How Long Do Collections Stay on Your Credit Report?

Oct

2024

By Kim Franke-Folstad | Credit, Debt Payoff, Financial Topics, relay | Comments Off

If you neglect to pay a bill for a significant period of time, your creditor may send your debt to a collection agency, which then seeks repayment from you. This can have serious — and lasting — repercussions for your credit score. Understanding how long collections stay on your credit report and how to manage them is essential for maintaining good financial health. Here’s a closer look at how debts end up in collections and how they impact on your credit.

Key Points

• If you miss multiple payments on a loan, credit card, or other bill, your account may be sold to a collection agency.

• A collection account can remain on your credit report for up to seven years.

• Paying off a collection account won’t remove it from your report but can prevent further damage.

• The negative impact of a collection on your credit score decreases over time.

• Unpaid medical debt is treated differently from other types of debt.

What Are Collections?

Having a debt in collections typically means that the original creditor or lender has written your debt off as a loss and has sent it to a debt collector. The collector may be an internal team within the same company that goes after delinquent debts or a third party debt collection agency.

Most of your monthly bills (including credit cards, mortgage, auto loan, student loans, and utilities) can go to collections if you neglect to pay them for long enough. This means that bills that might not typically appear on your credit report (electric, phone, or cable, for example) could show up on your credit report as debts in collections.

There’s no set time frame as to when a lender or company will place a past-due account into collections. Generally speaking, however, creditors will wait until after 90 to 180 days of nonpayment before they will send your debt to collections.

What Happens if a Bill Goes to Collections?

Some creditors have in-house collection departments, but many will “charge off” your debt. This means the original creditor closes your account and sells your debt to a third-party collection agency. When your account is sent to collections, the balance on your original unpaid account goes to $0, and a new collections account will be added to your credit reports. Having a collection account on your credit report is one of the many things that can affect your credit score.

Track your credit score with SoFi

Check your credit score for free. Sign up and get $10.*

How Long Will Collections Stay on Your Credit Report?

Like other negative information, a collection account can remain on your credit reports for up to seven years from the date you first miss a payment to the original lender or creditor. Even if you eventually pay what you owe or settle with the company that owns your debt, the collection will typically remain on your credit reports (though it will say “Paid Collection” in the account information).

Recommended: How Long Does It Take to Build Credit?

Medical Debt on Your Credit Report

Medical debt is not included in your credit reports, provided it stays with your health-care provider. If you have a medical bill that is several months overdue, the provider may sell it to a collections agency. But even if that happens, it won’t show up on your credit reports right away.

That’s because the three major credit bureaus (Equifax®, Experian®, and TransUnion®) give consumers a one-year grace period to clear up any medical debt that’s gone to collections before listing the account in your credit reports. This waiting period allows time for bills to make their way through the insurance approval and payment process. It also gives consumers a chance to report any billing errors to their insurance company and/or health care provider, perhaps negotiate a smaller bill amount, or get on a payment plan.

More good news: Medical debts under $500 will not appear on your credit reports. In addition, medical debts in collections that have been paid off are removed from your credit reports — they won’t stick around for seven years.

Managing and Preventing Collections Accounts

One of the best ways to protect your credit reports (and credit scores) is to avoid having a debt ever go to collections. Here are some tips that can help.

• Stay organized: Keep track of payment due dates by setting reminders on your phone or switching to autopay. A budgeting and spending app can help ensure you aren’t short on cash when it comes time to make your payments.

• Communicate with creditors: If you’re having trouble paying some of your bills on time, it’s a good idea to contact your creditors or service providers. They may be to offer a more manageable payment plan or offer temporary relief.

• Monitor your credit report: It’s wise to regularly check your credit reports for any inaccuracies or any accounts labeled “delinquent” (a sign they may be headed to collections).

• Establish an emergency fun: Having savings to cover unexpected expenses, like medical bills, can help prevent debt from going to collections.

If you already have an account in collections, you’ll want to make sure the debt and collection agency are legitimate and, if so, create a plan to resolve the unpaid balance. Generally, it’s a good idea to pay off the debt in collections, either as a lump sum or payment plan, so your debt can be marked “paid” and the collection agency stops contacting you.

How Collections Impact Your Credit Report and Credit Score

Collections fall under payment history, which is the biggest factor in your FICO® Score calculation (representing about 35% of your score). People with collections on their credit reports tend to have lower credit scores than those who have no collections.

How much damage a collection account will do to your credit will depend on the size of the debt, how recent the collection is, and the overall strength of your credit profile. A collection account tells future lenders that you’ve had trouble managing debt in the past, making them less likely to offer favorable loan terms or approve you for new credit.

In general, the more recent a collection, the bigger the impact. However, over time, the damage to your credit score diminishes, especially if you maintain good credit habits, like making on-time payments and keeping credit card balances low. Also keep in mind that paid collection accounts may not affect your credit scores in the same way that unpaid collection accounts can.

How to Find Out if You Have Accounts in Collections

There are a few different ways you may find out that you have an account in collections.

• A debt collector must contact you about your debt before it sends information about the debt to a credit reporting company. If you receive a “validation notice” about a debt from a debt collector, it means they have satisfied their requirement to contact you and can begin to report the debt to credit reporting companies.

• If you aren’t sure about the status of an unpaid bill, you may want to check your credit reports. You’re entitled to a free credit report from each of the three major credit bureaus once a week through AnnualCreditReport.com. On your report, collections accounts will appear as a separate section, listing the original creditor, the collection agency, and the outstanding balance.

• You also can contact the original creditor to learn the status of your account. Just remember that if your debt has been sold, the original creditor is no longer able to collect your debt. You’ll have to deal with the debt buyer.

• Some credit monitoring services will automatically alert you if a new collection account is added to your report, allowing you to address the issue as soon as possible.

How Do You Remove Collections From Your Credit Report?

You generally can’t remove a collection account from your credit report unless the account is listed in error or as a result of fraud.

