on for a closer look at how debt financing works, its pros and cons, and how it compares to equity financing.

Key Points

•  With debt financing, businesses borrow money without giving up ownership or equity, allowing founders to maintain control over the company.

•  Businesses agree to repay the borrowed amount with interest over a set period, providing predictable, structured payments.

•  Interest payments on business loans are typically tax-deductible, which can reduce the overall cost of borrowing.

•  Successfully managing debt improves a business’s credit rating, potentially making it easier to secure future financing at better terms.

•  Taking on debt increases financial obligations, and failure to meet repayment terms can lead to penalties, legal action, or even bankruptcy. It’s important to always make your debt payments on time each month.

What Is Debt Financing?

Debt financing is essentially borrowing money for your business from an external source. In exchange for the borrowed funds, you agree to pay back the principal, the interest, and possibly other fees (like an origination fee) by a future date.

The most common form of debt financing is a small business loan from a bank, credit union, or online lender. The definition of debt financing also includes bond issues. Used mostly by larger companies, a traditional bond certificate includes a principal value, a repayment term, and an interest rate. Individuals or companies that purchase the bond then become creditors by loaning money to your business.

How Does Debt Financing Work?

Debt financing can be divided into two categories based on the type of loan you’re seeking: short-term or long-term.

Short-term Debt Financing

Short-term debt financing is usually used for day-to-day operational expenses, such as purchasing inventory or paying employee wages. These loans typically need to be paid off within a year, though some may extend a bit longer. Common types of short-term debt financing include short-term loans from banks or online lenders, business lines of credit, credit cards, and trade credit (accounts payable).

Short-term debt financing tends to be easier to qualify for than longer term financing options, which can make them a good option for newer businesses and companies that lack strong credit. Short-term business loans, however, tend to come with higher interest rates than other types of debt financing.

Long-term Debt Financing

Long-term debt financing is often used for large purchases (or capital investments) like equipment or real estate. You might also opt for long-term debt financing when expanding your business. Generally, the term to pay off these loans is a year or longer.

For large loan amounts, the longer payoff period can make the payments more affordable. These loans also tend to have lower interest rates than short-term financing. However, you generally need to be an established business with strong revenue in order to qualify for long-term debt financing.

Key Terms and Concepts

Key terms and concepts of debt financing include:

•  Principal: The borrowed amount

•  Interest rate: The cost of borrowing

•  Maturity: The repayment timeline

•  Secured loans: Loans that require collateral

•  Unsecured loans: Loans that do not require collateral

•  Debt covenants: Conditions lenders impose to mitigate risk

Effective management of these elements ensures sustainable borrowing and financial health.

5 Types of Debt Financing

There are many types of small business loans. Here are some options you may want to consider.

1. Traditional Loans

With a traditional term loan from a bank or credit union, you receive a lump sum of capital up front then repay it (plus interest) in monthly installments over time. Long-term business loans allow you to borrow large amounts for bigger capital projects but tend to come with strict requirements, like a minimum amount of time in business, proof of revenue, and a strong credit history. It can also take several weeks (or more) to get your application approved and receive the proceeds of the loan.

2. Online Loans

Online business loans tend to have more flexible qualification requirements and are typically faster to fund than bank loans. This can make them a good option for companies that can’t qualify for a traditional bank loan or need access to funds quickly. Some online business lenders will work with startups or businesses with bad credit.

Applications are typically vetted almost instantaneously and, if approved, you could get your funds as soon as the same business day. However, these loan products tend to come with higher interest rates than other types of business loans. If you’re considering an online loan, it can be a good idea to shop around and compare interest rates to make sure you’re getting the best possible deal.

Recommended: What Is Seed Funding?

3. SBA Loans

The Small Business Administration (SBA) guarantees these loans, which are offered by banks and other lenders. Since they’re backed by the government (reducing risk to the lender), SBA loans tend to come with low rates, large loan amounts, and long repayment terms. For the SBA 7(a) loan, for example, you can borrow up to $5 million for 10 to 25 years.

