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Purchase order financing is a funding solution that helps businesses fulfill large customer orders without upfront capital. This financing option is particularly useful for businesses experiencing rapid growth or dealing with large, one-time orders.

Purchase order financing comes at a relatively high cost, however. Here’s what you need to know about this type of funding, how it works, its pros and cons, plus alternatives you might consider.

Purchase Order Financing Definition

Purchase order financing, also known as PO financing, is essentially a cash advance that a company can use to fulfill its purchase orders. With this type of financing, a lender will pay a third-party supplier up to 100% off the cost involved in producing and delivering goods to your customers.

While you often need strong credit to get a traditional small business loan, that’s not necessarily the case with PO financing. Purchase order financing companies are typically willing to work with small businesses and startups with bad credit. These lenders tend to be more concerned about the creditworthiness of your customers, since they will be repaying much of the loan.

Recommended: Typical Small Business Loan Fees

How Purchase Order Financing Works

To understand how purchase order financing works, here’s an example. Let’s say you receive a large order from a customer but discover that you don’t have enough inventory on hand to fill it. After reaching out to your supplier, you determine that you don’t have enough available cash to purchase the goods needed to fulfill the order, either.

Rather than turn your customer away, you reach out to a PO financing company. As part of your application for funding, you send the lender your purchase order as well as your supplier’s estimate. If the lender approves you for PO financing, they will then pay your supplier all or a large portion of the invoiced amount. If, for example, the lender approves you for just 90% of the supplier’s costs, you would need to cover the remaining 10% on your own.

The supplier then fills the order and sends the product to your customer. Next, you invoice your customer, who sends payment directly to the lender. The lender then deducts their fees and sends you the balance.

Who Uses Purchase Order Financing?

You might consider PO financing if your business needs to purchase goods or supplies from a third party, but you don’t have enough cash reserves to make those purchases.

Types of companies that may use PO financing include:

•  Startups

•  Business owners with low credit scores

•  Wholesalers

•  Distributors

•  Resellers

•  Importers/exporters of finished goods

•  Outsourcers

•  Government contractors who are fulfilling government orders

•  Companies with seasonal sales

Pros and Cons of Purchase Order Financing

There are advantages and disadvantages to small business purchase order financing. Here’s a look at how the pros and cons stack up.

Pros

•  Enables you to take customer orders you otherwise could not fulfill. Purchase order financing allows you to serve customers despite seasonal dips in cash flow and/or take on an unusually large order from a customer.

•  Can be easier to get than other types of business loans. While PO financing companies will look at your business’s financials and credit history, they are typically more interested in the creditworthiness of your customers and the reputation of your supplier. As a result, it can be easier for startups and businesses with less-than-stellar credit to qualify for PO financing compared with other types of business funding.

•  You don’t need to make regular loan payments. Since PO financing is more of a cash advance than a loan, you won’t need to pay the money back in regular installments like you would with a regular term business loan.

Cons

•  Can be costly. PO financing fees may seem relatively low at first glance, often ranging between 1% and 6% of the total supplier’s costs per month. But when that rate is converted into an annual percentage rate (APR), purchase order financing rates are actually fairly high, potentially 20% or significantly more.

•  Cost depends on your customer. Since fees are charged per month, how much you will end up owing the PO financing company will depend on how long it takes your customer to pay their invoice. This can make it difficult to estimate the total cost upfront.

•  You’re cut out of the process. With this type of financing, the lender and supplier often take over most of what you normally do. In many cases, the lender will pay the supplier, the supplier will ship the product to the customer, and the customer will pay the lender. As a result, you won’t have the usual amount of quality control.

Recommended: 5 Crowdfunding Sites to Help Fund Your Business

Applying for Purchase Order Financing

Purchase order financing is primarily offered by online financing companies. Some banks offer PO financing, but typically only to large companies or existing clients.

To qualify for PO financing, you usually need to:

•  Have a purchase order of $50,000 or more

•  Sell finished goods (not parts or raw materials) that you don’t make yourself

•  Sell to business-to-business (B2B) or business-to-government (B2G) customers

•  Have profit margins of at least 20%

•  Have creditworthy customers (some lenders will conduct a detailed credit check on your customers)

•  Have reputable and trustworthy suppliers

If you meet the basic criteria for PO financing and want to apply, you’ll typically need to have the following documents:

•  The customer’s PO

•  Your supplier’s invoice

•  Your invoice to your customer

•  Your purchase order to your supplier

•  Information about your business

•  Financial statements (such as your balance sheet, income statement, and cash flow statement)

•  Tax returns

Recommended: What Is EBITDA?

Alternatives to Purchase Order Financing

If PO financing doesn’t sound like the right financing solution for your business, you’re not necessarily out of luck. There are a number of other small business financing options that can help smooth out dips in cash flow and help you grow your business. Here are some to consider.

Invoice Factoring

Invoice factoring is a type of invoice financing that involves “selling” some or all of your company’s outstanding invoices to a third party, called an invoice factoring company. The factoring company will typically pay you 80% to 90% of the invoice amounts, then collect payment directly from your customers. Once the factoring company gets paid by your customers, the company will pay you the remaining invoice amount — minus any fees.

Small Business Loans

With a traditional term business loan, you receive a lump sum of capital upfront and then pay it back (plus interest) in regular installments over a set term. While banks typically have strict criteria for business loans, online business lenders tend to have more flexible qualification requirements and are faster to fund. A short-term business loan from an online lender can help solve a short-term cash crisis, but rates and terms are generally higher than bank loans.