If you see an error on your credit report, such as an account you don’t recognize or a paid account that shows as unpaid, you can file a dispute using the credit bureau’s online process by phone or by mail. The credit bureau is required to respond within 30 days.

If you think the error is on the part of the debt collector, you can contact the collection agency using the phone number listed on your credit report. They can confirm if the debt belongs to you and provide other relevant information about the account.

If the entry is legitimate, one way you might be able to get it removed from your credit reports is to write a “goodwill letter” to the creditor that explains your situation and why you would like the debt removed. It may not work, but there’s no downside in trying.

When Will Credit Bureaus Remove Medical Collections?

In 2022, the three major credit bureaus agreed to remove medical collections from consumers’ credit reports once they were paid. They also decided to exclude unpaid medical collections under $500, and to extend the time before medical bills in collections can appear on credit reports from 180 days to one year. These changes provide some relief for consumers facing medical debt, giving more time to settle the bills before they affect credit.

Medical collections that meet these criteria should have automatically come off your reports, but if they are still listed on any of your credit reports, you can file a dispute with the credit bureau.

Will Making Payments Change the Timeline?

Making payments on a collection account does not restart the seven-year timeline for when the collection falls off your credit report. The original delinquency date remains the same, even if you make partial payments. However, paying off or settling a collection account can have positive effects. While it won’t immediately remove the collection from your credit report, a paid collection may be viewed more favorably by lenders than an unpaid one. It also stops the collection agency from continuing to pursue you for the debt.

But there is another timeline to keep in mind — the statute of limitations on the debt. The statute limits how long a creditor or debt collector can take legal action against you in pursuit of repayment. The time frame depends on the type of debt and where you live but is typically three to six years. Once the statute of limitations expires, the debt becomes “time-barred,” meaning that debt is no longer legally enforceable.

If you make a payment on a time-barred debt, it can restart the statute of limitations. This means the creditor can take you to court and, potentially, sue you for the full amount owed plus interest and fees.

The Takeaway

Collections can have a significant impact on your credit score, but they don’t last forever. Typically, collections remain on your credit report for seven years from the date of delinquency, but recent changes have provided some relief for medical debt.

The best way to protect your credit is to manage your accounts carefully and be sure to pay all of your bills in full and on time. If you do have accounts in collections, taking steps to resolve them — whether through payment, negotiation, or disputing inaccuracies — can help improve your financial health over time.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

Should I pay off a three-year old collection?

Paying off a three-year-old collection can be beneficial, especially if you’re looking to build your credit or apply for new credit. While paying it off won’t remove it from your credit report, it can stop further damage and prevent additional actions like lawsuits or wage garnishments. Paid collections also tend to be viewed more favorably by lenders than unpaid ones. In fact, some credit scoring models don’t include paid collection accounts when calculating credit scores.

Can you have a 700 credit score with collections?

Yes, but it’s not common. Factors such as the size of the debt in collection, how old it is, and the overall makeup of your credit profile play significant roles in determining your score. If the collection is small, paid off, or several years old, and the rest of your credit history is strong, you may be able to achieve a 700 score. Larger or recent collections, on the other hand, typically have a more negative impact on your credit.

What happens if you never pay collections?

If you never pay collections, the debt will remain on your credit report as an unpaid collection account for up to seven years, significantly harming your credit score. Unpaid collections can also lead to lawsuits, judgments, and wage garnishments. On a positive note, many states have statute of limitations in place to prevent creditors and debt collectors from suing you to collect on an older debt.

Photo Credit: iStock/MixMedia
SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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 .

SORL-Q324-022

Oct

2024

What Is Full Retirement Age for Social Security?

By Samuel Becker | invest, Preparing for Retirement | Comments Off

In the United States, full retirement age actually varies depending on the year you were born. But if you were born in 1960 or later, your full retirement age is 67. Full retirement age (FRA) is the age at which you become eligible to receive your full retirement, or Social Security benefits. FRA is a key milestone in life and a crucial component of the U.S. Social Security system.

It impacts how much you’ll receive monthly, when you can claim Social Security in full, and how much your delayed retirement credits will increase over time. Your Social Security benefits will, likely, also have an effect on the decisions you make around your strategies for saving and investing for retirement, too.

Key Points

• Full retirement age varies depending on birth year. It ranges from 66 for those born from 1943 to 1954 to 67 for those born in 1960 or later.

• You can claim your Social Security benefits before FRA (as early as age 62), but your benefit will be permanently reduced by up to 30%.

• You can delay your retirement to increase your monthly benefit by 8% for each year of delay (up until age 70).

• You can still work after you’ve started collecting Social Security retirement benefits. But if you’re younger than FRA and earn above certain limits, your benefits may be reduced. There’s no earnings limit once you reach FRA.

What is Full Retirement Age?

Full retirement age (FRA) is the age at which you become eligible to receive 100% of your monthly primary insurance amount (PIA), which is the starting point for calculating your Social Security retirement benefit.

The PIA is the base monthly payment you should receive once you retire. It’s based on your past earnings and adjusted for inflation. In general, here’s how it works:

• If you retire once you’ve reached your exact FRA, you’ll receive 100% of your PIA.

• Retiring earlier will reduce your monthly Social Security retirement benefit to a smaller percentage of your PIA (but no less than 70% of it — more on this later).

• Conversely, if you delay retirement beyond your FRA, your Social Security retirement benefit will be a higher percentage of your PIA.

The bottom line is that because your Social Security retirement benefit is permanently set based on when you retire relative to your FRA, knowing your FRA is extremely important. Even if you’ve done some planning and opened an online IRA or other retirement account.

And, as noted, having an idea of what you can or should expect from your Social Security benefits can have a profound impact on your strategies as they relate to investing for retirement. Since many people may hope to supplement their Social Security income with their own savings and investment income, it can change the calculus in terms of when you’re able to retire.