SBA loans, however, can be tough to qualify for. Eligibility requirements vary depending on the lender, but generally businesses must meet SBA size standards, be able to repay, and have a sound business purpose. The application process for an SBA loan also tends to be rigorous and can take as long as three months.

4. Short-term Business Loans

Short-term business loan terms typically last for 12 months or less, though in some cases they may extend to as much as 18 months. Common uses for this type of debt financing include working capital, inventory purchases, cash flow, marketing, expansions, improvements, and covering unexpected costs.

Short-term business loans are often offered by online lenders and tend to come with more lenient qualification requirements than long-term, traditional bank loans. They’re also funded quickly (anywhere from one to three business days). These loans may be more accessible for new or small businesses, but tend to come with higher costs.

5. Business Line of Credit

A business line of credit is a type of revolving credit that allows you to borrow money as you need it, up to your credit limit, and only pay interest on what you borrow. In some ways, it works like a credit card. As you use and repay the money you owe, you can access that same credit line again throughout the draw period, which may be 12 to 24 months.

Credit lines can be secured (i.e., require collateral that you own as a guarantee for your loan) or unsecured (no collateral required). Unsecured lines of credit tend to be harder to qualify for and come with higher rates than secured credit lines.

This type of flexible debt financing can be helpful for smoothing out cash flow, covering small expenses, funding projects with undetermined costs, or serving as a backup for emergencies.

Recommended: Conventional Business Loans vs SBA Loans

Advantages of Debt Financing

One of the biggest benefits of debt financing is that you get to retain full ownership and control of your company. Unlike equity financing, you don’t need to give up an ownership share of your business to obtain the capital. The financial obligation is temporary and your relationship with the lender ends after you pay off the loan.

Another perk is that the payments you make on interest generally qualify as a tax-deductible business expense. This interest tax deduction is typically available as long as you’re borrowing money from an actual lender (not friends or family) and using the loan for business purposes. Other loan costs, such as origination fees, may also be tax-deductible.

In the case of long-term financing, the repayment period can be extended over many years, reducing the monthly expense. Assuming the loan does not have a variable rate, the interest expense is a known quantity for budgeting and business planning purposes.

If you make all of your payments on time, debt financing can help you build business credit. This can help you qualify for other debt financing options in the future, potentially with better rates and terms.

Disadvantages of Debt Financing

You’ll need to make consistent payments on your loan, regardless of your revenue, which could be challenging if you have seasonal business or inconsistent cash flow.

Also, if your business is new or doesn’t have strong credit, interest rates may be high, making this a potentially expensive form of financing. And, if you are late or miss payments, it could negatively impact your credit.

Business lenders often require business collateral or a personal guarantee (or both) to secure loans. If you default on the loan, any business assets you pledge could be repossessed by the lender. If you sign a personal guarantee, you could potentially lose your personal savings or home. These are significant risks to take, so it’s important to understand the terms of your debt financing and feel confident in your ability to repay the borrowed funds.

Pros Cons
Retain ownership and control over your business Interest rates can be high if business is not well-established
Can help you build business credit Late or missed payments can hurt credit
Interest payments are typically tax-deductible May need to put business and/or personal assets at risk
Long-term loans can have low monthly payments Must keep up payments even during slow periods

Recommended: What Is the Minimum Credit Score for a Business Loan?

Choosing Debt Financing for Your Small Business

Deciding on debt financing is a big decision that can impact the future of your business. Here are some reasons why you might consider debt financing as a way to raise capital for your business.

•  You’re past the startup phase. It can be difficult to qualify for loans with attractive rates and terms as a brand new business. In addition, many startups lose money before they start turning a profit, which can make committing to a regular repayment schedule risky. Should you default on the loan, you can lose any business or personal assets you used to secure the loan, plus damage your business credit, which could make it harder to get loans with competitive rates in the future.

