Small Business Archives - Page 10 of 115

Apache is functioning normally

May 24, 2024 by Brett Tams

When looking for funding for your small business, there are plenty of types of loans to consider, including term loans. A term loan provides a borrower with a lump sum of cash that’s repaid on a fixed repayment schedule.

Term loans could be helpful for businesses looking to expand their business, buy more real estate, update equipment, or purchase more inventory in advance.

Read on to learn more on small business term loans, their pros and cons, and the different types of term loans available.

What Is a Term Loan?

With a term loan, a person or business takes out a lump sum of money from a lender and then pays back the loan amount through regular, fixed-interval payments. These are often monthly payments but could be weekly, bi-weekly, or even quarterly.

Part of the payment would go to principal, lowering the remaining loan balance, and part would go to the lender in the form of interest, which can be a fixed or variable rate.

Term loans aren’t just used for small businesses, though. Mortgage loans, auto loans, and student loans are also all types of term loans.

What Can a Term Loan Be Used For?

Common uses of term loans for businesses include:

• Buying real estate or rehabbing property you already own (in that case, the real estate would likely serve as the collateral for the loan)

• Buying new equipment or repairing what you have (the equipment could serve as collateral)

• Restocking inventory, perhaps in anticipation of the holidays or another busy season

• Buying vehicles for work

• Meeting payroll and other expenses

• Covering employee wages

What Are Different Types of Term Loans?

Small business owners may take out a term loan for a variety of purposes, which is one way to consider types of term loans. Another way is through the loan term’s length: short, intermediate, and long.

Payments may be higher with short-term loans compared to when the payback period is longer (depending upon how much the business needs to borrow). When considering what your business can qualify for and pay back with its available cash flow, this needs to be factored in.

Short-Term Loans

Short-term loans typically have a length of less than one year. They may extend to 18 months. Businesses that don’t qualify for a line of credit might find this type of term loan helpful. Though these loans are typically easier to qualify for, they tend to have higher interest rates.

A short-term loan may come with a balloon payment, meaning the last payment is much larger than the rest.

Recommended: Cost of Capital

Intermediate-Term Loans

Intermediate loans typically have terms between one and three years. Because of their slightly longer payoff time, they may be an option if you’re hiring a new salesperson, for instance, and know there might be some lag time before they start bringing in revenue.

Like short-term loans, intermediate business term loans may also come with a balloon repayment structure.

Long-Term Loans

Long-term loans typically have terms of five to 10 years, but they may go up to 25 years. They typically require collateral, such as real estate or equipment, and may come with lower interest rates compared to short- and intermediate-term loans.

Also keep in mind that long-term loans typically tend to be more difficult to qualify for, requiring proof of revenue and a solid credit history.

Recommended: Merchant Cash Advance for Bad Credit

How Do Term Loans Work?

After you’re clear about how much you need to borrow and for what purpose, then you can approach financial institutions to see what programs they offer, their interest rates, and their loan terms.

You’ll also want to find out what documentation you’ll need in order to apply, what collateral might be needed, and whether they can supply the funds on your timeline. Also, check to see what small business loan fees may apply.

Once you’ve evaluated all of the above factors, comparison shop multiple lenders and choose the lender that suits your needs. Applying for the loan is typically done online, but may be able to be done in person if you’re applying with a bank.

Rates and terms offered can vary based on the lender, your personal and business credit history, your time in business, and your financial health and history.

If you’re approved for the loan, you would sign paperwork and then be free to use the funds once disbursed. You’d then make regular payments based on the loan agreement.

Recommended: How to Check Your Credit Score for Free

What Are the Pros and Cons to Term Loans?

Just as with any kind of loan, term loans have advantages and disadvantages.

Pros of Term Loans

Pros of term loans include:

• You may be able to borrow a large amount of money.

• Multiple types of term loan programs may be available when you look at different lenders.

• Interest rates are typically lower than credit cards, payday loans, and other short-term funding options.

• As you pay the term loan back on time, you can boost your business credit score.

Note: Check with your accountant or tax professional to see what tax benefits you may realize. Term loan interest may be tax-deductible.

Recommended: What Are the Tax Benefits of a Limited Liability Company (LLC)?

Cons of Term Loans

As with any financial product, there are downsides to consider, as well. Cons of term loans include:

• You may be entering into a long-term debt.

• The loan application process may take longer than you’d like.

• Some loans come with prepayment penalties, which means that you can’t prepay to reduce the amount of interest paid over the loan’s life.

• If your credit isn’t the best, the interest rates you’re offered may not be, either.

Recommended: Debt to Income Ratio

Applying for a Term Loan

Be sure to assess your business goals and lenders’ eligibility requirements as you choose the best option for your company.

Compare Small Business Term Loans

Comparing the lenders’ terms helps you improve your chances of qualifying for a loan and saves you time by helping you avoid applying for options for which you’re not eligible. On top of that, you want to make sure you’re not overpaying when it comes to rates and fees, or endangering your business cash flow with a repayment schedule that’s too aggressive.

Look at Each Lender’s Eligibility Requirements

It’s helpful to examine these requirements side by side:

• Personal and business credit

• Time in business

• Annual revenue

• Collateral

• Down payment

• Personal guarantee

Scrutinize the Lender’s Fees

Also look at the fees side by side:

• Interest rate and APR

• Origination fees

• Late payment fees

• Early payoff penalty

Be Sure You Understand Repayment Schedule

Questions to ask:

• Are payments made daily, weekly, monthly, or quarterly?

• Are payments automatically deducted from a business bank account?

Many lenders have strict repayment terms, meaning you need to make sure you can meet those standards so you don’t overdraft your accounts, accrue late fees, and damage your credit score.

Recommended: Long-Term Small Business Loans

Documents Needed to Apply for a Term Loan

When applying for a loan, documents often requested by lenders include:

• Bank statements (personal and business)

• Tax returns (personal and business)

• Business legal documents, including licenses and permits

• Personal identification

• Business plan

• Revenue statements

• Accounts receivable reports

• Accounts payable reports

Because exact documentation required varies by lender and loan type (and whether collateral is involved), you’ll need to clarify what the lender you choose will need.

Also, before you go straight to loans, it can be worthwhile to explore business grants since those do not need to be paid back.

Recommended: What Are Small Business Grants?

The Takeaway

When businesses seek funding, term loans are an option to consider. With a business term loan, the company borrows a certain amount of money in a lump sum and then pays it back in regular installments at either a fixed or variable interest rate. Terms can range from short (even under a year) to long (perhaps as long as 25 years), with the funds used for a variety of purposes.

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 does “term loan” mean for a business loan?

A term loan provides borrowers with a certain amount of cash upfront in exchange for specific borrowing terms. Borrowers agree to pay their lenders a fixed amount over a certain repayment schedule. The interest rate can be either fixed or variable.

What is an example of a term loan?

A small business loan of $50,000 from a bank that has to be paid over three years in monthly payments, with fixed interest.

What are the three main types of term loans?

They are short term, intermediate term, and long term.