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Determine Your Full Retirement Age

As mentioned, FRA varies depending on your birth year. If you were born in 1960 or later, your FRA is 67. For those born before 1960, FRA decreases by two months for each year earlier, down to 66 for those born between 1943 and 1954.

Here’s a table to clarify the math:

Social Security Retirement Age Chart
Year of Birth	Full Retirement Age	Months between 62 and FRA	Maximum PIA reduction if you retire at 62	Months between 70 and FRA	Maximum PIA increase if you retire at 70
1943 to 1954	66	48	-25%	48	+32%
1955	66 and 2 months	50	-25.83%	46	+30.67%
1956	66 and 4 months	52	-25.67%	44	+29.33%
1957	66 and 6 months	54	-27.5%	42	+28%
1958	66 and 8 months	56	-28.33%	40	+26.67%
1959	66 and 10 months	58	-29.17%	38	+25.33%
1960 and later	67	60	-30%	36	+24%
Source: Social Security Administration

Why Full Retirement Age Matters

FRA is a key factor in deciding when to start collecting Social Security benefits. Claim them too early, and your monthly check will be permanently reduced. Wait too long, and you won’t get any additional benefits. So, if you’re trying to figure out how to retire early, this could become a key piece of information in your calculations.

As mentioned, you’ll receive 100% of your PIA if you retire exactly at your FRA. You can apply for Social Security and start collecting earlier, but no earlier than age 62. And your benefits will be reduced for each month you begin early. How much? Here’s a recap:

• 5/9 of 1% for each month up to 36 months before your FRA

• 5/12 of 1% for each month over 36 months before your FRA

For example, if your FRA is 67, and you retire at 65 (i.e., 24 months earlier), your benefits will be reduced by:

24 months x 5/9 x 1% = 13.33%

That means your monthly benefit will be (100 – 13.33)% = 86.67% of your PIA.

If that sounds too complicated, you can check the retirement age calculator on the Social Security Administration (SSA) website.

But that’s not all. If you retire earlier than 65, the age of eligibility for Medicare, you may need to pay for your own healthcare coverage until you turn 65. If your previous job included medical benefits and you retire before becoming eligible for Medicare, you may have to pay a monthly premium to maintain coverage during this interim period. This could increase your expected expenses in retirement.

Regardless, it may be a good idea to enroll in Medicare when you turn 65 or risk paying a late enrollment penalty when you do sign up. Make sure to factor this into your calculations.

If you retire later instead, delaying your retirement beyond your FRA will earn you more money in the form of delayed retirement credits (DRCs), which increase your monthly benefit. If you were born in 1943 or later, you’ll earn a 2/3 of 1% (roughly 0.67%) increase for each month after FRA, equating to an 8% increase per year. You can keep earning these benefits only up until age 70, so there’s no financial reason to wait beyond this age.

For example, if your FRA is 66 and you wait until 68 to retire, you will earn an increase of:

24 months x 2/3 x 1% = 16%

That means your monthly benefit will be (100 + 16)% = 116% of your PIA.

When to Start Collecting Social Security

Given that the average retirement age in the U.S. is 65 for men and 62 for women, many Americans do choose to retire before reaching full retirement age. But there’s no one-size-fits-all answer for when it’s the right time to choose to retire and start collecting Social Security benefits. It depends on several factors.

First, you should honestly assess your health situation.

• Is your life expectancy short or long?

• Are you in good enough health to keep working and earning?

• Do you have persistent health issues that require the best possible health insurance coverage?

• Do you have the means to pay for private insurance if you retire before you’re eligible for Medicare?

Your answers to these types of questions will steer you in the direction.

Additionally, if you’re the higher-earning spouse, your surviving partner might continue receiving your benefits for many years after your passing. In that case, it could make sense to wait to maximize their future benefits — especially if they’re younger than you.

Other considerations like immediate income needs, if you have money in a Roth IRA, the potential for reduced expenses in retirement, or foreseeable job instability (such as concerns about your employer’s financial health) might mean early retirement is the right call.

Further, it may be worthwhile to investigate how a traditional IRA or other type of retirement plan could affect your plans as well.

Early Versus Late Retirement

Here’s a quick recap of the pros and cons of waiting to claim benefits until after FRA versus before FRA:

Claiming Benefits Before FRA
Pros	Cons
Access to income sooner	Permanently reduced monthly benefits
Better if your life expectancy is shorter or you suffer from health issues	Reduced spousal and survivor benefits
Useful if your job stability is uncertain	Might need to pay for private health insurance until Medicare eligibility at 65
Claiming Benefits After FRA
Pros	Cons
Permanently increased monthly benefits	Access to income is delayed
Higher survivor benefits for your spouse	Risky if you have health issues
Potential for higher lifetime income	Can impact your lifestyle or quality of life

Working After Reaching Full Retirement Age

You can keep working and collecting a paycheck after reaching full retirement age. If you keep working after hitting your FRA, your Social Security benefits won’t take a hit. However, if you claim benefits earlier, the government might temporarily withhold some of the benefits until you reach your FRA.

In particular, you might face one of three scenarios:

1. If you’re under FRA for the entire year, you can earn up to $22,320 (in 2024) without any benefit reduction.

2. If you earn more than $22,320, the SSA will deduct $1 from your benefits for every $2 you earn above this limit.

3. In the year you reach FRA, the earnings limit increases to $59,520 (for 2024). The SSA will deduct $1 from your benefits for every $3 you earn above this limit. Only earnings up to the month before you reach FRA count toward this limit.

This provision is known as the retirement earnings test (RET) and is periodically adjusted to account for inflation.

Once you reach FRA, the SSA will recalculate your benefits to account for the months when benefits were withheld due to excess earnings. So, while you don’t get a lump sum back, you do get higher payments for the rest of your life.

The Takeaway

Choosing the right time to apply for Social Security has a tremendous impact on your retirement strategy. Understanding what your full retirement age is factors heavily into this decision since it essentially defines the timing of your retirement. Whether you claim benefits early, at your FRA, or later will affect the amount of your checks. That will also come into play when seeing how far your savings and investments will take you, when paired with your Social Security benefits.