Merchant Cash Advances

A merchant cash advance (MCA) might be an option if you do business using credit card transactions. With an MCA, you get a cash advance in exchange for a fixed percentage of future credit card receipts. Typically, the MCA provider automatically deducts a daily (or weekly) percentage of your debit and credit card sales until the advance, plus fees, is repaid in full. While an MCA can be a quick source of cash, this is one of the most expensive ways to finance a small business.

Business Lines of Credit

You can also use a business line of credit for short-term financing. Similar to how a credit card works, a line of credit allows you to draw up to a certain limit and only pay interest on the money you borrow. You then repay the funds and can continue to draw on the line. A business line of credit can be used for a variety of immediate needs, such as managing cash flow, buying inventory, or paying employees.

Recommended: Guide to Debt Instruments

The Takeaway

Purchase order financing provides funds to buy needed items to fulfill business needs. If it isn’t right for you, you may want to shop around and compare other small business financing options.

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.

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

FAQ

Is PO financing a loan?

Purchase order financing is not a traditional loan. Since it doesn’t provide you with a lump sum of capital you then pay back in installments, it’s considered a cash advance.

What documents are required for purchase order financing?

To apply for purchase order financing, you’ll need to provide a number of documents, which may include the customer’s purchase order, your supplier’s invoice, information about your business, financial statements (such as your balance sheet, income statement, and cash flow statement), and personal and business tax returns.

Can purchase orders be used as collateral?

Yes, purchase orders can be used as collateral in purchase order financing. Lenders consider the purchase order as a guarantee of future payment from a customer, advancing funds to cover supplier costs. The order itself serves as security, ensuring repayment once the customer fulfills their payment obligations.

What is the difference between purchasing order financing and invoice financing?

Purchase order financing funds suppliers upfront to fulfill customer orders, covering the cost of goods before they’re sold. Invoice financing, on the other hand, provides cash advances based on unpaid customer invoices, helping businesses access cash after a sale is made but before the customer pays the invoice.

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Photo credit: iStock/Kerkez

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

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

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

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If you’re looking to grow your small business, you have two main financing options to choose from: installment loans and revolving credit. Installment loans give you a lump sum of cash up front that you pay back (with interest) in monthly payments. Revolving credit, on the other hand, provides a source of funds you can draw on and repay (with interest) as needed. Each has its own features, pros, and cons to consider as you research your business financing options.

Below, you’ll find the basics about installment loans, revolving credit, and the differences between the two so you can make an informed choice about which financing option makes sense for your business.

Revolving Credit vs Installment Loans

While both types of business loans offer companies access to the funds they need, there are a few key differences to be aware of.

Features	Installment Loan	Revolving Credit
How You Get Your Money	You receive a fixed lump sum when the loan is approved.	You take out what you need up to a fixed maximum.
When Payments Start	Payments (often fixed) include principal and interest and generally begin shortly after you receive the funds.	Payments are charged after you draw money and depend upon how much you’ve withdrawn. You may be able to pay a monthly minimum.
APR	6.13% to 99$; often fixed.	10% to 99%; often variable.
Possible Fees	Origination fee, application fee, administrative fee, prepayment fee, late fee.	Application fee, monthly and/or annual account fee, prepayment fee, late fee, origination fee with draw.

What Is an Installment Loan?

A business installment loan is a type of small business financing that provides a fixed amount of capital you can use to cover business expenses. You then pay back the loan in fixed monthly installments that include both principal and interest for the duration of the loan term. For example, if your company takes out a $20,000 loan with a 7.5% annual percentage rate (APR) and a five-year term, your monthly payment will be $400.76.

Within the category of business installment loans, there are both long-term business loans and short-term business loans. Both are offered by banks, credit unions, and online lenders.

Qualification requirements for installment loans will vary depending on the lender. Bank and Small Business Administration (SBA) loans tend to have higher requirements in terms of time in business and credit scores, while online lenders may rely more on your sales and revenues to determine your eligibility. If you own a startup but have bad credit, there may be loan options for your business as well.

Recommended: Guide to Business Loans for Bad Credit

Features of Installment Loans

Also known as installment debt, installment loans give you access to the working capital you need, whether it’s to expand your business or to get through a slow period. The downside to these loans is that they involve an ongoing commitment to regular payments that you’ll have to make for the duration of your loan term.

Here are some features of installment loans to consider.

You’ll Make Monthly Payments

When you sign your loan agreement, you’re agreeing to make a payment (which includes both principal and interest) each month. If you choose a fixed interest rate, the amount you pay will be the same each month. This can make it easier for you to budget that loan payment among your other monthly business costs. Most installment loans come with fixed rates.

If you opt for a variable interest rate, your interest rate can change depending on market conditions. The small business loan interest rates for variable loans typically start lower than the interest rate on a fixed business loan, but they can go up or down over time. This may make it a little more difficult to budget. However, the loan terms typically limit how much it can fluctuate from one period to the next.

Recommended: Conventional Business Loans vs SBA Loans

You’ll Get a Lump Sum

Many times, you know you need a certain amount of money to cover a business expense, such as renovating a building or purchasing costly equipment. An installment loan, unlike revolving credit, gives you access to the amount you are eligible to borrow in one lump sum. Having that working capital may allow you to take advantage of business opportunities you wouldn’t otherwise have been able to afford.

You May Get a Tax Deduction

If you’re concerned that taking out a loan would mean you have to pay more in taxes, don’t be. The money you receive as a loan doesn’t count as part of your revenue. And a potential plus is that the interest you pay on the loan may be tax deductible.

When to Use an Installment Loan

An installment loan might be good for your business if:

•  You need a lump sum up front.

•  Your small business has a relatively steady income so you can budget for regular payments.