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.

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 .

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

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Source: sofi.com

Apache is functioning normally

May 23, 2024 by Brett Tams

Accounts receivable factoring, also known as invoice factoring or business receivable factoring, is a method of business financing that companies sometimes use to help manage cash flow and meet expenses. Factoring receivables involves a different process than taking out a bank loan, but the general goal for both is often the same: to provide the business with needed cash.

For clarity, a factoring company or factor is a lender that provides financing through the invoice factoring process. In other words, the lender gives the small business financing in exchange for unpaid invoices.

Learn more on what accounts receivable factoring is, pros and cons of this type of financing, and alternatives you may want to consider.

What Is Accounts Receivable Factoring?

Factoring accounts receivable is a method of financing that B2B companies that invoice their customers and vendors could consider when they’re in need of quick cash. Basically, the business gets a loan from a factoring company using its accounts receivables as security.

Typically, the factoring company will give the business a percentage of its outstanding invoices (the advance percentage, which is typically around 80%). When the invoices are paid by the customers, the factoring company gives the remaining 20% to the business, minus any factoring fees (which can be high).

Recommended: What Are Accounts Payable?

How Does Factoring Accounts Receivable Work?

Here’s a basic illustration to show how accounts receivable factoring works.

Let’s say that your business has issued $20,000 in invoices that haven’t been paid yet. Let’s also say that your business will be $10,000 short in meeting payroll if those payments aren’t made on time.

To address the situation, your business might decide to factor receivables in order to get enough cash in to pay your employees. This would involve selling the unpaid invoices to a third-party factoring company (or “factor”).

At this point, the factor would own the invoices and your business would receive a certain percentage of the dollar amount on them. This is called the “advance rate.” The advance rate that your business would receive would be based on how risky the transaction is for the factoring company.

The difference between the dollar amount on the invoice and the amount your business gets upfront is held in reserve until the invoices are paid. Once your customers have paid, the remainder is forwarded to your business, minus the factoring fee.

Factoring Accounts Receivable Example

To give some numbers to the example, let’s say that your business qualifies for an advance rate of 80%. To meet payroll expenses of $10,000, you decide to factor $15,000 out of your $20,000 in outstanding receivables.

The factoring company would then issue you 80% of the value of the receivables being factored ($15,000 x 80%): $12,000. You could then use $10,000 of the funds to pay your employees and have $2,000 left over for miscellaneous expenses.

The next step is for your customers to pay their invoices in full (that money goes to the factor, not directly to your business). Once paid, the factoring company will release the reserve amount (in our example, 20% of the invoice amount, or $3,000) minus the factoring fee charged by that particular factor.

How Are Factor Fees Calculated?

A factor may consider a number of things to determine what factor fee to charge your business. It might look at the industry your business is in, how many invoices are involved, your customers’ payment histories, and your company’s financials to determine what factor fee to charge you.

That said, typically these fees run from 1% to 3% of your invoices, but may go as high as 5%.

Bear in mind that you might have to pay a flat factor fee for each week that an invoice goes unpaid — 2% the first week, 2% the second week, and so on. But some factors charge a tiered factoring fee, meaning that the amount of your fee can go up if the invoice isn’t paid right away. So while the factor fee might be 2% the first week, it might rise to 3% the next week.

Recommended: Business Cash Management: Tips for Managing Cash

How to Qualify for Accounts Receivable Factoring

Qualifications for accounts receivable financing are much less stringent than for other types of small business financing, such as small business loans or business lines of credit.

With accounts receivable financing, the invoices serve as collateral, making it an attractive form of borrowing for businesses without strong credit histories. To qualify, you simply need to have outstanding invoices from reliable customers. The factoring company will look at the credit history of your customers as opposed to your business.

Recommended: Business Loans Based on Revenue

Pros and Cons of Accounts Receivable Factoring

Even companies that focus on cash management strategies sometimes need an influx of cash — and, for some of them, invoice factoring can be a good solution. Just as with other forms of small business financing, though, there are pros and cons to accounts receivable factoring.

Advantages of Accounts Receivable Factoring

Benefits may include the following:

• No collateral is required, other than the invoices.

• You can typically access the cash quickly.

• Factoring can help your business manage cash flow.

• Lenders typically focus less on the business’s or owner’s credit score and more on the creditworthiness of the customers owing on the invoices.

• Some factors will work with startups.

• Funds provided by a factor can typically be spent in any way the business desires, with no restrictions.

• The factor company takes over collecting on the invoices, freeing up your business to handle other tasks.

Disadvantages of Accounts Receivable Factoring

Cons of accounts receivable factoring can include the following:

• Rates can be relatively high. Plus, there can be a variety of fees, including application, processing, and service fees, which means that factoring can be a more expensive way of getting business funding. This can be especially true if the invoiced customers don’t pay on time.

• The factoring company has control of the invoices after your business sells them. That’s why it’s important to choose a factor that will treat your customers fairly and with respect.

• If customers don’t pay the invoices that were factored, your business may need to pay for those invoices, along with added fees.

• If a business’s customers aren’t creditworthy, then it may be difficult to factor accounts receivable from them.

• What a factor charges will depend on the creditworthiness of the invoiced customers, how old the invoices being factored are, the invoice due dates, and more. Just as with banks that make loans, it’s important to compare what different factoring companies would charge.

Recommended: Types of Small Business Loan Fees

Accounts Receivable Factoring vs Accounts Receivable Financing

Accounts receivable factoring gives the lender full control of the unpaid invoices. Your business no longer owns them; instead, the factoring company does. With accounts receivable financing, on the other hand, your business still owns the unpaid invoices.

To qualify for accounts receivable financing, or invoice financing, your credit score and financial history are taken into consideration. With accounts receivable factoring, it’s the credit history of your customers that’s taken into account.

Recourse Versus Non-Recourse

These are two different factoring models: recourse and non-recourse.

When a factor uses a recourse approach, this means that a company would be responsible for any factored invoices that its customers didn’t pay.

When factors are using a non-recourse approach, the factoring company is responsible for any unpaid invoices. There can be exceptions to this rule if certain conditions are met, though. For example, if an invoiced customer files for bankruptcy within a defined window of time or goes out of business, the business might not be held responsible for its invoices. Non-recourse factoring companies may charge a higher fee because they’re taking on more risk.

Recommended: What Is Traditional Income Statements Explained

Choosing the Right Factoring Company

Just as with any lender, you should check out factoring companies that you might want to work with carefully to make sure they’re trustworthy.

• Is it registered in your state?

• Does it have good reviews online?

• What is its Better Business Bureau ranking?

• Does it specialize in specific industries? (Some factoring companies work with very specific industries, such as medical or freight transport, while others are more general.)

• What are its rates and advance percentages?

• Is there a minimum number of factoring transactions required each month?

• If there are no minimum requirements, will factoring a certain amount of invoices each month provide your company with a discount?

Once you settle on a factoring company, the factor will then conduct due diligence on your business and on the customers whose invoices may be factored.