As you plan for your retirement, consider a savings strategy that can potentially offer you compound growth. SoFi Traditional IRAs or Roth IRAs allow you to invest your way. With investment options like stocks, ETFs, and more, you can invest your way. Save, invest, and watch your money grow as you work toward a secure and comfortable retirement.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

How does age affect my Social Security benefits?

Your Social Security benefits will be reduced by a percentage if you claim them before your full retirement age (FRA) and increased if you delay claiming them. The earlier you claim before FRA, the greater the reduction, the longer you wait, the higher the increase (up until age 70).

Can I choose to receive Social Security benefits earlier than full retirement age?

Yes, you can start receiving benefits as early as age 62, but the earlier you claim them, the more they will be reduced. Note that this reduction is permanent.

What is the significance of the full retirement age increase?

The increase in FRA means you must work longer to claim 100% of your benefits. For example, people born in 1954 could earn full benefits at age 66, while those born in 1960 or later must wait until age 67 for unreduced benefits.

Photo credit: iStock/JLco – Julia Amaral

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q324-049

Oct

2024

ETFs vs Index Funds: What’s the Difference?

By Kim Franke-Folstad | invest, Investing, Terminology | No Comments

The main difference between exchange-traded funds (ETFs) vs. index funds stems from a difference in how each type of fund is structured.

Index funds, like many mutual funds, are open-end funds with a portfolio based on a basket of securities (e.g. stocks and bonds). Fund shares are priced once at the end of the trading day, based on the fund’s net asset value (NAV).

An ETF is a type of investment fund that also includes a basket of securities, but shares of the fund are designed to be traded throughout the day on an exchange, similar to stocks.

Although index funds and most ETFs track a benchmark index and are passively managed, ETFs rely on a special creation and redemption mechanism that help make ETF shares more liquid, and the fund potentially more tax efficient.

In order to understand the differences between ETFs vs. index funds, it helps to know how each type of fund works.

Key Points

• ETFs and index funds both offer investors exposure to a basket of securities, which may provide portfolio diversification.

• ETFs can be traded throughout the day, while index funds are traded at the end of the day.

• ETFs typically disclose their holdings daily, whereas index funds disclose quarterly.

• ETFs tend to have higher expense ratios than index funds, but can offer more trading flexibility.

• ETFs are generally more tax efficient than index funds.

What Are Index Funds?

Index funds are a type of mutual fund. Like other mutual funds, an index fund portfolio is a collection of stocks, bonds, or other securities that are bundled together into a pooled investment fund.

Index Funds Are Passive

Unlike most other types of mutual funds, which are actively managed by a portfolio manager, index funds are designed to mirror the holdings and the performance of an index like the S&P 500 index of U.S. large-cap stocks, or the Russell 2000 index of small-cap stocks.

Because index funds are passively managed, they tend to be lower cost than other types of mutual funds.

Not as Liquid

Investors buy shares of the fund, which gives them exposure to the basket of securities within the fund. As noted above, index mutual fund trades can only be executed once per day, which makes them less liquid than ETFs.

In addition, index funds (and mutual funds in general) have to reveal their holdings every quarter, so they tend to be less transparent than ETFs, which typically reveal their holdings once a day.

There are thousands of indexes to choose from, and it’s possible to create an investing portfolio from index funds alone.

What Are ETFs?

Unlike index funds, ETF shares can be traded on exchanges throughout the day, just like stocks, so ETFs require a different wrapper or structure than traditional mutual funds.

How ETF Shares Are Created and Redeemed

Because an ETF itself can hold hundreds or even thousands of securities, these funds utilize a special creation and redemption mechanism that allows for intraday trading of shares. This helps to reconcile the number of ETF shares that are traded with the price of the underlying securities in the fund, thus keeping share price as close to the value of the underlying securities as possible.

As a result, ETF shares are not only more liquid than index funds from a cash standpoint, they are also more fluid from a trading standpoint. An investor can place a trade while markets are open, and get real-time pricing information with relative ease by checking financial websites or calling a broker. That’s a plus for investors and financial professionals who prefer to make trades based on market conditions.

ETF Costs

When trading ETFs, bear in mind that the average expense ratio of ETFs is 0.15%, according to the Investment Company Institute, which is historically low — but still higher than most index mutual funds, which have an average expense ratio of 0.05%.

Depending on the brokerage involved, investors may also pay commissions and a bid-ask spread, which is the difference between the ask price and the bid price of an ETF share, although this has less of an impact for buy-and-hold investors.

ETFs and Tax Efficiency

Owing to the way ETF shares are created and redeemed, ETFs may be more tax efficient than index funds. When investors sell shares of an index fund, the underlying securities in the fund must be sold, and if there is a capital gain it’s passed onto all the fund shareholders.

When an investor sells shares of an ETF, the fund doesn’t incur capital gains, owing to the mechanism for redeeming shares. But if the investor sees a profit from the sale, this would result in capital gains (which is also true when selling index fund shares), which has specific tax implications.

Of course, investors who hold ETFs or index funds within an IRA or other retirement account would not be subject to capital gains tax events.

When picking ETFs, however, bear in mind that the majority of ETFs are passively managed: i.e. they are index ETFs. Only about 2% of ETFs are actively managed, owing to the complexity of their structure and industry rules about transparency for these funds.

ETFs vs. Index Funds at a Glance

When comparing ETFs vs. index funds, there are a few similarities:

• Both types of funds include a basket of securities that can include stocks, bonds, and other securities.

• ETFs and index funds may provide some portfolio diversification.

• Index funds and most ETFs are considered passive investments because they typically mirror the constituents of a benchmark index. (By comparison, actively managed mutual funds and active ETFs have a live portfolio manager who oversees the fund, and makes trades with the goal of outperformance.)

