Small Business

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Negative working capital is when a company’s current liabilities are greater than its current assets. Current liabilities are those that are due in less than 12 months. Current assets are those that can turn into cash in less than 12 months.

It’s easy to think that companies with negative net working capital would be at financial risk, but that’s not necessarily the case. There are many situations where having occasional and controlled negative working capital can actually work in a business’s favor.

Read on for an in-depth look at what it means to have negative working capital, when it can happen, and whether it’s a good or bad thing for your small business.

Key Points

•   Negative working capital occurs when a company’s current liabilities exceed its current assets, indicating potential cash flow challenges.

•   Businesses like supermarkets and restaurants often have negative working capital due to fast inventory turnover and delayed payments to suppliers.

•   Negative working capital can, however, signal a risk of not meeting short-term obligations, potentially leading to financial strain.

•   Some companies use negative working capital strategically to free up cash by delaying payments to suppliers.

•   If your small business is struggling with working capital, you can take out a working capital loan or business line of credit to help meet short-term obligations.

What Is Negative Working Capital?

Working capital is the difference between a business’s current assets and current liabilities.

Working Capital = Current Assets – Current Liabilities

A current asset is an asset that can be easily converted to cash within a year. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, prepaid liabilities, and other liquid assets. A current liability is any debt that is expected to be repaid within a year. Current liabilities include obligations such as accounts payable and amounts due to suppliers, employee wages, and payroll tax withholding.

Ideally, current assets should be greater than current liabilities but for many businesses, that’s not always the case.

Negative working capital is when a company’s current liabilities are greater than its current assets, as stated on the firm’s balance sheet. While that may sound like a risky proposition, some businesses are able to dip into periods of negative working capital without any ill effects.

Negative working capital commonly arises when a business generates cash very quickly because it can sell products to its customers before it has to pay the bills to its vendors for the original goods or raw materials. It then uses that cash to purchase more inventory or expedite growth in other ways. By doing this, the company is effectively using the vendor’s money as an interest-free loan. The firm still has an outstanding liability, however, which means it can end up with negative working capital.

Positive Working Capital

Positive working capital is when a company’s current assets exceed its current liabilities. It’s the opposite of negative working capital and is usually a good position for a company to be in. Positive working capital means your business will be able to fulfill its financial obligations in the coming year and still have cash leftover to deal with any market disruptions (or other challenges) and/or invest in growth.

In order to be approved for a small business loan, businesses usually need to have a positive working capital, since many loans require assets as collateral. If the business is upside down on its debts vs. its assets, it may have trouble getting approved. However, working capital is one of many factors that lenders look at when approving loans.

Is it possible to have too much positive working capital? Yes. If assets are sitting somewhere and not helping the business grow and generate further revenue, then it’s possible they could be better used elsewhere to fuel the company’s next phase of development. To be competitive in today’s market, leveraging growth for healthy, steady business expansion is often essential.

Zero Working Capital

Zero working capital is when a company’s current assets are the same amount as its current liabilities. Having zero working capital can be a good sign, suggesting that the company is managing its resources effectively, maintaining just enough liquidity to cover its short-term obligations without tying up excess capital in non-productive assets.

However, having zero working capital can also signify that the company is operating on thin margins and doesn’t have much room for error. If unexpected expenses arise or if there’s a downturn in sales, the company could face liquidity problems.

Sometimes, a company might intentionally maintain zero working capital for a short period, perhaps to finance a specific project or investment. However, this is typically not a sustainable long-term strategy.

How to Calculate Negative Working Capital

Negative working capital is calculated by subtracting current liabilities from current assets. If liabilities exceed assets, the result is negative working capital. The formula is the same as the formula for working capital, with the end result being negative:

Negative Working Capital = Current Assets – Current Liabilities

Here’s a negative working capital example:

A gaming retailer buys $1.5 million worth of the latest console directly from the manufacturer. It sells every console within the first day, but doesn’t have to pay its bill for the next 45 days. So it uses this influx of cash to buy more consoles and further increase revenues. In this case, negative working capital works because sales are growing. As a result, this retailer should not have trouble meeting its short-term financial obligations as they become due.

Recommended: How to Calculate Cash Flow

How Negative Working Capital Arises

While negative working capital might seem alarming, there are situations where it can be a strategic choice or a temporary condition. Here’s a look at some reasons why a company might have negative working capital.

•  Industry norms: Some industries naturally operate with negative working capital due to their business models. For example, retail businesses often collect cash from customers before paying suppliers for inventory. This allows them to operate with negative working capital, using suppliers’ credit to finance their operations.

•  Rapid growth: A company experiencing rapid growth might have negative working capital because it’s investing heavily in inventory and receivables to support increased sales. While this can strain short-term liquidity, it’s often seen as a sign of expansion and can be managed if the growth trajectory is sustainable.

•  Seasonal variation: Businesses that experience seasonal fluctuations in sales may have negative working capital during slow periods when they build up inventory and receivables in anticipation of higher demand.

•  Efficiency goals: In some cases, companies deliberately manage their working capital to optimize efficiency. They may prioritize cash flow by delaying payments to suppliers or accelerating the collection of receivables, even if it results in negative working capital on their balance sheet.

When Is Negative Working Capital Good vs Bad?