After that review is satisfactorily completed, the factoring company will offer an agreement that should be carefully reviewed. Check the interest rate and fees, including whether there is a cancellation fee. See if any minimum factoring amounts are listed, whether there’s a contract term that you’re agreeing to, and so forth.

Alternatives to Accounts Receivable Factoring

While accounts receivable factoring is one way to get cash for your business, there are other ways, too.

Free Up Cash Flow: Ways to free up cash flow include cutting expenses, increasing pricing, and turning invoices into cash more quickly, perhaps by offering early pay discounts to customers and/or asking for a deposit when orders are made.

Business Line of Credit: Getting a business line of credit from a bank or online lender gives you access to a certain amount of funding decided upon by the lender that you can draw on at will. Interest is charged only on unpaid balances. Business lines of credit are typically revolving credit that replenish how much you can draw as you pay back whatever you owe.

Online Business Loan: Online lenders frequently provide loan options similar to those of a traditional bank. However, typically online lenders have a faster approval process. What’s more, they may offer more options for business owners with lower credit scores.

The Takeaway

Accounts receivable factoring is a method of small business financing where you sell your invoices to a factoring company. You receive a percentage of the invoices upfront, and the remaining amount (minus any fees) when the invoice is paid in full. However, depending on your situation, accounts receivable factoring may not be the best type of financing for your small business. Other options include traditional small business loans, small business lines of credit, and SBA loans.

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

FAQ

What is accounts receivable factoring?

Accounts receivable factoring is a type of small business financing where you sell your unpaid invoices to a factoring company. You receive a percentage of the invoices immediately, and once the customer pays the invoice, you receive the rest, minus any fees (which can be expensive).

How do you calculate AR factoring?

Accounts receivable factoring is calculated by first determining eligible invoices. Ideal invoices are no more than 90 days late and are owned by creditworthy customers. Then, the factoring company will determine how much of the invoice they’ll give you — typically 80-90% of the invoice total. Once the customer pays the invoice, the factoring company will give you the remaining percentage, minus any fees.

Photo credit: iStock/Thapana Onphalai

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

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

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Source: sofi.com

Apache is functioning normally

May 16, 2024 by Brett Tams

In addition to serving as the unofficial start to summer, Memorial Day weekend is also a major sale holiday. You can typically find Memorial Day sales across just about every category, from mattresses to major appliances to fashion. The holiday isn’t until May 27, but between spring savings events and early Memorial Day offers, there are already some solid early deals available.

Here’s how to make the most of the upcoming Memorial Day sales—plus some early offers you can shop … [+] now.

Illustration: Forbes / Photos: Retailers

Some of the best offers you can shop today include up to 50% off a new DreamCloud mattress, up to 30% off soft linens and loungewear at Cozy Earth and up to 60% off furniture at Burrow. Find additional info on these sales below, plus get answers about what to expect from this year’s Memorial Day sales.

The Best Early Memorial Day Sales At A Glance:

Best Early Memorial Day Sales: Mattresses

Best Early Memorial Day Sales: Home

Burrow: Save up to 60% sitewide at this mod home furnishings retailer right now.
Cozy Earth: Score soft bamboo linens for up to 30% off during its current sale. Psst, Cozy Earth makes our pick for the best bamboo sheets.
Frontagate: Frontgate is counting down to Memorial Day weekend by offering up to 40% off sitewide. That includes tops picks like our favorite bath towels.
CB2: Take up to 30% off chic furniture, rugs and décor and up to 60% off clearance items at CB2.
Our Place: During Our Place’s Spring Sale, you can save up to 40% on cult-favorite kitchenware, like the Always Pan 2.0 and the Wonder Oven.
Pottery Barn: Shop its current sale to save up to 50% on all outdoor and garden gear.
Target: The popular one-stop shop is currently offering up to 50% off kitchen and dining favorites. (Plus, RedCard holders get an additional 5% off.)
Williams-Sonoma: Shop best-selling cookware, bakeware and kitchen appliances for up to 40% off.

Best Early Memorial Day Sales: Appliances

Lowe’s

LG WashTower (4.5 Cubic Feet Washer And 7.4 Cubic Feet Dryer)

Buy From Lowe’s

Lowe’s: Take up to 35% off major appliances for your home this week including our pick for the best stackable washer and dryer.
Samsung: Save up to $1,200 on refrigerators, $1,000 on laundry sets and up to $1,500 on select appliance bundles right now.
The Home Depot: Score up to 40% off select floor care and air quality tools at the home improvement retailer this week.
Best Buy: The popular tech retailer is offering up to 30% off major appliances this week as well as hundreds of deals on small kitchen appliances.
LG: Refresh your major appliances at LG this week. Take up to 30% off best-selling LG laundry sets and dishwashers, and up to 25% off refrigerators.
Amazon: Score deals on thousands of small kitchen appliances (and two-day shipping for Prime members) at the retail giant.
Costco: Costco members qualify for exclusive deals on popular appliances from brands like LG, Samsung and more.

Best Early Memorial Day Sales: Tech

Amazon: Amazon has discounts on thousands of tech favorites like AirPods, laptops, smartwatches and more.
Best Buy: The beloved tech retailer is a sure bet for discounts on the latest tech, often rivaling Amazon. Right now, save on Beats headphones, smart TVs and more.
Dell: Shop its deals section to save up to $750 on laptops and other peripherals.
Lenovo: During Small Business Month, Lenovo is offering up to 69% off laptops, including our pick for the best business laptop overall.
Walmart: Walmart is another great place to search for discounts on popular electronics from brands like Apple, LG, HP and more.
Woot: This Amazon subsidiary has hundreds of deals on products like TVs and smartphones (like this unlocked Google Pixel 7 Pro). You can also still qualify for Prime shipping.
Newegg: Newegg drops a slew of fresh deals every week, including items like laptops and SSDs. You can also often find discounts on gift cards from Nintendo and Xbox.
OnePlus: You can save even more on our top pick for the best budget noise-cancelling earbuds right now.

Best Early Memorial Day Sales: Fashion

Net-A-Porter

Net-A-Porter: Score discounts of up to 60% on curated pieces from brands like Good American, Nike, Balenciaga and more.
J.Crew: Save up to 50% on warm weather pieces like dresses, tops and bathing suits for women, men and kids.
Shopbop: Peruse its sale section to save up to 60% on brands like Theory, Reformation and Free People.
Rue La La: Save on designer favorites, like up to 70% off Burberry for men, women and kids and up to 30% off Gucci bags.
Athleta: Athleta’s sale section was just refreshed. Save up to 60% on athleisure wear favorites, like the Run With It High Rise Skort.
Backcountry: Sign into your free account to take 20% off one full-priced item during this outdoor retailer’s member sale.