This chart helps to summarize the similarities and differences between ETFs vs index funds.

ETFs	Index Funds
Similarities:
Portfolio consists of many securities	Portfolio consists of many securities
Provides diversification via exposure to different asset classes	Provides diversification via exposure to different asset classes
ETF expense ratios are generally low	Index fund expense ratios are generally low
Most ETFs are passively managed	Index funds are passively managed
Differences:
A special creation-redemption mechanism enables intraday share trading	Shares bought and sold/redeemed via the fund itself
Shares trade during market hours on an exchange	Trades executed at end of day
Fund holdings disclosed daily	Fund holdings disclosed quarterly
Shares are more liquid	Shares are less liquid
Investors may also pay a commission on trades or other fees	Investors may pay a sales load or other fees
ETFs tend to be more tax efficient	Index funds may be less tax efficient

Recommended: Learn what actively managed ETFs are and how they work.

ETF vs. Index Fund: Which Is Right for You?

There’s no cut-and-dried answer to whether ETFs are better than index funds, but there are a number of pros and cons to consider for each type of fund.

Transparency

By law, mutual funds are required to disclose their holdings every quarter. This is a stark contrast with ETFs, which typically disclose their holdings each day.

Transparency may matter less when it comes to index funds, however, because index funds track an index, so the holdings are not in dispute. That said, many investors prefer the transparency of ETFs, whose holdings can be verified day to day.

Fund Pricing

Because a mutual fund’s net asset value (NAV) isn’t determined until markets close, it can be hard to know exactly how much shares of an index fund cost until the end of the trading day. That’s partly why mutual funds, including index funds, allow straight dollar amounts to be invested. If you buy an index fund at noon, you can buy $100 worth, for example, regardless of the price per share.

ETF shares, which trade throughout the day like stocks, are priced by the share like stocks as well. Knowing stock market basics can help you invest in ETFs, as well. If you have $100 and the ETF is $50 per share when you place the trade, you can buy two shares.

This ETF pricing structure also allows investors to use stop orders or limit orders to set the price at which they’re willing to buy or sell.

These types of orders, which are different than standard market orders, can also be executed through an online investing platform or by calling a broker.

Taxes

ETFs are generally considered more tax efficient than mutual funds, including index funds.

The way mutual funds are structured, there can be more tax implications as investors buy in and out of an index fund, and the cost of taxes is shared among different investors.

ETF shares are redeemed differently, so if there are capital gains, you would only owe them based on your ETF shares.

The Takeaway

Choosing between ETFs vs. index funds typically comes down to cost and flexibility, as well as understanding the tax implications of the two fund types. While both ETFs and index funds are low-cost, passively managed funds — two factors which can provide an upside when it comes to long-term performance — ETFs can have the upper hand when it comes to taxes.

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

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Is it better to choose an ETF or an index fund?

ETFs and index funds each have their pros and cons. ETFs tend to be more tax efficient, and you can trade ETFs like stocks throughout the day. If you’re interested in a buy-and-hold strategy, an index fund may make more sense.

Are ETFs or index funds better for taxes?

In general, ETFs tend to be more tax efficient.

What are the differences between an ETF and an index fund?

While both types of funds can provide some portfolio diversification, ETFs are generally more transparent, and more tax efficient compared with index funds.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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.

SOIN-Q324-040

Oct

2024

10 Small Business Grants for Minorities

By Susan Guillory | SMB | Comments Off

Minority small business grants are designed to provide funds and opportunities to business owners who belong to historically marginalized communities. Unlike loans, these grants offer capital you don’t have to pay back. Plus, many grants also provide free coaching and other forms of support.

Read on for a closer look at how small business grants for minorities work, key places you can find these grants, and how to apply for a small business grant.

Key Points

• Small business grants aim to provide financial assistance to minority-owned businesses to promote diversity, equity, and inclusion in the entrepreneurial space.

• Unlike small business loans, minority business grants do not require repayment.

• Both federal, state, and private organizations offer grants, including programs like the Minority Business Development Agency (MBDA).

• In addition to grants, small businesses who need funding can apply for small business loans, business lines of credit, microloans, and more.

How Small Business Grants for Minorities Work

Minority business grants are for people who identify as Asian, Pacific Islander, Hispanic, Latino, Native American, Black, multiracial, and other non-white races or ethnicities. They are designed to provide financial resources to individuals who may otherwise find it difficult to get ahead in the business world.

Grants do not have to be paid back the way a loan would. Depending on the source, this money can be used for a variety of purposes, including:

• Startup costs

• Equipment

• Marketing

• Payroll

• Office space

• New product line

Applying for small business grants will likely require some legwork. However, those willing to put in the effort could be rewarded with an injection of capital that could help their businesses thrive.

Recommended: Survey of Hispanic-Owned Businesses

Private Small Business Grants for Minorities

There are many grants for minority business owners that you can apply for. Here’s a list of options that can serve as a jumping off point.

1. NAACP Black-Owned Business Grants

The NAACP partners with other companies and organizations to offer several grants. Since the group is continually looking for new partners, small business grants for Black entrepreneurs change from time to time — so keep an eye out for new ones.

A good place to start is the Hello Alice and NAACP partnership site, where you can find a running list of Black minority business grants.

Qualifications vary by grant, though all require that businesses be Black-owned.

2. GrantWatch

GrantWatch provides a database of small business grants that allows you to search by grant topics. When using the group’s search function, you can select “small business” as the recipient and “BIPOC” (which stands for Black, Indigenous, and People of Color) as the category to home in on grants designed specifically for minority business owners.

As GrantWatch rounds up thousands of grants, including those for nonprofits, individuals, and small businesses, there isn’t one standard set of qualifications.

3. Galaxy Grants

Galaxy of Stars is a community of minority and women business owners offering support to entrepreneurs. Additionally, they provide a grant opportunity for minority business owners worth $4,250 to start or grow a company. Unlike many other grant options, you only need to fill out a brief form with the absolute basics to enter. Any and all women small business owners are encouraged to apply.