•  Your small business is well-established and/or you have good credit, meaning you may be more likely to get good loan terms.

Recommended: Can a Personal Loan Be Used to Start a Business?

What Is Revolving Credit?

Revolving credit provides working capital or credit to cover small business expenses. It can include business lines of credit, tradelines from vendors, and business credit cards. With each one, you’re approved to use up to a set amount of credit, but you aren’t required to take it all out at once. You only pay interest on the amount you actually borrow. Once you repay the funds, they are available to borrow again.

For example, let’s say you get a line of credit of $20,000 for your small business. In the first month, you take out $10,000 but pay back $5,000 that same month. That means that you’ll make payments (including interest) on the $5,000 you still owe, and you’ll still be able to draw on the remaining $15,000.

Features of Revolving Credit

Like installment loans, revolving credit has both advantages and disadvantages. It’s important to be aware of both when you’re choosing a way to purchase what you need for your business.

You Can Access Funds When and If You Need Them

Sometimes you can’t anticipate how much cash you’ll need to cover business expenses down the road. If that’s the case for your business, it can be helpful to have access to a line of credit instead of receiving a lump sum that you immediately have to start paying back.

Funds Are Always Available (Up to Your Maximum)

With an installment loan, the account is closed once you’ve paid off your balance in full. But with revolving credit, you can take out additional funds once you’ve paid down your balance. There’s no need to reapply for more funds after you’re initially approved.

You May Have an Option to Earn Rewards

Credit cards, which are one type of revolving credit, often offer rewards and perks that may help offset what you pay in interest. If you earn points for your transactions, you may be able to redeem those points for cash back or travel rewards. And while high interest rates are a potential negative for credit cards, if you pay your balance in full each month, you won’t be hit by high interest charges.

When to Use Revolving Credit

Revolving credit might be good for your business if:

•  You want to be prepared for future financial needs but don’t require a lump sum right away.

•  You may need access to relatively small amounts quickly to take advantage of business opportunities or pay for shortfalls.

•  Your business has a need for perks offered by business credit cards. If you have to travel frequently for your company, for instance, a card that offers miles could help defray those costs.

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

Installment Loan and Revolving Credit Options

Once you’ve researched the numbers and determined how much money you want to borrow, either through an installment loan or a revolving credit line, it’s time to start shopping solutions. Here are a few options you may want to consider.

•   Traditional bank loan: This is a small business loan given by a bank or credit union. Qualification requirements are often stricter than with online business loans.

•   SBA loan: Backed by the Small Business Administration, SBA loans typically come with better rates and higher loan amounts than traditional and online business loans.

•   Business line of credit: Similar to a credit card, a business line of credit gives you a maximum amount to draw on. Once you pay it back, you can continue to use the funds up to the maximum credit limit.

•   Equipment loan: An equipment loan is a small business loan used to purchase equipment. The equipment acts as collateral, which can sometimes land you a better interest rate.

•   Merchant cash advance: A merchant cash advance allows you to receive funding in exchange for future credit and debit card sales. Merchant cash advances technically are not loans, and can be one of the most expensive forms of borrowing.

•   Business credit card: Business credit cards may be ideal for those that want to take advantage of credit card perks and rewards. Interest rates are often higher than loans, so if you go this route, you’ll want to make sure you can afford to pay your credit card in full each month.

•   Invoice factoring: Invoice factoring allows you to sell unpaid invoices to a factoring company. You get a percentage upfront, and then once the factoring company collects the payment, you get the remainder minus any fees. With invoice factoring, funding is typically fast but can be expensive.

Each option and lender will have different criteria, so do your due diligence when researching which options you will qualify for at the best rate.

Recommended: 15 Types of Business Loans to Consider

The Takeaway

Installment loans give a lump sum of cash up front that must be paid back (with interest) in monthly payments. Revolving credit, on the other hand, provides a source of funds a business owner can draw on and repay (with interest) as needed. Each has its own pros and cons.

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.

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

FAQ

Is a small business loan an installment loan or revolving credit?

A small business loan is typically an installment loan, where a lump sum is provided upfront and repaid in fixed payments over a set period. However, some small business financing options, like lines of credit, function as revolving credit, allowing flexible borrowing and repayment as needed up to a limit.

What types of loans are revolving?

Business revolving loans include business lines of credit and business credit cards. These loans allow borrowers to access funds repeatedly up to a set limit, repay them, and borrow again as needed. Interest is charged only on the amount used, offering flexible borrowing and repayment terms.

Is an SBA loan considered an installment loan?

Yes, an SBA loan is considered an installment loan. Backed by the Small Business Administration, borrowers receive a lump sum upfront and repay it in fixed monthly installments over a set period. The loan terms, including interest rates and repayment periods, vary based on the specific SBA program.

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Photo credit: iStock/PixelCatchers

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

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

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

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Depreciation and amortization are methods for deducting the cost of business assets over a number of years, as opposed to writing off the entire cost the year you make the purchase. The concept behind both is to match the expense of acquiring an asset with the revenue it generates.

The key difference between depreciation and amortization is the type of asset being expensed: Depreciation is used for tangible (physical) assets, while amortization is used for intangible (non-physical) assets.

Read on to learn exactly how depreciation and amortization work, how these two accounting methods are similar and different, and when to choose one or the other.

Amortization vs Depreciation

Similarities Between Amortization and Depreciation	Differences Between Amortization and Depreciation
Both are used to deduct the cost of a business asset over time	Amortization is for intangible assets; depreciation is for tangible assets
Both are non-cash expenses	Depreciation has salvage value; amortization does not
	Depreciation use straight-line or accelerated method; amortization uses only straight-line method

Similarities

Both depreciation and amortization are accounting methods used to spread the cost of an asset over a specified period of time. With both, you are able to deduct a certain portion of the asset’s cost — and reduce your tax burden — each year for the number of years that asset is of value to your business.