•  You need capital quickly. There are various forms of debt financing that get funds in a business bank account much faster than equity financing or most other alternatives. You’ll want to focus on online options if you’re truly strapped for time.

•  You want to maintain full ownership of your business. Lenders don’t want an ownership stake in your business, only the certainty that you can repay that debt. While taking on debt means making a payment with interest each month (compared to no payments with equity financing), it may be worth it if you’re not prepared to give away a percentage of your company and/or do not want to share future profits.

•  You anticipate a positive return. While debt financing comes with costs, you may be able to recoup those costs (and more) if the money you borrow leads to an investment that can bring in a significant increase in revenues — a concept known as leverage. For example, if you take out a $150,000 loan with an 8% annual percentage rate (APR) but can get a 15% return on that money, debt financing can be a smart business move.

•  You’re comfortable with risk. If you put up collateral or sign a personal guarantee for a business loan, failing to repay the loan could cost you important business or personal assets. Even if you get an unsecured loan, your company’s credit score will be on the line. These are risks you have to be willing to take if you choose debt financing.

Recommended: Unearned Revenue

Alternatives to Debt Financing

The main alternative to debt financing is equity financing, which involves selling a portion of your company’s equity in return for capital. This means the investor will own a certain percentage of the company and have a say in business decisions going forward.

The advantage of equity financing is that there is no obligation to repay the money you acquire through it. Investors also often provide operational expertise and valuable business contacts along with an infusion of capital.

On the downside, you’ll have to share control and profits with the investors. And, the only way to remove investors is to buy them out (which could cost more than the money they originally gave you).

Some sources of equity financing are:

•  Angel investors

•  Crowdfunding

•  Venture capital firms

•  Corporate investors

•  Listing on an exchange with an initial public offering (IPO)

Recommended: What Is Crowdfunding? Definition & Examples

Equity Financing vs Debt Financing

Here’s a closer look at how equity and debt financing compare.

Similarities

Both debt and equity financing allow you to raise capital for your business. You can use those funds for a variety of business expenses, including day-to-day operations, inventory, equipment, real estate, expansion, or hiring staff.

Differences

Debt financing involves borrowing funds from a person or other entity that you must pay back with interest by a certain date, whereas equity financing involves securing capital in exchange for a percentage of ownership in the business.

With debt financing, the lender doesn’t have any say in your business decisions, and your relationship ends once you’ve paid off the loan. With equity financing, on the other hand, investors will often want to have a say in business decisions and the relationship is ongoing.

Another key difference: Investors can often provide valuable industry knowledge and connections, which you would not get from a lender.

These financing options also differ in terms of risk involved. Equity financing tends to be less risky than debt financing because you don’t have a loan to repay or collateral at stake.

Debt Financing Equity Financing
No dilution of equity Dilution of equity
Maintain full control of business Share control of business
Keep all profits Share profits
Must pay back the money, plus interest No repayment required
No mentorship May offer mentorship
Higher risk Lower risk

The Takeaway

Debt financing is when you borrow money to fund your business and pay it back with interest over time. Small business loans are one of the most common types of debt financing.

If you’re thinking about financing your business with debt, you’ll want to consider how much capital you need, your business’s qualifications (including your personal credit score, time in business, and annual revenue), how quickly you need to access funding, and how much debt you can afford.

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

What are some examples of debt financing?

Examples of debt financing include traditional bank loans, online loans, Small Business Administration (SBA) loans, business lines of credit, credit cards, equipment financing, invoice financing, peer-to-peer loans (crowdlending), and real estate loans.

What are the advantages of debt financing?

One key advantage of debt financing is that it can allow a business to grow more rapidly than might otherwise be possible. Another is that the interest payments on the debt are generally tax-deductible. Also, with debt financing, the company does not have to give up any ownership control in return for the capital, as is the case with equity financing.

Are debt financing and business loans the same thing?