Best Early Memorial Day Sales: Beauty

Amazon: Now through May 19, you can save on summer skincare and beauty essentials—plus get a $10 credit on orders of $50 or more with code BEAUTYHAUL.
Paula’s Choice: You can take 20% off Niacinamide skincare products right now, including this best-selling Niacinamide + BHA Duo.
Solawave: Save 25% on these best-selling light therapy wands and skincare serums.
Revolve: Check out its sale section to find deals on products from brands like Indie Lee, T3 and Korres.
Origins: Take 25% off sitewide from this classic skincare brands. You’ll also get a free eight-piece gift with orders over $100.
SK-II: You can save 15% on all of its skincare right now, including bestsellers like the Petera Facial Treatment Essence.

When Is Memorial Day 2024?

Memorial Day is always the last Monday in May. This year, it falls on May 27.

When Do Memorial Day Sales Start?

We expect many of this year’s Memorial Day sales to kick off on Friday, May 24. Some sales will start even earlier in May, but retailers typically save their best offers for the official holiday weekend.

What Are The Best Things To Buy On Memorial Day?

Memorial Day is typically a great time to save on big-ticket items like mattresses, patio furniture, major appliances and TVs. In recent years we’ve also seen more and more sales cropping up from fashion and beauty brands. Think of the holiday weekend as sort of a mini Black Friday where you can find deals across nearly all product categories.

Do Appliances Go On Sale During Memorial Day?

Yes, Memorial Day is a great time to find discounts on appliances of all sizes. Retailers like Samsung, Lowe’s and The Home Depot typically host appliance sales over the long weekend. But if the appliance you’ve been eyeing isn’t discounted, don’t get discouraged; you’ll likely get an opportunity to save over July 4 or Labor Day.

Do Clothes Go On Sale During Memorial Day?

Memorial Day clothing sales are fairly common. In the past we’ve seen discounts from retailers like Madewell, Rent The Runway, J.Crew and Abercrombie & Fitch.

Source: forbes.com

Apache is functioning normally

May 15, 2024 by Brett Tams

The average homeowner with a mortgage ended 2023 with $299,000 in home equity, according to ICE Mortgage Monitor, which also estimates that the average funds homeowners could tap by borrowing against their home equity is $193,000.

Obviously, that number varies for each individual and depends on factors such as the original down payment, local property values, and the amount of time in the home. But if you have more than 20% equity in your home, using a home equity line of credit (HELOC) to build wealth is a strategy to consider.

Ways to Build Wealth With a HELOC

A home equity line of credit lets you borrow funds as needed (up to a prearranged limit) through a credit draw. This is different from a home equity loan, in which you would borrow a one-time sum of cash. Drawing on your home equity for certain expenses could help grow your wealth over time, if it financially makes sense. Here are some options to consider.

1. Home Improvements

A HELOC works well for larger home improvement projects and renovations because you can draw funds to pay for materials and contractors as needed. You accrue interest only on the outstanding balance, so it could be cheaper to opt for a HELOC vs. a home equity loan. And if you itemize your taxes, you could deduct HELOC interest payments when the money is used to improve the home.

Plus, a renovation project could build wealth by increasing the value of your home. Home improvement experts estimate that a kitchen refresh could deliver a 377% return on investment and refinishing hardwood floors could have a 348% ROI.

2. Debt Consolidation

You can’t deduct HELOC interest when you use the funds to consolidate debt, but you could still build your wealth. Paying off debt with a lower interest rate could save you a lot of money over the long run. Let’s look at an example.

Say you qualify for a HELOC with an 8% APR but you have a $10,000 credit card balance with a 22% APR. In order to pay off that card in five years, you’d pay $276.19 per month and pay $6,571.35 in interest.

With the HELOC, on the other hand, let’s say you made interest-only payments for one year, then spread out the principal and remaining interest over four years, for a total of five years. During the interest-only period, your payment would be $66.67, followed by $244.13 for the remaining four years. On top of that, you’d only pay a total of $2,518.19 in interest for the entire five years. That’s a potential savings of $4,053.16 in interest payments by consolidating to a lower rate!

3. Real Estate Investments

Using a HELOC to finance an investment property can help you start climbing the real estate ladder. Homeowners could use the funds to make a down payment, cover closing costs, and/or make some upgrades before renting out the property.

You’ll still need to qualify for the new property’s monthly mortgage loan payments, particularly if there isn’t a current rental income history for the lender to review. Assuming you’re eligible for the loan, the goal is to use the rental income to pay off the HELOC and make a profit. On top of that, the property itself could increase in value over time, building your overall wealth.

4. Education and Skills Development

Investing your home equity in your education or skills development could increase your earning power and, consequently, your wealth. Research shows that people with advanced degrees tend to earn more than those without them.

For instance, a study published in Demography revealed that women with bachelor’s degrees earn $630,000 more in a lifetime than those with a high school degree. For men, the increase in lifetime earnings is $900,000. The numbers are even more dramatic with graduate degrees. Women’s lifetime earnings are $1.1 million higher than their high school graduate counterparts, whereas men earn $1.5 million more. Clearly, investing in your professional skills can translate into greater wealth.

5. Start or Expand a Business

The majority of small business owners invest their personal funds in the growth of their companies. Research also shows that upfront funding correlates with greater revenue. So while there’s no way to know that home equity financing you use for your business will guarantee success, it could improve your odds to scale more quickly.

6. Investment Portfolio Growth

Growing a diversified investment portfolio is another option for using a HELOC to build wealth. Obviously, there is risk involved when funding investments. Focusing on long-term investments could help reduce the risk of short-term market volatility. Remember, though, that for investments made with money from a HELOC to truly pay off, you would have to earn more on the investment than you pay in interest for the HELOC.

7. Emergency Fund or Cash Reserve

Most financial experts recommend having three to six month’s worth of savings on hand in cash in case you lose a job or the ability to earn an income. However, the economic volatility that came during the pandemic has people rethinking that number and even recommending up to a year of expenses in savings. Using a type of home equity loan like a HELOC could give you the peace of mind of having a financial cushion to fall back on, while allowing you to carefully invest that six months of savings instead of keeping it in cash.

Turn your home equity into cash with a HELOC brokered by SoFi.

Access up to 95% or $500k of your home’s equity to finance almost anything.

What to Consider Before Getting a HELOC

There are several factors to consider before you decide on a HELOC instead of some other type of financing, such as a cash-out refinance or unsecured personal line of credit.

• Your home is used as collateral: In other words, if you default on your HELOC payments, you could lose your house.

• You must maintain 10% to 20% equity in your home: You can’t tap into your entire equity amount; lenders require you to keep some, which means you may not be able to borrow as much as you originally thought.

• Rates are usually variable: Your interest won’t stay the same and could increase if rates rise. That could mean a bigger balance and bigger payments down the road.

• HELOCs have two stages: The first is the draw period, in which you only have to make interest payments. After the draw period, you’ll make payments on both principal and interest.

Pros and Cons of Taking Equity Out of Your Home

It’s certainly possible to build wealth using a HELOC, but there are advantages and disadvantages to think about.