In addition, both depreciation and amortization are non-cash expenses, which means they are reported on the income statement of the company, but no cash is spent.

Differences

The key difference between amortization and depreciation is that amortization is used for intangible property (meaning property you can’t pick up and hold), such as a patent or computer software program.

Depreciation, on the other hand, is used for fixed assets or tangible property (meaning assets that are physical in nature), such as computers, manufacturing equipment, and cars.

Another distinction: With depreciation, you cannot deduct the full cost of the asset. You must account for its resale value at the end of its useful life. For example, if you pay $20,000 for a piece of farming equipment and at the end of its useful life (10 years) you think you’ll be able to sell it for $5,000, then you would only deduct $15,000 over the course of 10 years.

In addition, amortization is almost always implemented using the straight-line method, whereas depreciation can be implemented using either the straight-line or an accelerated method.

Recommended: How to Read Financial Statements

What Is Amortization and How Does It Work?

Amortization is a method of spreading the cost of an intangible asset over a specific period of time, typically the course of its useful life. Intangible assets are non-physical in nature, but are nonetheless considered valuable assets to a business.

Types of intangible assets a business may have include:

•   Patents

•   Trademarks

•   Copyrights

•   Software

•   Franchise agreement

•   Licenses

•   Organizational costs

•   Costs of issuing bonds to raise capital

Amortization is typically expensed on a straight-line basis, which means that you would divide the total cost of the asset by the number of years it will provide use to the business, then deduct that amount each year.

To determine an intangible asset’s useful life, you need to consider the length of time that the asset is expected to produce benefits for the business. An intangible asset’s useful life can also be the length of the contract that allows for the use of the asset.

(Something to note: The term “amortization” is also used in a different way in relation to loans, such as the amortization of a car loan or mortgage. The loan amortization process involves making fixed payments each pay period with varying interest, depending on the balance.)

Amortization Example

How amortization works is relatively simple. Let’s say you purchase a license for $10,000 and the license will expire in 10 years. Since the license is an intangible asset, it would have no salvage value and the full cost would be amortized over that 10-year period.

Using the straight-line method of amortization, your annual amortization expense for the license will be $1,000 ($10,000/10 years), meaning the asset will decline in value by $1,000 every year and you would be able to deduct $1,000 each year on your taxes.

Recommended: Guide to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

What Is Depreciation and How Does It Work?

Depreciation is the process of spreading the cost of a tangible or fixed asset over a specific period of time, typically the asset’s useful life. Tangible business assets (which the IRS refers to as “property”) are high-cost physical items that are owned by a business and are expected to last more than a year. They include:

•   Buildings

•   Equipment

•   Computers

•   Office furniture

•   Vehicles

•   Machinery

Unlike intangible assets, tangible assets typically still have some value even after they are no longer of use to a business. This value is known as resale or “salvage” value. Because the IRS assumes you will sell off the asset at some point, this amount must be accounted for in the beginning.

What is the useful life of a tangible asset? You can refer to IRS Publication 946 PDF File for guidance, which provides useful life by asset type. For office furniture, for example, it’s seven years. For computers, it’s five years.

To calculate depreciation, you need to first subtract the asset’s estimated salvage value from its original cost. Using the straight-line deduction method, you would then take that number and divide it by the number of years the asset will be of use to your business. There are other methods of depreciation that accelerate the process, meaning that a larger portion of the asset’s value is expensed in the early years of the asset’s life.

Recommended: Business Cash Management, Explained

Depreciation Example

Depreciation works in a very similar way to amortization, except that you must account for salvage value. Let’s say you purchase a $3,000 computer for your company. Per the IRS, a computer has a useful life of 60 months (or five years). After five years, you determine you’ll likely be able to sell it for $500. Here are the calculations you would make:

$3,000 – $500 = $2,500

$2,500 / 5 = $500

That means that each year for five years, you would be able to deduct $500 on your taxes.

Keep in mind that after the end of the computer’s designated useful life, you can (but are not obligated to) sell that computer. Either way, you would stop deducting the item’s depreciation as a business expense.

The Takeaway

Depreciation and amortization are both methods of calculating the value of business assets over time. Amortization vs. depreciation just depends on the type of asset you have acquired for your business.

Amortization is used for intangible (non-physical) assets, while depreciation is used for tangible (physical) assets. As a business owner, you will want to calculate these expense amounts in order to use them as a tax deduction and reduce your business’s tax liability.

If you’re in the market to purchase an asset (tangible or intangible) for your company but don’t want to deplete your cash reserves, you may want to explore funding options, such as a small business loan, equipment financing, or inventory financing.

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.

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

FAQ

Do buildings depreciate or amortize

Buildings are fixed assets, so they depreciate. Depreciation is used for physical assets like buildings to account for their wear and tear over time.

Can an asset amortize and depreciate at the same time?

No, an asset cannot amortize and depreciate at the same time. Amortization is used to spread out the cost of an intangible asset over time, while depreciation is used to spread out the cost of a tangible asset over time. An asset is either tangible or intangible — it can’t be both.

Is rent considered amortization?

No, paying rent is an operating expense for your business. If you own a rental property, however, you can use depreciation to spread the cost of buying or improving the property across the useful life of the property.

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Photo credit: iStock/Pinkypills

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.

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Incorporating your business as an LLC is a good idea for a number of reasons, not just obtaining a loan. In addition to helping you qualify for a business loan, an LLC helps protect your personal liabilities, maximize your write-offs, and more.