They offer additional grants or financial awards on occasion, so you may want to bookmark this site and check back from time to time.

Recommended: Small Business Loans for Women

4. First Nations Development Institute

The First Nations Development Institute offers grant opportunities to Native Americans in 45 states, the District of Columbia, and U.S. Territory American Samoa. Their grants change throughout the year, and not all grants are specifically for small business owners, as some can support small business ventures or business-minded students. New grants opportunities are posted periodically on the website.

5. IFundWomen

IFundWomen is a funding marketplace exclusively for women-owned businesses. The platform provides access to small business grants from corporate partners, along with expert business coaching and connections to other women business owners. By filling out the IFundWomen Universal Grant Application, you put your business in the running for all the grant opportunities that come their way. In addition to upcoming grants, you will be the first to hear about new funding opportunities and receive additional resources from the IFundWomen community.

6. Amber Grant

The Amber Grant is a funding initiative designed to support women entrepreneurs, including minority women, in launching and growing their small businesses. Created in honor of Amber Wigdahl, a young woman who passed away before realizing her entrepreneurial dreams, the grant offers $10,000 in monthly awards. Additionally, an annual $25,000 grant is awarded to one of the monthly winners.

7. Comcast RISE

The Comcast RISE grant is a program designed to support minority-owned small businesses with marketing, media, and technology resources. The goal of Comcast RISE (Representation, Investment, Strength, and Empowerment) is to empower minority entrepreneurs by offering critical tools and resources to help them succeed, grow, and thrive in an increasingly competitive marketplace.

8. FedEx Small Business Grant

FedEx offers an annual grant competition that provides funding to minority and other small business owners. Winners can receive up to $50,000, along with valuable business services like FedEx Office® print and business services credits.

9. Fast Break for Small Business (LegalZoom and NBA)

LegalZoom partners with the NBA to provide $10,000 grants and $500 in LegalZoom services to minority-owned small businesses, aiming to assist businesses with legal compliance and growth. The grant can be used to help start, run, and grow businesses — known as the perfect play.

10. Asian Women Giving Circle Grant

The Asian Women Giving Circle Grant supports Asian-American women entrepreneurs focused on arts and social change. It offers funding for projects that raise awareness and bring positive social transformation within the community. Each grant is $8,000, and typically 8-10 grants are awarded annually.

Recommended: 30 Small Business Grants for Women

Federal Grants for Minority Small Business Owners

Many federal government agencies offer grants to businesses, including minority-owned businesses. Here are two resources that can help you find federal grants.

Grants.gov

Grants.gov is a database that helps grant seekers find and apply for federal funding opportunities. It stores information on more than 1,000 grant programs offered by a range of federal grant-making agencies, including the U.S. Department of Commerce and the U.S. Small Business Administration (SBA). To apply, you’ll need to create an account, as well as a unique entity ID, which lets you apply for federal grants and bid on government contracts.

Recommended: Small Business Grants in Arizona

United States Department of Agriculture (USDA) Grants

Though not limited to minority business owners, the USDA provides financial backing and technical assistance for rural businesses to create quality jobs and improve the quality of life in rural areas. USDA Rural Business Development Grants are available to small and large for-profit businesses, as well as nonprofit and tribal entities. The funds can be used for a wide range of projects, from agriculture innovation to housing, water quality, health care, and rural job creation in general.

How Do I Apply for a Small Business Grant?

Small business grant applications vary widely. Some grantors require full grant proposals, while others only ask for a small amount of information. Here are some steps that can help you get started.

1. Check the grant’s requirements. These are often very specific, so be sure you meet the basic program requirements, including location, business size, industry, and any founder requirements. Some may even require that you have a membership to a specific organization before applying.

2. Collect all of your documents. You’ll likely need to supply a business plan that lays out why you’re applying for the grant and how you plan to use the funds. In addition, you may need:

• Employer Identification Number (EIN)

• DUNS number

• Revenue history

• Organizational chart, including the number of employees

• Bank statements

• Tax returns

• List of contracts your business holds

3. Fill out the application. This is typically the most time-consuming part of the process. You may need to answer multiple questions about why you need the funds, your plans for their use, and how your business contributes to the community.

Other Resources for Minority Business Owners

In addition to the above grants for minority business owners, here are some other helpful resources you may want to look into.

National Minority Supplier Development Council

The National Minority Supplier Development Council strives to provide business opportunities for certified minority businesses through training, networking, and funding opportunities. With over 1,500 corporate members, the NMSDC plays a key role in advancing minority-owned businesses and driving economic inclusion.

SBA Microloan Program

The U.S. Small Business Administration’s (SBA’s) microloan program provides up to $50,000 to new and existing startups. It is fully funded by the SBA but administered by an intermediary network of nonprofit community-based lenders, rather than traditional banks.

Unlike many traditional loans, SBA microloans are available to small business owners with no credit history, as well as lower incomes. The program is also geared toward businesses otherwise underserved by traditional banks, including women- and minority-owned businesses and those in low-income communities. Exact eligibility requirements vary by lender.

To apply for a microloan, work with an SBA-approved intermediary in your area.

Operation Hope’s Small Business Development Program

Operation Hope’s Small Business Development Program is an intensive course providing training in business basics like financial counseling, personal development, and access to professional services. It focuses on empowering minority business owners by giving them the tools to succeed in competitive markets.

SBA’s 8(a) Business Development Program

The SBA’s 8(a) Business Development Program aims to help socially and economically disadvantaged people or entities by assisting in applying for federal contracting opportunities. They also offer mentoring and business training.

To qualify, businesses must be minority-owned, meet size standards, and demonstrate the owner’s economic disadvantage and management control over the company.

Alternatives to Small Business Grants

Small Business Loans

If grants aren’t available for your business right now or you need faster funding, you may want to look into different types of small business loans. While banks typically have strict qualification requirements, such as at least two years in business and a minimum amount of revenue per year, online lenders tend to be more flexible, as well as faster to fund (though rates are typically higher).