Pros:

• Low interest rate compared to other financing

• Interest accrues only on the balance, not available credit

• Borrow again when you replenish the credit line

• No restrictions on how you use the money you borrow

Cons:

• Home is used as collateral, putting it at risk

• Payment amount increases after draw period is over

• May come with closing costs and maintenance fees

The Takeaway

Tapping into your home equity using a HELOC is one way to potentially build wealth, especially because rates tend to be low when compared to other forms of borrowing. It’s always worth weighing the pros and cons, since defaulting on payments could result in losing your house. But if you have the financial confidence to move forward, there are several ways that your home equity could help you build wealth.

SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 95% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit brokered by SoFi.

FAQ

Is it smart to use a HELOC for investment property?

Using a HELOC for an investment property could help you fund the transaction sooner than if you used other types of financing. You may be able to make a bigger down payment or even make an all-cash offer. Just be sure that you feel confident in your real estate market research and your ability to make payments even if a worst-case scenario occurs.

What should you not use a HELOC for?

A HELOC should not be used for depreciating assets, especially when your goal is to build wealth. Things like vacations and car purchases aren’t usually recommended since they don’t hold their financial value.

What are the pitfalls of a HELOC?

The biggest pitfall is that your home is used as collateral to secure a HELOC and can go into foreclosure if you miss payments. On top of that, variable interest rates result in the potential for larger-than-expected payments if rates increase over time.

Photo credit: iStock/nortonrsx

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

^²

To obtain a home equity loan, SoFi Bank (NMLS #696891) may assist you obtaining a loan from Spring EQ (NMLS #1464945).

All loan terms, fees, and rates may vary based upon individual financial and personal circumstances and state.

You may discuss with your loan officer whether a SoFi Mortgage or a home equity loan from Spring EQ is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit brokered through SoFi. Terms and conditions will apply. Before you apply for a SoFi Mortgage, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and loan amount. Minimum loan amount is $75,000. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria.

SoFi Mortgages originated through SoFi Bank, N.A., NMLS #696891 (Member FDIC), (www.nmlsconsumeraccess.org). Equal Housing Lender. SoFi Bank, N.A. is currently NOT able to accept applications for refinance loans in NY.

In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

SOHL-Q224-1861911-V1

Source: sofi.com

Apache is functioning normally

May 12, 2024 by Brett Tams

Expedition Subsahara is a Black woman-owned small business making colorful woven home goods that’ll add a pop of color to any interior. Founded by Senegal native Sofi Seck, every product is made by African artisans. Twenty percent of all sales go towards a school in Senegal for young girls that focuses on STEAM (science, technology, engineering, art, and math).

Promising review: “I am thrilled with my one-of-a-kind basket handwoven by amazing women in Senegal. I am so excited to have this in my apartment to store towels, sheets, blankets, pillows, etc. Highly recommend!” —Jennifer Boyer

Get it from Expedition Subsahara for $135+ (available in three sizes)

Source: buzzfeed.com

Apache is functioning normally

May 10, 2024 by Brett Tams

Government home loans are mortgages that are guaranteed or issued by a federal agency to help first-timers, rural residents, veterans and others buy, refinance or improve a home.

The three biggest loan programs are backed by the Federal Housing Administration, U.S. Department of Veterans Affairs and U.S. Department of Agriculture. With low or no down-payment requirements, these loans are often good options for first-time buyers, although they’re open to repeat buyers, too.

Explore mortgages today and get started on your homeownership goals

Get personalized rates. Your lender matches are just a few questions away.

Won’t affect your credit score

Government home loans for buying

FHA home loans

FHA loans are backed by the Federal Housing Administration and issued by FHA-approved private lenders. The down payment requirement is as low as 3.5% with a minimum credit score of 580 and 10% with a minimum credit score of 500.

Borrowers must pay for mortgage insurance, including an upfront premium of 1.75% of the loan amount and an annual premium ranging from 0.15% to 0.75% of the average outstanding loan balance. The annual cost, which is divided into monthly installments, depends on the down payment, loan amount and term. Mortgage insurance can be canceled after 11 years with a down payment of 10% or more.

Properties must meet FHA minimum requirements and be within FHA loan limits, which generally are up to $498,257 for single-family homes in low-cost areas and up to $1,149,825 in high-cost areas.

USDA home loans

USDA mortgages are no-down-payment loans for moderate- and low-income buyers in federally designated rural areas.

Most USDA loans are guaranteed by the U.S. Department of Agriculture and issued by approved lenders. Your household income must be under 115% of the median household income in your county. Loan limits also apply. You can learn more about those limits in your area on the USDA website.

Unlike FHA loans, USDA guaranteed loans don’t require mortgage insurance. Instead, borrowers pay an upfront fee of 1% of the loan amount and an annual fee of 0.35% of that year’s average outstanding loan balance. The annual fee is divided into monthly installments and included in mortgage payments.

The USDA also issues home loans directly to low-income buyers who are without safe housing and can’t otherwise get a home loan.

VA home loans

VA loans are no-down-payment mortgages for active-duty and veteran military members and some surviving spouses. The loans are guaranteed by the U.S. Department of Veterans Affairs and issued by approved lenders.

VA loans don’t require mortgage insurance, but most borrowers will pay an upfront funding fee, which ranges from 1.25% to 3.3% of the loan. The amount depends on your down payment and whether this is your first VA loan.

Homes must meet the VA’s minimum property requirements.

Government mortgage programs for refinancing

FHA rate and term refinance

A rate and term refinance loan lets you refinance an FHA or other mortgage to get a lower interest rate or different term, such as a 30-year loan instead of a 15-year mortgage.

FHA streamline refinance

An FHA streamline refinance makes refinancing easier because it doesn’t require a home appraisal. To qualify, you must have an FHA loan and a history of making mortgage payments on time. With a non-credit-qualifying streamline refinance, the lender isn’t required to check your credit.

FHA cash-out refinance

An FHA cash-out refinance replaces your mortgage with an FHA loan and lets you convert some of your home equity into cash.

USDA streamlined assist refinance

A streamlined assist lets you refinance a USDA guaranteed or direct loan to lower your payments. No appraisal or credit check is required in many cases.

VA Interest Rate Reduction Refinance Loan

VA cash-out refinance

With this loan, you can refinance a VA or other type of mortgage and convert some of your home equity into cash.

Explore mortgages today and get started on your homeownership goals

Get personalized rates. Your lender matches are just a few questions away.

Won’t affect your credit score

Government-backed mortgages for home improvements

FHA home improvement loans

The FHA 203(k) mortgage allows you to buy or refinance a home and include the cost of improvements in the same loan.

VA supplemental loans

You must have a VA mortgage to qualify for a VA supplemental loan to finance projects that improve the safety and livability of the home. The loan cannot be used for luxuries, such as swimming pools or barbecue pits.

FHA and VA energy-efficient loans

The FHA and VA back energy-efficient mortgages, which allow you to upgrade your home with money-saving modifications that use less energy.

Rural housing repair loans and grants

Another option for rural residents is the USDA Section 504 Home Repair program. If you can’t get a loan anywhere else and are on a tight budget, this loan can help with improvements and emergency repairs. Grants are available to those 62 and older.