Keep reading to find out what an LLC is, pros and cons of forming an LLC, what type of LLC small business loans are available, and how to improve your chances of getting approved.

What Is a Limited Liability Company (LLC)?

A limited liability company (or LLC for short) is a popular option when choosing a business structure. Essentially, an LLC is a separate legal entity from you that’s created under state law. It has its own assets, liabilities, bank accounts, and credit profile separate from yours.

An LLC can have one or more owners, and each owner is called a “member.” Even if you’re just a one-person operation, however, you may still wish to opt for this business structure.

Unlike a sole proprietorship (which is owned by one person with no distinction between the business and the owner), the members of an LLC have liability protection from the debts and obligations of the business. That means a business creditor or someone who sues the business can’t come after the personal assets of the owners. Like a sole proprietorship, however, the owner of an LLC pays taxes as an individual (not as a corporation).

To form an LLC, you choose a name and file articles of organization with your state’s corporate filing office, often the Secretary of State. And, if an LLC has more than one member, it must obtain its own IRS Employer Identification Number (EIN).

Recommended: Sole Proprietorship vs LLC: How to Choose

Pros and Cons of Forming an LLC

Here are some of the pluses and minuses of forming an LLC.

Pros of Forming an LLC	Cons of Forming an LLC
Limited liability protection for owners/members	Leadership roles are less clear than in a corporation
Simple and inexpensive formation process in most states	Must renew with state (and pay a fee) each year
Allows you to separate your personal and business finances	Harder to raise funds from investors
Avoids double taxation	Risk of dissolution if one of the partners leaves the company

Forming an LLC provides many advantages to small business owners. One of the biggest is that it can reduce your personal liability to debts incurred by the LLC. This liability protection comes without the work and expense of forming a corporation.

There are also some tax advantages. An LLC has pass-through taxation, meaning it does not pay corporate taxes on profits. Business profits pass through to the members, who pay personal income taxes on salary and other distributions received from the LLC.

On the downside, LLCs do not issue stock, which can be a powerful tool when raising capital. And, LLCs typically face higher annual fees than corporations. Some states also require annual reports in order to keep an LLC in good standing.

Another potential negative is that if a member joins or leaves an existing LLC, that LLC may be obligated to dissolve and reform with new membership.

How the Small Business Loan Process Is Different for LLCs

LLCs follow the same loan application process as other types of businesses. The major difference is who holds liability for the loan funds in case the borrower defaults.

With an LLC, the company owners are not personally responsible for the loan funds unless they sign a personal guarantee . In order to avoid having to sign a personal guarantee, your company typically needs to have an established financial track record or have some type of business assets to use as collateral to secure the loan.

What Is an LLC Loan?

An LLC loan is no different than any other type of small business loan, except it is given to the LLC and not the individual. As stated above, the business owners themselves are not liable for the loan unless they sign a personal guarantee. Instead, it is the business itself that is liable.

How Do LLC Loans Work?

An LLC loan works just like any other small business loan, since essentially that is what it is. The type of loan you choose will determine how the loan works. A business line of credit, for example, works similarly to a credit card. You are given a maximum limit of funds to which you can draw on. You make payments and pay interest only on the amount you spend.

A business term loan, on the other hand, is a lump sum of money given to you. The interest rate is usually fixed, allowing your monthly payments to stay the same until the loan is paid back.

What Expenses Are LLC Loans Used For?

LLC loans can be used for any type of business expense, including paying for working capital, hiring new employees, purchasing inventory, expanding your business, paying marketing expenses, launching a new business, refinancing existing debt, and more. Small business loans are not allowed to be used for personal expenses.

Recommended: Consolidate Business Loans

Types of LLC Business Loans

When exploring business loans for your LLC, here are some lending options you may want to consider.

Bank Loans

Banks will offer some of the most ideal loan amounts, terms, and interest rates. However, getting a business loan for an LLC from a bank generally requires strong financials and a good credit score. You also typically need to submit a fair amount of documentation in order to complete your application. If you’re looking for fast financing, a bank loan may not be the way to go.

Unsecured Loans

If your LLC is short on valuable assets or you would prefer not to put assets down as security on loans, an unsecured business loan may be a good option since they don’t require any collateral to qualify. However, since the risk is higher on the lender’s part, interest rates for unsecured business loans are typically higher than secured loans.

Online Term Loans

Online term loans generally have more flexible requirements than bank loans — meaning new LLCs, and even those with bad credit — may be able to qualify. In addition, the application process is typically quick and funding time can be fast. However, the ease and flexibility come at a cost — online business term loans tend to have higher interest rates and fees than traditional bank loans.

SBA Loans

LLCs are eligible to apply for SBA loans, which are offered by private lenders but backed by the U.S. Small Business Administration. Because this backing reduces risk for the lender, SBA loans offer LLCs some of the best interest rates, loan amounts, and repayment terms out there. However, SBA loans also have tougher qualification criteria when compared with other types of LLC business loans. And, the application and approval process can take months to complete.

Invoice Factoring

If your LLC processes a large amount of client invoices, another option to consider is invoice factoring. With this type of financing, the factoring lender pays you a percentage of your outstanding invoices up front. Once an invoice is paid, you’re given the remaining balance after a fee is subtracted for the lender. This type of financing can offer quick cash. However, fees can be hefty and the factoring company may take over communication with your customers.

Line of Credit

A business line of credit works differently than a traditional term loan. Rather than receiving a lump sum of money, a business line of credit gives you access to a pool of funds that you can draw from when you need funding. You only pay interest on the funds you draw.