Business Line of Credit

A business line of credit is a type of small business funding that allows businesses to borrow up to a predetermined limit as needed, rather than receiving a lump sum. Similar to a credit card, funds can be drawn and repaid repeatedly, with interest charged only on the amount borrowed.

Microloans

Microloans are small, short-term loans designed to help small businesses and startups with limited access to traditional financing. Typically ranging from a few hundred to $50,000, microloans are often offered by nonprofit organizations, community lenders, or government programs like the U.S. Small Business Administration (SBA).

Recommended: Microloans for Women-Owned Small Businesses

The Takeaway

There are many grants available to small businesses owned by minorities, meaning you can access cash that you don’t have to repay. While it does take some time researching and applying for grants, it can be a valuable source of funding to get your small business off the ground or help it expand. Since competition can be stiff, you may also want to investigate other sources of capital for your business.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

What is the best source of funding for small businesses?

The best source of funding for small businesses depends on the business’s needs and goals. Common options include small business loans, grants, venture capital, angel investors, and business lines of credit. For flexible, non-repayable funds, grants are ideal, while loans and lines of credit offer structured financing.

Does the government give money to startups?

Yes, there are government programs offering small business loans and grants to startups. Those in specific sectors like technology, research, or those owned by minorities and women may have an easier time finding government assistance, though.

What organization helps small business owners borrow money?

The Small Business Administration (SBA) helps small business owners borrow money by providing access to loan programs, such as 7(a) loans, 504 loans, and microloans. The SBA partners with banks, credit unions, and other lenders, offering guarantees to reduce the risk for lenders and making loans more accessible.

Photo credit: iStock/mapodile

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOSMB-Q324-063

Oct

2024

Foundation vs Charity vs Nonprofit: Key Differences

By Nancy Bilyeau | SMB | Comments Off

Foundations, charities, and nonprofits all operate with a mission-driven focus, aiming to serve public or community interests rather than generating profits. And while they are similar, there are distinct differences between the three as well.

Each structure has distinct legal, operational, and financial characteristics, in addition to important tax differences. Read on to learn what separates foundations, charities, and nonprofits from one another.

Key Points

• Foundations typically fund other organizations or projects through grants, whereas charities focus on directly providing aid and services to those in need. Nonprofits may include both foundations and charities.

• When it comes to funding, foundations rely on endowments or large donations, charities are usually funded by public donations and fundraising, and nonprofits generate revenue through membership fees, services, or grants.

• Nonprofits serve both public and private interests, foundations serve specific causes, and charities are more focused in social, health, or environmental fields.

• All foundations and charities are nonprofits, but not all nonprofits are charities.

Defining Each Entity

A foundation is a type of nonprofit organization that typically provides grants or funding to support specific causes, projects, or other nonprofits. It can be private or public and usually relies on endowments or donations for funding.

A charity is a type of nonprofit organization focused on providing aid, services, or relief to improve public welfare. Charities often address social issues like poverty, education, health, or disaster relief and are primarily funded by donations.

A nonprofit is an organization that operates for a specific mission or cause, rather than for profit. Profits are reinvested into the organization’s goals. Nonprofits can include charities, foundations, trade associations, and advocacy groups.

What Is a Foundation?

Foundations are charitable organizations, but they don’t qualify as public charities. Often funded by a person, married couple, family, or corporation, foundations enjoy tax-exempt status as long as they meet certain state and federal requirements.

Foundations are similar to nonprofits, except money for a foundation usually comes from a family or a corporate entity. In fact, foundations can donate money to nonprofits from their revenues, often in the form of grants or gifts.

How Foundations Work

Foundations make grants to other charities and nonprofit organizations. They can take the money they started out with, invest it, and then distribute it.

There are subsets of private foundations: operating and nonoperating. A private nonoperating foundation grants money to other charitable organizations and is the more common form. Foundations don’t directly perform charitable programs or services, either. A private operating foundation distributes funds to its own programs that exist for charitable purposes.

Recommended: How to Start a NGO

What Is a Charity?

A charity is a type of nonprofit organization dedicated to improving public welfare with a focus on social issues. Their primary goal is to benefit society or specific groups, not to generate profit.

Charities rely heavily on donations, grants, and volunteers to carry out their work. In many countries, charities are eligible for tax-exempt status, meaning they don’t pay taxes on the funds they raise. Charities operate under strict regulations to ensure transparency and that funds are used for their intended purposes.

How Charities Work

Charities aim to make a positive, lasting impact on the communities or causes they serve. They work as nonprofit organizations, meaning any surplus income is reinvested into their programs and services.

Charities rely on volunteers, staff, and partnerships with other organizations to carry out activities such as providing aid, education, healthcare, or advocacy. They are accountable to donors, beneficiaries, and governing bodies, often required to report on how funds are used.

What Is a Nonprofit?

A nonprofit organization is dedicated to furthering a social cause or advocating for a shared point of view. It is a business or corporation that has been given tax-exempt status by the Internal Revenue Service (IRS) because it pursues a religious, scientific, charitable, educational, literary, public safety, or cruelty-prevention mission or area of work.

How Nonprofits Work

Once you’ve registered your nonprofit, you must file IRS Form 1023. PDF File, which is the formal request that the IRS recognize you as a 501(c)(3) organization eligible for tax exemptions under this rule.

Nonprofit organizations receive their funds from governments, various institutions, and individuals. The surplus received is mainly funded in its operations. None of the members or employees are supposed to get the benefit from a surplus.

It’s called a nonprofit for this reason. Employees are not supposed to “profit.” In fact, many of the people who work for a nonprofit are volunteers.

Recommended: Funding Sources for Nonprofits

Pros and Cons of Each

Foundations

Foundations allow you to support an important cause or establish a family legacy. Individuals who already donate large sums to charity may wonder if they could make a bigger impact by starting their own foundation. A foundation allows you to strengthen and focus your philanthropic ideas.