Not exactly. Debt financing is a broad term that means borrowing money for the benefit of your business. Loans are one of the most common types of debt financing. However, debt financing in business also includes selling fixed-income products, such as bonds or bills, to individuals or institutional investors.


Photo credit: iStock/VioletaStoimenova

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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 .

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-Q424-009

Read more

What Is Net Income (NI)? Definition, Calculation, and Example

Net income is the total profit a business makes in a given reporting period after all of its expenses are paid. It’s often referred to as a company’s “bottom line” because it appears at the bottom line of the income statement.

Read on for a closer look at what net income is, how to calculate net income, the pros and cons of using net income as a performance gauge, plus an example that includes routine business expenses.

Key Points

•   Net income is a company’s total profit — what’s left after adding up all revenue and subtracting all expenses, including taxes.

•   Net income is a key profitability metric for analysts, investors, and lenders.

•   It appears on the income statement, and affects equity on the balance sheet.

•   While net income includes all expenses (for a complete financial picture), it may not reflect actual cash flow.

•   Net income is less useful than EBITDA for comparing the profitability of companies across an industry.

What Is Net Income?

Net income (NI) is defined as the total amount of money a business makes during a reporting period after deducting all costs, allowances, and taxes.

Also referred to as “net profit” or “net earnings,” net income is calculated by taking the company’s total sales and subtracting the cost of goods sold (COGS); selling, general and administrative (SG&A) expenses; operating expenses (OPEX); interest on debt (such as small business financing); taxes; and other expenses. In other words, it is a measurement of profit after a business has covered all of its costs.

Net income appears on the bottom line of a company’s income statement.

Calculating Net Income

To calculate net income for a business, you start with a company’s total revenue, then subtract the business’s COGS and OPEX to calculate the company’s earnings before tax. You then deduct tax from this amount to find the net income.

There are three formulas for calculating net income:

Option 1:
Total Revenue – COGS – Operating Expenses = Net Income

Option 2:
Total Revenue – Total Expenses = Net Income

Option 3:
Gross Income – Expenses = Net Income

Before you can calculate net income, it’s important to understand the following terms.

•  Revenue: Total amount of money a company brings in from its business operations

•  Cost of goods sold (COGS): All costs associated with the manufacturing of a product or delivery of a service. Examples include:

◦  Factory labor

◦  Freight costs

◦  Production parts

◦  Raw materials

◦  Storage costs

•  Gross income: Revenue minus COGS

•  Operating expenses (OPEX): All costs associated with the day-to-day running of a business not related to COGS. Examples include:

◦  Office supplies

◦  Payroll

◦  Property taxes

◦  Rent

◦  Repairs

◦  Travel

◦  Utilities

Net Income Calculation Example

Let’s say Company ABC wants to calculate its net income for the first quarter of this year. Here are the numbers Company ABC is working with:

Total revenue: $300,000

COGS: $100,000

OPEX: $15,000

Interest expense: $10,000

Taxes: $60,000

Net income = $300,000 – $100,000 – $15,000 – $10,000 – $60,000

Net income = $115,000

What Is Net Income Used for?

Net income is a measure of a company’s profitability. It tells you exactly how much money a company has left over after subtracting all costs from total revenue that can be invested back into the business, distributed to shareholders, or saved for a future use.

Overall, a company’s profit (or lack thereof) determines its future operations. Therefore, net income can determine whether a company:

•  Needs to restructure

•  Is able to pay its current and future liabilities

•  Needs access to alternative capital (such as debt or equity financing)

•  Should consider expanding its operations for further growth

Lenders will also look at a company’s net income when deciding whether to approve or deny a company for a loan, such as ​​business term loan or equipment financing. While assets and credit scores are important, lenders also want to see whether a company has enough profit to pay upon its debts.