Other government home loan programs

Home loans for Native American veterans

Native American veterans, or veterans whose spouse is Native American, can use the VA’s Native American Direct Loan program to buy, build or improve their home or refinance a mortgage. The residence must be on Native American trust land.

Section 184 Indian home loan

This loan for Native Americans, Alaska Natives and members of other designated entities or tribes allows low down payments and relaxed credit standards. The mortgage can be used to build a house, buy an existing home, pay for improvements or refinance a mortgage.

The Department of Housing and Urban Development’s Section 184A program offers the same benefits to Native Hawaiians. Find complete details and participating lenders at the HUD Section 184 page.

Home and property disaster loans

In a county declared as a disaster area, homeowners may qualify for low-interest loans to repair or replace their primary residence and personal property. The program is implemented by the U.S. Small Business Administration.

FHA loans for disaster victims

A Section 203(h) loan, insured by the FHA, offers mortgages to homeowners to rebuild or replace their homes after a presidentially declared disaster. See an FHA lender for details.

Source: nerdwallet.com

Apache is functioning normally

May 5, 2024 by Brett Tams

The National Association for the Self-Employed’s membership has grown dramatically over the last few years, says Keith Hall, the group’s president and CEO. And while that growth has slowed since its COVID-era peak in 2022, he thinks flexible work is here to stay.

The boom in self-employment started when “a lot of people had to do it because of COVID. They didn’t choose to do it; they had to do it,” Hall says. “Many others saw and learned and read that you can do this. You don’t need to be tied to the desk in corporate America.”

Below is NerdWallet’s 2024 list of the 10 best U.S. metro areas for freelancers and the self-employed. Our analysis used recent metro-area data from the U.S. Census Bureau and state-level data from the Tax Foundation. The top metro areas are those where a significant percentage of the workforce is self-employed already, rent is relatively affordable, unemployment is low, worker mobility is high and state income taxes are relatively low.

Smart money moves for your business

Grow your small business with tailored insights, recommendations, and expert content.

Top 10 metro areas for freelancers and the self-employed

Nashville-Davidson-Murfreesboro-Franklin, Tennessee.
North Port-Bradenton-Sarasota, Florida.
Chattanooga, Tennessee.
Knoxville, Tennessee.
Austin-Round Rock-San Marcos, Texas.
Lancaster, Pennsylvania.
Boise City, Idaho.
Columbus, Ohio
Bridgeport-Stamford-Danbury, Connecticut.
Portland-South Portland, Maine

How much do you need?

We’ll start with a brief questionnaire to better understand the unique needs of your business.

Once we uncover your personalized matches, our team will consult you on the process moving forward.

Key findings

Of our top 10 cities, Bridgeport-Stamford-Danbury, Connecticut, and North Port-Bradenton-Sarasota, Florida, have the largest percentages of the workforce that are already self-employed (8.5% and 8.2%, respectively). The median of all metro areas in our dataset is 5.3%.
Housing affordability continues to benefit communities like Chattanooga and Knoxville, Tennessee; Lancaster, Pennsylvania; and Portland, Maine — all places in which more than half of renters spend less than 30% of their income on rent.
Tennessee, Florida and Texas all have no state income tax, which can keep a portion of income in self-employed workers’ pockets. That said, “It’s rare when I personally hear an individual relocating states just because of the tax code,” Hall says.
Columbus, Ohio, was boosted by a significant increase in the number of people moving to the city for work between the end of 2022 and the beginning of 2023. While those people weren’t necessarily freelancers, we use this data point to better understand economic vibrancy.

Identify your self-employment goals when considering a move

What might self-employment look like for you? That depends on what you hope to get out of it.

1. Desired industry

Though some industries have shifted broadly toward remote work, others still benefit from proximity.

Brian Rood, a certified financial planner and owner of Artisan Financial Planning, knows that firsthand: He spent 27 years playing trumpet in the Kansas City Symphony before shifting to financial planning and now works primarily with artists.

In highly specialized fields like the performing arts, “you really do go where the work is,” Rood says. That might mean an industry-specific location, like New York or Los Angeles, or a small city where you landed an orchestra job and then built a network of students and professional contacts.

Seth Hodes, co-founder and managing partner at Able Wealth Management, also works primarily with artists and creatives. He says his clients often move from creative agencies to tech companies to freelance portfolios and then back again based on what opportunities arise. Living in regions that have active job markets and lots of opportunities in their industries helps facilitate such mobility.

“The artist freelancer has always been adaptable,” Hodes says. “It’s a grind out there — you’re going to have to survive and work up a certain kind of cultural capital.”

2. Financial goals

Self-employed workers typically need to set aside 25% to 30% of their income for tax payments.

Next, Rood adapts the 50/30/20 budget to each client; the budget is a framework that recommends spending 50% of your income on expenses, 30% on “wants” and 20% on savings. “It’s a little high on the first parts and a little low on the savings,” he says, but it’s a useful jumping-off point.

Rood encourages self-employed clients to have a larger-than-average emergency fund. For some performing artists, he recommends six to 12 months of living expenses.

That math can get difficult when the cost of living is high, and it can tempt people to move, especially if they can take work with them or are scaling back on hours.

When his clients leave a high-cost-of-living city, Rood says, “it’s because they either are going to retire, and so they want to go somewhere cheaper and they don’t need the work, or the rat race is too much and they want to do something else.”

Hall says he’s seen lots of older Americans strike out on their own, too. If your freelance work is a transition step out of full-time work, you may lean toward the place where you want to spend your retirement.

3. Identity, safety and values

Self-employment can afford you the freedom to live in a place for personal reasons, not just professional or financial ones.

For some, self-employment may support a move that lets them live more safely. According to a 2022 survey from the National Center for Transgender Equality, 5% of trans people had moved out of state due to laws targeting their community and 47% of respondents had thought about it.

And Hall says family ties and hometown memories are common reasons for relocation.

“We do hear a lot from NASE members and from small-business owners moving to a different community,” Hall says. “Maybe they grew up in a small city when they were younger and they had the need to go to the big city, because that’s where the jobs were. Now they’re going back home.”

Hodes says he works with his clients to find harmony between their financial goals and how they want to live their lives more broadly.

“You have to plan for the future, but it has to be a balance,” Hodes says. “Don’t sacrifice too much in the present.”

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Methodology

To create the Best Cities for Freelancers and Self-Employed Workers 2024 list, NerdWallet pulled data for major U.S. metropolitan areas from the U.S. Census Bureau. We also pulled state tax rates from the Tax Foundation and calculated the tax rate for a household earning the median U.S. household income. We weighted the impact of each factor depending on how important we felt that factor would be in the potential financial success of a freelancer. We excluded metro areas for which there was negative or no Job-to-Job Flows Census data.