However, setting up a foundation requires a lot of work. You will usually need to hire outside professionals — such as attorneys and accountants — who can provide expert advice on how to form and run your foundation.

Private foundations must pay a 1% to 2% annual excise tax on their net income. The exact percentage depends on a foundation’s annual grantmaking. Your records will need to be meticulous.

While different states may have different annual reporting requirements, the IRS mandates annual reporting by all private foundations. This process typically takes eight hours to complete and often requires an accountant or attorney to finalize and submit the necessary paperwork.

Charities

Pros of charities are that many charities qualify for tax-exempt status, which enables them to direct more resources toward their programs. They also rely on volunteers, which fosters community involvement. This creates a sense of purpose and social responsibility among donors and participants.

However, despite their good intentions, charities can face challenges in efficiency and accountability. Limited funding and reliance on donations can make it difficult to sustain long-term programs or scale operations. Administrative costs can reduce the amount of money directly benefiting the cause, leading to criticism about resource allocation. And finally, regulatory oversight and competition for donor funds can also make it harder for smaller charities to thrive.

Nonprofits

Nonprofits can be highly fulfilling – you are pursuing a mission you believe in. When your organization has nonprofit status, particularly when recognized at the federal level by the IRS, it can take advantage of tax and financial benefits:

• When donations to an organization are tax-deductible, donors have an incentive to contribute.

• Nonprofit organizations may be given favorable terms and discounts by landlords, service providers and retail companies.

• IRS-recognized nonprofit 501(c)(3) public charities do not have to pay corporate income tax.

However, fundraising is difficult and you may find yourself in fierce competition for donations. You will also come under pressure to be very open, even revealing financial statements to the media and general public. This type of accountability can result in unflattering press coverage, particularly if your organization is experiencing some financial or administrative challenges.

Recommended: What Are Nonprofit Business Loans?

Structural and Operational Differences

Structural differences between foundations, charities, and nonprofits include foundations often focusing on grant-making, charities providing direct aid, and nonprofits covering a broader mission range.

Operationally, foundations primarily manage endowments, charities rely on public donations and volunteers for hands-on work, and nonprofits may serve educational, advocacy, or membership-based roles beyond charitable activities.

Tax Implications and Regulations

Foundations, charities, and nonprofits all typically qualify for tax-exempt status under Section 501(c)(3) in the U.S., meaning they are exempt from federal income tax. However, each has different regulations.

Foundations must meet stricter guidelines, including mandatory annual distributions and they may be subject to excise taxes. Charities focus on public benefit and must prove their charitable activities to maintain tax-exempt status. And finally, nonprofits can include a broader range of organizations, and some, like trade associations, may not be fully tax-exempt, depending on their purpose and activities.

In order to be tax-exempt, the organization must exist for one of the following reasons, according to the IRS:

• Religious

• Charitable

• Scientific

• Testing for public safety

• Literary

• Educational purposes

• Foster national or international amateur sports

• Prevention of cruelty for children or animals

Donations to both foundations and charities are typically tax-deductible, as well.

Funding and Donation Processes

Foundations are typically funded through large endowments or donations from wealthy individuals or corporations. They primarily distribute grants to other organizations or projects aligned with their mission.

Charities rely on donations from the public, grants, and fundraising events. Their funding is often more diverse and directly supports their programs, services, or aid initiatives.

Finally, nonprofits may receive funding through membership fees, services, sponsorships, and donations. Not all nonprofits focus on public fundraising; some rely on private funding or grants. Each type of organization allocates funds based on their specific mission.

Recommended: How to Set Up a Fundraising Bank Account

Choosing the Right Structure for Your Organization

Choosing the right structure — foundation, charity, or nonprofit — depends on your organization’s mission and funding approach. If your goal is to provide grants or financial support to other causes, a foundation could be ideal. Charities, on the other hand, are suited for organizations that focus on direct services or aid to the public, relying on donations and public support. And finally, a nonprofit structure is broader and can support a variety of missions, including advocacy, education, or trade associations, with more diverse funding options.

Consider tax implications, regulations, and your long-term goals to determine which structure best aligns with your organization’s purpose and operational needs.

The Takeaway

Foundations, charities, and nonprofits differ in many key ways. How you receive money is not the same – and what you do with the money you receive differs, as well.

Like businesses, nonprofit organizations sometimes need cash to achieve their objectives and to expand. Many nonprofits qualify for grants, which is money you will not need to pay back.

Funding can also come in the form of a loan. Loans are a tool that can help a nonprofit grow and succeed. Nonprofits may qualify for small business loans, which are offered by banks, credit unions, and online lenders.

Get personalized small business financing quotes with SoFi's marketplace.

FAQ

What is the difference between a foundation and a nonprofit organization?

A nonprofit is a charitable organization with a specific social goal that uses its revenues and surplus to fund its operations rather than benefiting the organizations’ members, shareholders, or employees. A foundation refers to a charitable organization that sources funds from its founders, which could be a corporate entity or a family.

Is a foundation a nonprofit?

Yes, a foundation is a nonprofit corporation or a charitable trust that makes grants to organizations, institutions, or individuals for charitable purposes such as education, culture, education, science, and religion.

Can a nonprofit have “Foundation” in its name?

Yes, but it’s not recommended because it could create confusion and deter donors. Foundations usually can’t accept private donations. It’s even more important to never imply that your nonprofit is a government entity. Refrain from using names that include words like “national” and “federal,” as well, as they are used for government purposes.

Are all nonprofits considered charities?

No, not all nonprofits are considered charities. While charities are a type of nonprofit focused on public benefit, other nonprofits, such as trade associations or social clubs, may serve specific member interests rather than charitable causes. Nonprofits vary in purpose, but all reinvest profits into their mission rather than distributing them.

Photo credit: iStock/SDI Productions

SOSMB-Q324-062