Once you’ve repaid what you’ve borrowed, your line of credit will typically reset to the original amount. This can be a good way to iron out seasonal cash flow issues and keep you prepared for unexpected expenses.

Merchant Cash Advance

If you need cash quickly and your LLC processes debit and credit card payments from customers, you might consider a merchant cash advance instead of a loan. With this option, you get a lump sum of money upfront from the lender. The lender then takes a percentage of your business’s future credit and debit card sales until the borrowed amount, plus a fee, is repaid. This type of LLC financing is typically more costly than other options.

Recommended: Large Loans for Business

How to Qualify for an LLC Business Loan

Below are some tips for choosing the best loan while also expediting the application process as much as possible.

Determine What You Need

Before you start applying for an LLC business loan, you’ll want to think about what you will do with the loan and exactly how much you will need to accomplish your goal. You may also want to create a detailed plan for how your company will use the funds and what impact you expect the money to have on your business growth.

Recommended: How Much of a Business Loan Can You Get?

Review Loan Requirements

To review loan requirements for a small business loan, start by checking the lender’s criteria, including credit score, business history, and revenue thresholds. Assess the loan amount, interest rates, repayment terms, and required documentation. Ensure the terms align with your business needs and capacity.

Consider Your Qualifications

Key factors lenders look at to determine your eligibility for a loan include:

•  Revenues: Lenders will want to know if your business has sufficient cash flow to repay the loan or financing.

•  Credit: This shows lenders how your company has managed debt in the past. If your business doesn’t have much credit history, the lender will likely want to check your personal credit.

•  Time in business: Many lenders have a minimum time in business requirement. Some require a minimum of two years in business, while others will provide financing to younger businesses and even startups.

•  Collateral: This is a tangible asset pledged to secure the loan. Not all business loans require collateral.

Recommended: Long-Term Small Business Loans

Compare Lenders

There are a variety of business loans available, and it can be wise to compare multiple options to find one with rates and terms that work best for you.

In addition to looking at the interest rate, you may also want to keep an eye out for any other costs, like origination fees (this is a percentage of the loan funds a lender takes as payment for processing the loan) and prepayment fees (a fee charged for paying off the loan early), which also impact the cost of the loan.

Gather Documentation in Advance

It can take time to collect all of the legal and financial documents you need to apply for an LLC business loan. Since most lenders request most of the same information, you can start pulling those documents as you’re rate shopping.

Once you start to apply for a loan, make sure your business loan application includes everything the lender asked for and in the appropriate format. This can help reduce any unnecessary back and forth, allowing you to get a decision as quickly as possible.

Requirements do vary by lender, but we’ve listed some common ones below.

Financial Documentation

•  Business credit report

•  Income tax return

•  Personal financial statements from all owners with at least 20% interest in the LLC

•  Up to one year of business bank statements

•  Projected cash flow, income statements, and balance sheets

•  Collateral documents that outline the value of any assets you intend to secure the loan with

Online lenders may allow you to digitally connect your banking and accounting software to import some of this information directly.

Business Documents

As an LLC, you’ll need to submit your LLC’s Employer Identification Number (EIN) and possibly also your IRS Form SS-4 notice (this is the notice you receive after filing an SS-4 application for your EIN).

You may also need to submit your articles of organization, which designates your registered agent and management structure, as well as your operating agreement to confirm the ownership structure, revenue sharing percentages, and other details.

In addition, a lender might request a business plan to demonstrate the market, competitive landscape, and growth projections after using the loan funds.

Other Important Documents

A lender may also want to see any relevant legal documents that impact the LLC’s finances. This could include existing loan agreements, leases, and contracts with other businesses.

Offer Collateral

And finally, you may want to consider offering collateral to secure your loan. Examples of collateral include equipment, buildings, invoices, home equity, inventory, real estate, vehicles, and securities, such as corporate bonds or certificates of deposit.

Putting up collateral reduces the risk to the lender, allowing them to possibly offer you a lower interest rate or better terms. Keep in mind, though, that if you default on your loan, the lender is able to seize your collateral.

Recommended: Business Loans for Bad Credit

The Takeaway

Getting a business loan as an LLC can help you reach your financial goals with an extra infusion of working capital. The best loan choice will depend on your LLC’s needs, as well as factors like your credit score, if you have collateral, how long you’ve been in business, and your company’s annual revenue.

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.

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FAQ

Can you get a business loan as an LLC?

Yes. Lenders will review your application just as they would any other type of corporate applicant. You may need to submit documentation like your articles of organization to show the ownership structure. Otherwise, the application process should be similar to any other company’s experience.

Is it hard to get business loans as an LLC?

Each lender has its own criteria for approving business loans, including those for an LLC. Requirements may include a minimum amount of years in business, credit score, and annual revenue.

Can LLCs borrow money from banks?

Banks that offer any type of business loan will allow LLCs to apply. Depending on the loan and your company’s financial history and credit profile, you may be required to provide a personal guarantee. If you do, this eliminates the limited liability protection that typically comes with owning an LLC.

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

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

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

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

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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High-yield savings accounts (HYSAs) typically offer significantly higher returns than traditional savings accounts. As of August 2024, the national average interest rate for savings accounts was 0.46% according to the FDIC¹, while some HYSAs provided annual percentage yields (APYs) of 3.00% or more.

Whether held at a traditional bank, online bank, or credit union, these accounts can keep your money liquid (meaning it’s nice and accessible), plus they don’t expose you to the risk that may accompany investing. However, you may have to meet a high initial deposit requirement or maintain a significant balance to reap that enticingly high interest rate.

What Is a High-Yield Savings Account?