NerdWallet’s analysis includes data from the following sources:

U.S. Census 2022 American Community Survey data for the unemployment rate, percentage of people in Census-designated metro areas who identified as self-employed in non-incorporated businesses, and percentage of renters in a Census-designated metro area who spend less than 30% of their household income on rent.
U.S. Census Q4 2022 and Q4 2023 Job-to-Job Explorer data.
The 2024 state tax rate for the median U.S. household (which earned $74,580 in 2023, according to Census data), according to the Tax Foundation.

Source: nerdwallet.com

Apache is functioning normally

May 3, 2024 by Brett Tams

Paying off a credit card with a personal loan can offer the advantage of potentially lower interest rates, saving money on interest charges over time. It also simplifies debt repayment by consolidating multiple credit card balances into a single monthly payment. However, the personal loan could come with origination fees or other charges that should be carefully considered.

When you have several high-interest credit cards, it’s easy to rack up more debt than you can manage. As your balance grows, you may find yourself worrying about your financial future. Fortunately, you have options. Learn more about using personal loans to pay off credit cards and get your finances back on track.

What Is a Personal Loan?

A personal loan is a type of installment loan. If you qualify, the lender gives you a lump sum of money, making it possible to pay off high-interest debt or cover some of your expenses. In return, you make monthly payments at a fixed interest rate.

The terms of a personal loan, including the interest rate and repayment schedule, vary based on your income and credit. Your credit also determines whether you qualify for a secured loan or an unsecured loan. The difference between the two is that a secured loan is backed by collateral, while an unsecured loan isn’t.

In banking terms, collateral is an asset used to secure a loan. If you don’t pay the loan as agreed, the bank is allowed to seize your collateral, sell it, and use the proceeds to cover your balance. With unsecured personal loans, there’s no need to put up any collateral.

Using Personal Loans to Pay Off Credit Cards

The process of getting a personal loan is fairly simple. You’ll need to provide the following information:

Name
Address
Telephone number
Social Security number
Employer name
Annual income

Once you complete an application, the lender reviews it to determine if you meet the minimum criteria for a loan. If you’re approved, you’ll receive a lump sum within a few days. Some lenders even offer same-day or next-day funding. If you want to pay off a credit card before your statement closing date, make sure you choose a lender with quick funding options.

Pros and Cons of Using a Personal Loan to Pay Off Your Credit Cards

Like any financial decision, using personal loans to pay off credit cards has several pros and cons.

Advantages

On the plus side, getting a personal loan allows you to pay off high-interest debt, which may prevent your balances from getting out of control. Personal loans typically have much lower rates than credit cards, giving you a little more breathing room.

For example, if you have a minimum monthly payment of $237 on a credit card with a balance of $7,599.14 and an APR of 19.99%, interest accounts for a significant portion of each payment. As a result, your payments don’t reduce the principal by much, allowing the balance to keep growing over time. If you paid the minimum every month, it would take more than 20 years to pay the full balance.

If you take out a personal loan at 9% interest, you can pay down your debt much faster, and you don’t even have to increase your minimum payment by all that much. For best results, apply for a personal loan when rates are as low as possible. The lower your rate, the less interest you have to pay every month.

Another benefit of using personal loans to pay off credit cards is that you don’t have to worry about making multiple payments every month. Once you pay your credit card balances, all you have to do is make your loan payment. If you don’t open any additional accounts, this makes it much easier to manage your finances.

Disadvantages

One disadvantage of this approach is that you need good credit to qualify for a personal loan with reasonable terms. It doesn’t help much to take out a personal loan at 18% when your credit card APR is at 19.99%.

Additionally, using personal loans to pay off credit cards is only helpful if you stop using your cards. If you keep making charges that you can’t pay in full, your credit card balance will continue to climb, and you’ll have to make minimum monthly payments on top of the payment for your personal loan.

Alternatives to Using Personal Loans to Pay Off Credit Cards

If getting a personal loan isn’t right for you, consider these alternatives.

Balance-Transfer Credit Cards

Many credit card companies offer balance transfers, which are transactions that allow you to move debt from one account to another. For example, if you have two high-interest credit cards, you can move the balance from each one to a card with a lower APR. The main benefit of doing a balance transfer is that your debt doesn’t accumulate as much interest.

Although balance transfers have some benefits, you need to time them correctly. It’s best to do this type of transfer when your credit card company is offering a 0% promotional period. Otherwise, you may not save enough money to justify the transfer fee.

Increased Income

Another option is to increase your income so you have more funds available to pay down high-interest balances. You can get a second job, sell unused items from your home or start a small business on the side. Once you have more income coming in, start paying more than the minimum due on each credit card to reduce your balances faster.

Should You Use a Personal Loan to Pay Off Your Credit Card?

Using a personal loan to pay off a credit card is only a good idea if taking out a loan helps you save a substantial amount of money. If the interest rate isn’t much lower, it’s not worth the effort to fill out an application and allow a lender to put a hard inquiry on your credit reports.

If you want to apply for a loan, it’s wise to check your credit reports beforehand. By law, you’re allowed to get a free copy of each credit report at least once per year. To keep a closer eye on your credit, take advantage of the free Credit Report Card offered by Credit.com. The report uses letter grades to make it easy to understand your current credit situation, and it updates every 14 days.

Source: credit.com

Apache is functioning normally

May 1, 2024 by Brett Tams

95% of Parents Saving for Kids’ College Expenses Expect to Cover Over Half the Costs, According to Northwestern Mutual Planning & Progress Study 2 in 3 parents who are helping their kids cover college costs expect their children to pay for part of the educational expenses; 1 in 3 say the parents will pay for … [Read more…]

Apache is functioning normally

May 1, 2024 by Brett Tams

Starting a new business requires a good idea, customers to whom you can sell your product or service, and money to get you off the ground. A personal loan to start a business can be one option for funding, especially if you don’t yet qualify for a small business loan or you qualify for a personal loan with a low interest rate.

Here’s a look at the pros and cons of using a personal business loan to start your business as well as some alternatives to look into.

What Is a Personal Business Loan?

Personal loans to start a business are offered by some banks, credit unions, and online lenders. The borrowed funds are paid back with interest in regular monthly installments. While most loans will specify what you can spend the money on — a mortgage must be used to buy a house, for example — the sum you receive from a personal business loan can be spent in a variety of ways. It’s important to check with your lender about whether their personal loans can be used for business expenses, as some lenders do not allow it.

Your personal loan interest rate is based on a combination of financial factors, including financial history, income, and credit score. Generally speaking, the higher a person’s credit score, the more likely they are to receive a personal loan with favorable terms and interest rates. Applicants with lower credit scores may find it more difficult to qualify for low-interest rates. That’s because lenders tend to see them as at greater risk of defaulting on their payments and, to offset that risk, they might charge a higher interest rate.
💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.

Why Might You Use a Personal Loan to Start a Business?

Taking out personal loans for business may present a number of benefits compared to some other alternatives.

Ease of Qualification

Banks offer personal business loans based on personal income and credit score. When you apply for a business loan, you’ll likely be asked for quite a bit of information during the application process, including your personal and business credit score, annual business revenue and monthly profits, and how long you’ve been in business. The longer your business has existed, the more likely you are to have a record of revenue and profit, and the more likely you are to qualify.