Pros and Cons of Using Net Income as a Metric

Pros Cons
Includes all company expenses Can suggest a company is or is not doing well, even though that may not be the case
Accepted by GAAP Not useful for comparing the profitability of two different companies with different capital structures
Needed for multiple financial statements Doesn’t reflect actual cash flow

Pros

One of the biggest benefits of using net income as a performance metric is that it includes all of a company’s expenses. Because of this, it provides a complete picture of how much a company is making vs. how much it is spending.

Another plus is that net income is recognized under the Generally Accepted Accounting Principles (GAAP), which means companies don’t have much flexibility when it comes to calculating and interpreting net income. All publicly traded companies must report financial results that meet GAAP.

In addition, net income is a central line item to all three of a firm’s primary financial statements — the income statement, balance sheet, and cash flow statements.

Recommended: Net Operating Income vs EBITDA

Cons

One drawback of net income is that it can be misleading. A company with a low net income may actually be doing well. If it made a large asset purchase or decided to expand, for example, those types of expenses would temporarily drive down its net income.

Also, because net income includes variable deductions like interest on business financing and taxes, it’s not particularly useful for comparing a company’s financial performance across an industry. EBITDA (earnings before interest, taxes, depreciation, and amortization) is generally a better way to determine a firm’s operational efficacy or an appropriate profit level.

In addition, net income doesn’t reveal a company’s actual flow, since there may be a delay between making sales and collecting on those sales.

Recommended: How to Start a Wedding Business

Net Income vs Gross Income

Net income is how much a company makes (or nets) after all expenses are paid. Gross income, on the other hand, is how much money a company makes from its sales after accounting for COGS. The difference between the two is that gross income does not include operating expenses, interest, or taxes, whereas net income does.

Net Income vs Cash Flow

When comparing a company’s cash flow vs. profit, the numbers can differ dramatically.

One reason is that there is typically a time gap between documented sales and actual payments. Another factor is that net income includes a variety of non-cash expenses, such as depreciation/amortization and stock-based compensation. These are real expenses and reduce a company’s earnings. However, they don’t actually affect its bank account.

Net Income vs Operating Net Income

Operating net income is similar to net income, but there are a few key differences.

Unlike net income, operating net income looks at a company’s profits from operations alone without accounting for income and expenses that aren’t related to the company’s core activities. So unlike net income, operating net income does not include income tax, interest expenses, interest income, or gains or losses from sales of fixed assets.

Sometimes referred to as EBIT (earnings before interest and taxes), the formula for operating net income is:

Operating Net Income = Net Income + Interest Expense + Taxes

How Net Income Is Used on a Balance Sheet

Once you’ve calculated your company’s net income, you can use that figure to start creating your balance sheet.

The balance sheet reports a business’s assets, liabilities, and equity at a specific point in time. It is divided into two main sections: assets on one side and liabilities and equity on the other side. The two sides must balance out, meaning they should be equal to one another.

Net income affects how much equity a business reports on the balance sheet. It appears in the retained earnings line item of the balance sheet.

The Takeaway

Net income is the amount of money a business has left over after all revenue and expenses are accounted for. Unlike gross income, it also includes interest, taxes, non-cash expenses, as well as non-recurring revenue and expenses.

Net income is a key metric of profitability used by analysts, investors, and lenders.

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 are net income and gross income different?

Net income takes total revenue and subtracts all expenses a business may have, which include the cost of goods sold (COGS), operating expenses (OPEX), taxes, interest on debt, and non-cash expenses. Gross income, on the other hand, takes total revenues and only subtracts COGS.

Are profit and net income the same thing?

Yes. Both profit and net income refer to the amount of money that a business has left over after expenses have been paid.

What is the formula for net income?

The formula for net income is:

Net Income = Total Revenue – Total Expenses

Can you find net income without revenue?

No. The formula for net income starts with total revenue. It’s possible, however, for that number to be zero in the event that the company did not make any sales.


Photo credit: iStock/Charnchai

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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-Q424-008

Read more
TLS 1.2 Encrypted
Equal Housing Lender