A high-yield savings account is a savings vehicle that functions similarly to a traditional savings account. These accounts, however, typically pay considerably higher interest rates than traditional savings accounts and almost always offer better returns than traditional checking accounts.

You may wonder, is a high-yield savings account worth it? For many people, the answer will be a resounding yes. Even a difference of one or two percent can add up over time, thanks to compounding interest — that’s when the interest you earn also starts earning interest after it’s added to your account. In other words, you make money on both your money and the interest, helping your funds grow.

You may be able to open a high-yield savings account at a variety of financial institutions, but the highest rates are often available from online banks vs. traditional banks or credit unions.

Depending on the financial institution, a high-yield savings account will likely be insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to $250,000 per depositor².

Like other savings accounts, withdrawals from high-yield savings accounts may be limited to six times per month. Exceeding that withdrawal limit may trigger a fee. (Worth noting: While federal regulation had required all savings accounts to limit withdrawals to six per month, that rule was lifted due to the coronavirus pandemic. Institutions can now decide if they want to allow more than six transactions per month. Check with your institution to be sure.)

How Are High-Yield Savings Different Than Regular Savings Accounts?

As briefly mentioned above, the average savings account interest rate is currently 0.46% (that’s right, a mere fraction of a percentage point). What’s more, many of the nation’s biggest banks pay significantly less than that – only around 0.01%. Yes, it’s better than nothing, but not by much!

Here’s how the math works out: If you had $5,000 in a savings account earning 0.01% per year, you would only earn 50 cents for the entire year it sat in your savings account, assuming no compounding occurred.

Disappointing, to say the least! So if you’re looking to make more on your savings, one option to consider is a high-yield savings account (which may also be called a growth savings account).

These savings vehicles can be a good place to put money you’re saving for short-term financial goals, since they can help you get a higher-than-average return on your money but still allow relatively easy access to your cash.

How Do High-Yield Savings Accounts Work?

How a high-yield savings account works is very similar to how other savings accounts operate.

•   You make an initial deposit to open the high-interest account, while also sharing identification and other personal information with the bank or credit union.

•   You can then add to your account as you see fit.

•   You can also take money out of the account (there may be a cap on how many times a month you can do this, however), either withdrawing it or transferring it to another account.

Your account may also have minimum balances and monthly fees. This will vary with the institution. While traditional banks and credit unions may offer these accounts, it is common to find them at online banks, which have a lower overhead and can pass the savings on to you. You may find accounts that have no fees, like a SoFi Savings Account.

In many cases, your funds will be protected by either FDIC or NCUA; check with your financial institution to know the coverage limits in place.

How much interest will I get on $1,000 a year in a savings account?

Your interest will depend on where you stash the $1,000. If you put it in an account that gets only 0.01% APY, your earnings after a year would be 10 cents. In a high-yield savings account that earns 3.75% APY, you’d earn $37.50, without any compounding. Use the APY interest calculator below to see how much interest you could earn using different APY percentages.

Those are the basics on how a high-yield savings account works. There’s one other angle to consider, however. It’s worth noting that the money you keep on deposit at a bank is used by the financial institution for other purposes, such as loans to their customers. That is why they pay you interest: They are compensating you for being able to do so.

Benefits of a High-Yield Savings Account

There are definitely some big pluses to opening a high-yield savings account. Here are some of the main ones:

•   The interest rate, of course! It is typically many times that of a traditional savings account or a CD.

•   It’s a secure place to deposit funds when you are savings towards a relatively short- or medium-term goal (say, building an emergency fund, or saving for a down payment, a wedding, or another purpose)

•   These accounts often come with no fees, zero! Typically, this is the case with online banks rather than bricks-and-mortar ones or credit unions.

Recommended: How Much Money Should You Have Left After Paying Bills?

Disadvantages of a High-Yield Savings Account

You know the saying, “Nobody’s perfect”? It holds true for high-yield savings accounts, too. These accounts may not suit your needs for a couple of key reasons.

•   While the interest is higher than your standard savings account, it may not be able to compete with other financial products (such as stocks) for long-term savings, like retirement. In fact, it may not even keep pace with inflation. So if you are able to take some time and take on a degree of risk, you may be better off with stocks or mutual funds to reach some financial goals.

•   More restrictions and/or requirements may be part of the package. For instance, you may need to deposit or keep a certain amount of money in the account, especially for those high-yield accounts offered by traditional banks. Or might need to set up direct deposit or automate bill payment.

•   Less access may be an issue. It may take more steps and/or more time (perhaps a couple of days) to transfer funds when you have a high-yield savings account.

Practical Uses for a High-Yield Savings Account

A high-yield savings account can be used for a variety of purposes, just as other types of savings accounts can be.

Building an Emergency Fund

It may be a good place to build an emergency fund that is your safety net in case you have an unexpected car or household repair needed. You typically want to have a three to six months’ worth of living expenses available, but you can certainly start one of these accounts with less and add to it.

Saving for a High Value Purchase

Perhaps you are saving for a car, a cruise, or other big-ticket item. Or maybe you are getting close to having enough money for a down payment on a house. A high-yield savings account can be a secure, interest-bearing place to park those funds until you are ready to use them.

Saving Surplus Money

A high-yield account can also be a great place for any extra cash for which you may be figuring out next steps. Perhaps you received a tax refund or a spot bonus, or you are selling your stuff that’s no longer needed on eBay. That extra cash can go into a high-yield savings account rather than sit in your checking account, potentially earning zero interest.