If your business is brand new, it can be tricky to get a business loan right off the bat, and it may be easier to qualify for a personal loan.

Faster Funding

How long it takes to get approved for a personal loan and receive funding will vary by lender. Online lenders are typically faster than banks and credit unions. However, you are likely to receive funding within seven business days.

By contrast, the process for a business loan can be much slower. For example, it can take 60 to 90 days to receive funding from a Small Business Administration (SBA) loan.

Can Have Low Interest Rates

Personal loan applicants with a positive credit history and a healthy credit score may be able to qualify for a low interest rate. In general, interest rates on personal loans can be much more competitive than those on other types of credit.

Credit cards, for instance — although not an inherently bad choice for business credit — can have higher interest rates than other types of lending options. They may also have penalties and fees that personal loans may not have, such as penalty annual percentage rates (APRs) that go into effect if you make a late payment, over-limit fees if you spend more than your credit limit, annual fees, and more.

Flexibility and Versatility

Personal loans have few restrictions on how you’re allowed to use the money you borrow. That means you can spend on anything from buying or renting a building to marketing materials to purchasing inventory, as long as your lender doesn’t restrict the personal loan funds to non-business purposes.

Recommended: 11 Types of Personal Loans & Their Differences

What Are Some Risks of Using a Personal Loan to Start a Business?

Despite the potential advantages of using a personal loan to help you start your business, there are also potential drawbacks to consider.

Some Lenders Don’t Allow Personal Loans for Business

Some lenders do place certain restrictions on how you spend your personal loan. Being upfront about your intentions to use it for business expenses and asking if that is allowed is a good idea. In some cases, it may not be. However, it’s far better to be honest about how you plan to use a loan than risk breaching the loan agreement. If you end up using a loan in a prohibited way, your lender could force you to repay the full amount of the loan with interest.

Can Mean a Smaller Loan

Personal loans generally offer borrowing limits as low as $1,000 and as high as $100,000 for larger personal loans. For small businesses, this might be plenty. But if you’re a larger business that needs more money, you may be better off looking for a loan that can better meet a business’ financial needs.

Can Have Shorter Repayment Terms

Lending periods for personal loans will vary. Typically you can find loans with term lengths of 12 months to five years, sometimes a bit longer. When compared to some small business loans, this is a relatively short period of time. Consider that for SBA loans, maximum terms can be as much as 25 years for real estate, 10 years for equipment, and 10 years for working capital or inventory.

Personal Credit Score and Assets Could be Affected

If you take out a personal loan and are unable to make monthly payments, you are putting your personal credit at risk. Missed payments may have a negative effect on your credit score, which can make it more difficult for you to access funding in the future.

Recommended: What Is Considered a Bad Credit Score?

May Qualify for Fewer Tax Deductions

In general, the interest you pay on a personal loan is not tax deductible. However, it may be if you use it for business purposes. This can get a bit tricky. You may only deduct interest on the portion of the loan that is used for business expenses. So if you use any of that money to remodel the bathroom in your home, for example, interest on that portion can’t be deducted.

Businesses are able to deduct interest from bank loans, vehicle loans, credit card debt, and lines of credit.

Personal Business Loans vs Small Business Loans

Borrowing money to pay for business expenses is a decision that takes some consideration. There are different reasons you might want or need a business loan, there are many lenders to choose from, and there are different lending options to compare. Here are some things to think about if choosing between a personal loan for business or a small business loan.

Factor to Consider	Personal Loan for Business	Small Business Loan
Use of funds	Some lenders may not allow personal loan funds to be used for business purposes	Specifically for business purposes — cannot be used for personal use
Qualification	Personal creditworthiness determines approval, interest rate, and loan terms	Lenders will require business financials, proof of time in business, and other details, in addition to possibly taking personal credit into account
Interest rate	Depending on your creditworthiness, interest rate may be lower than other forms of credit, such as credit cards	Depending on the type of loan, interest rates on SBA loans may be lower than some personal loans
Loan amount	Up to $100,000 depending on the lender.	SBA maximum loan amount is $5 million. Some lenders may approve working capital loans for up to several million dollars
Funding time	Depending on the lender, loan funds may be disbursed as soon as the day of approval or in up to seven days	The SBA loan timeline is between 60 and 90 days from application to disbursement. A working capital loan from a traditional lender may be approved quickly and funded shortly after approval
Tax deductibility	Interest is not generally tax deductible	Interest may be tax deductible in some cases

Recommended: Business Loan vs Personal Loan: Which Is Right for You?

Alternatives to Personal Business Loans

Personal loans may not be the best option for everyone and are not the only way you can fund your small business. You may also want to consider small business loans or a business line of credit.

Small Business Loans

Small business loans are offered through online lenders, banks, and credit unions. There are a variety to choose from that may be designed for specific purposes. For example, a working capital loan is designed to help you finance the day-to-day operations of your business. An equipment loan can help you replace aging technology and buy new equipment.

SBA loans are guaranteed by the Small Business Administration, whose aim is to help small businesses get off the ground and grow. That means if you aren’t able to make your payments, the SBA will step in and cover 85% of the default loss. By reducing risk in this way, the organization helps businesses get easier access to capital.

Shopping around for the best small business loan rates is a good way to compare lenders and find the one that works best for your unique financial needs.

Business Lines of Credit

A business line of credit is revolving credit, much like a credit card. You are allowed to borrow up to a certain amount, and you only pay interest on the amount you are currently borrowing — making this option more economical than a term loan for some business owners. As you repay the funds, the amount of credit available to you reverts back to the original limit and you can borrow the money again.

Another advantage to a line of credit over a term loan is the ability to use a check to pay vendors who may not accept credit cards.

Credit Cards

Credit cards, with a current average interest rate of more than 22%, tend to have higher interest rates than other types of funding. For example, the average finance rate for personal loans is about 12.49%, according to the Federal Reserve.

Also, credit cards are revolving credit. If you don’t pay off the balance each month, you can fall deeper into debt. Whereas, installment loans offer fixed monthly payments with a fixed end date.

Business credit cards may be a good choice for some business owners, though, to keep personal and business expenses separate. They may also offer rewards, perks, and bonuses that make them an attractive option.

Recommended: Breaking Down the Different Types of Credit Cards

Merchant Cash Advance

Funding for a merchant cash advance (MCA) is based on a business’ past credit card receipts. Technically not a loan, an MCA is an advance on future revenue. The business repays the MCA lender a percentage of its monthly sales revenue until the debt is paid in full.
💡 Quick Tip: Generally, the larger the personal loan, the bigger the risk for the lender — and the higher the interest rate. So one way to lower your interest rate is to try downsizing your loan amount.

The Takeaway

Can you use a personal loan to start a business? Short answer: Yes. Taking out a personal loan is one way to fund your small business needs, as long as your lender allows the funds to be used for business expenses. There are alternatives, though, including lines of credit and SBA loans.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

Photo credit: iStock/fizkes

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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Source: sofi.com