Separating Your Money

Sometimes, setting up an additional savings account (or two) can help you organize your money. Perhaps you want to have multiple savings accounts to help you achieve different goals, such as an account for future educational expenses and one for paying estimated taxes on your side hustle. As you save money towards each of those aims, you might as well accrue some interest. A high-yield savings account will help you do that, and let you check on how your cash is growing towards each goal.

What to Look For in a High-Yield Savings Account

Ready to explore high-yield savings accounts a bit further? Here are a few things to look for (and to look out for) when considering a high-yield account.

Annual Percentage Yield (APY)

One of the most important factors to look for in a savings account, the APY is how much you’ll earn in returns in one year. Some accounts will specify that the currently advertised rate is only available for an initial period of time, so that can be something to keep in mind.

Required Initial Deposit

Many high-yield savings accounts require a minimum opening deposit. If that’s the case, you’ll want to make sure you are comfortable depositing that much at the outset.

Minimum Balance

Some banks require you to maintain a minimum balance to keep your high-yield savings account open. You’ll want to feel comfortable with always meeting the minimum threshold because falling below it can trigger fees or mean you won’t get the interest rate you’re expecting.

Ways to Withdraw or Deposit Funds

Banks all have their own options and rules for withdrawing and transferring funds. Options might include ATM access with an ATM card, online transfers, wire transfers, or mobile check deposits. Withdrawals may be limited to six per month.

Balance Caps

A balance cap puts a limit on the amount of money you can earn interest at the high-yield account rate. So, for example, if an institution offers 3% interest on your savings account, but sets a balance cap at $2,000, you would only grow that interest on the first $2,000 and not on any additional funds you may deposit.

Bank Account Fees

It’s a good idea to understand what, if any, bank fees may be charged — and how you can avoid them, such as by keeping your balance above the minimum threshold or minimizing withdrawals per month.

Links to Other Banks and/or Brokerage Accounts

Make sure you know whether you can link your high-yield savings account and other accounts you may hold. There could be restrictions on connecting your account with other financial institutions or there might be a waiting period.

Withdrawing Your Money

You’ve just read that it may be a bit more complicated or time-consuming to get your funds transferred. You should also check to see how withdrawals can be made. For instance, would it be possible to pull some funds out of your high-yield savings at an ATM? Your financial institution can answer that question.

Compounding Method

It’s up to the bank whether they compound interest daily, monthly, quarterly, or annually — or at some other cadence. Compounding interest more frequently can boost your yield if you look at the APY versus the annual interest rate (the latter takes into account the compounding factor btw).

Recommended: 52 Week Savings Challenge

How to Open a High-Yield Savings Account

Now that you’ve learned about high-yield savings accounts, you may be ready to say, “Sign me up!” If so, a good first step is to take a look at your current bank and see if they have a high-yield savings account available — that could be the quickest, easiest path forward.

If not, look for an account and interest rate that speaks to you, and move ahead. Most high-yield savings accounts can be easily opened online with such basic information on hand, such as your driver’s license, your Social Security number, and other bank account details.

How Do High-Yield Savings Accounts Compare to CDs?

Another option you can use to grow your savings is a certificate of deposit or CD.

A CD is a type of deposit account that can pay a higher interest rate than a standard savings account in exchange for restricting access to your funds during the CD term — often between three months and five years.

Interest rates offered by CDs are typically tied to the length of time you agree to keep your money in the account. Generally, the longer the term, the better interest rate.

When you put your cash in a CD, it isn’t liquid in the way it would be in a savings account. If you want to withdraw money from a CD before it comes due, you will typically have to pay a penalty (ouch). This could mean giving up a portion of the interest you earned, depending on the policy of the bank.

Another key difference between CDs and high-interest savings accounts is that with CDs, the interest rate is guaranteed. With savings accounts, interest rates are not guaranteed and can fluctuate at any point.

A CD can be a good savings option if you’re certain you won’t need to access your cash for several months or years and you can find a CD with a higher rate than what high-yield savings accounts offer.

Make the Most of Your Money With SoFi

If you’re ready to amp up your money, a SoFi Checking and Savings account can help. We make it easy to open an online bank account and — if you sign up for direct deposit — you’ll earn a competitive APY on a qualifying account. Need more incentive? How about this: SoFi has zero account fees and offers Vaults and Roundups to further grow your cash. Plus, you’ll spend and save in one convenient place.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.30% APY on SoFi Checking and Savings.

FAQ

Can you lose money in a high-yield savings account?

In most cases, you likely won’t lose money with a high-yield savings account. If your account is held at a financial institution insured by FDIC or NCUA, you are covered in the rare event of a bank failure for up to $250,000 per account category, per depositor, per insured institution. That said, you might lose money vs. inflation if the rate of inflation exceeds that of the APY on your high-yield savings account.

Is a high-yield savings account a good idea?

A high-yield savings account can be a good idea. It provides significantly higher interest than a standard savings account, but offers the same security and easy access/liquidity.

Can I withdraw all my money from a high-yield savings account?

You can withdraw all your money from a high-yield savings account. One of the benefits of this kind of account is its liquidity. If you are ready to close the account, check with your financial institution about their exact process for doing so.

Are there any downsides to a high-yield savings account?

There are some potential downsides of a high-yield savings account. While these accounts earn more interest than a standard savings account, they may not keep pace with inflation nor how much you might earn from investments. There may be restrictions at some financial institutions, such as a minimum balance requirement and withdrawal limits. While the funds are liquid, access may require some maneuvering. Transfers may take longer, and if you keep your funds at an online bank, you cannot walk into a branch to take out cash.

Article Sources

• 1. FDIC – National Rates and Rate Caps
• 2. FDIC – Deposit Insurance FAQs

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SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.30% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.30% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.30% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/8/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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

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

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