As mentioned, negative working capital can either be good or bad. Let’s take a closer look at why.

Good Negative Working Capital

Negative working capital can be a good thing when companies are able to sell their inventory faster than their suppliers expect payment. This cash surplus allows the company to purchase more inventory or spur growth in other ways. In this scenario, the vendor is essentially financing part of the company’s operating and investment expenses — similar to a zero-interest loan.

Negative working capital can also provide a company with greater flexibility and agility to respond to changing market conditions or unexpected expenses, while also allowing it to take advantage of growth opportunities as they arise.

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

Bad Negative Working Capital

As soon as a company is unable to pay its operational costs or suppliers on time, negative working capital can shift from good to bad. Even if a company may have utilized negative working capital in the past without issues, a hiccup in sales can hurt operations fast. Negative working capital leaves a company with minimal cushion to absorb the unexpected.

If a business must constantly delay payments to vendors and suppliers, it could strain relationships with those partners. Over time, suppliers may become reluctant to extend credit or offer favorable terms, which could affect a company’s ability to secure necessary goods and services.

Recommended: 15 Types of Business Loans to Consider

Which Industries Typically Have Higher Negative Capital?

Companies with rapid turnover of inventory or services and make their money through cash often have negative working capital. This includes large food stores, retailers, fast food restaurants, service-oriented business, e-commerce companies, and software companies.

Strategies for Dealing With Negative Working Capital

To stay on top of negative working capital, business owners may want to:

1.   Fully understand the flow of cash within your company. Using a business balance sheet to track income and expenses can help you pinpoint money issues that could contribute to negative working capital.

2.   Keep track of account receivables.

3.   Analyze how long it takes to completely sell through inventory batches.

4.   Optimize billing cycles to space out expenses to match estimated sales.

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

The Takeaway

Negative working capital is a state in which a company’s current liabilities exceed its current assets. Negative net working capital is fine as long as a company is able to pay its operational expenses and suppliers on time. If it is unable to do so, however, its long-term financial health may be in jeopardy.

While negative working capital can offer certain advantages in terms of cash flow management and flexibility, it’s essential for companies to carefully monitor and manage their working capital levels to avoid potential pitfalls and maintain financial stability.

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 negative working capital indicate?

Negative working capital can indicate a business has a high inventory turnover, meaning it’s able to sell off inventory before any amount is owed to the supplier. On the other hand, it can also mean that the business is having difficulty receiving on-time payments from its customers.

Is negative working capital typically a bad thing to have?

Not necessarily. Businesses in retail or fast-moving consumer goods often operate with negative working capital because they receive payment from customers before paying their suppliers. However, negative working capital can also signify liquidity issues, financial distress, or strained supplier relationships if the company is unable to meet its short-term obligations.

Can working capital being too high be a problem?

Yes. High working capital often means that a significant portion of the company’s assets is tied up in short-term assets like cash, accounts receivable, and inventory. If these assets are not being efficiently utilized, it can lead to lower returns on investment and reduced profitability.

Photo credit: iStock/designer491

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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Apache is functioning normally

A trade credit is a business-to-business (B2B) transaction where one business is able to procure goods or services from the other without immediately paying for them. It’s called a trade credit because when a seller allows a buyer to pay for goods or services at a later date, they are extending credit to the buyer.

Trade credit can be a great tool for a small business that can free up cash flow and grow a company’s assets. However, there are some drawbacks, including a short financing window and potentially high interest if you need to extend that window.

Here’s what every small business needs to know about trade credit.

Key Points

•  Trade credit is a short-term financing arrangement where a supplier allows a business to purchase goods or services and pay at a later date, typically within 30 to 120 days.

•  It helps businesses maintain cash flow by deferring payments, allowing them to use available funds for other operational needs.

•  Trade credit generally does not carry interest if paid within the agreed-upon terms, making it a cost-effective financing option.

•  Strong trade credit terms can enhance relationships with suppliers, encouraging future collaborations.

•  Delayed payments may result in penalties or strained relationships with suppliers.

How Does Trade Credit Work?

Trade credit is a formal name for a common agreement between two companies where one company is able to purchase goods from the other without paying any cash until an agreed upon date. You can think of trade credit the same way as 0% financing, but with shorter terms. Sometimes trade credit is also referred to as vendor financing.

Sellers that grant their customers trade credit generally give them anywhere between 30 and 120 days to pay for the goods or services they received on credit. The range, however, can be higher or lower depending on the industry and individual seller.

Often, the seller will offer the buyer a discount if they settle their account earlier than the balance due date. If they do offer a discount, the terms of the trade credit sale are usually written in specific format. For example, if the seller offers a 5% discount if the invoice is paid within 20 days, but is willing to give the buyer a maximum of 45 days to pay the invoice, that agreement would be written as:

5/20, net 45.

If the buyer is unable to pay their invoice within the set time period (which is 45 days in the above example), the vendor will typically charge interest. If that happens, trade credit is no longer an interest-free form of financing.

Recommended: 15 Types of Business Loans to Consider

Common Terms

Common terms used in trade credit include:

•  Net terms: This specifies the number of days the buyer has to pay the invoice, such as “Net 30” or “Net 60,” meaning payment is due within 30 or 60 days.

•  Discount terms: Offers a discount for early payment, like “2/10, Net 30,” meaning a 2% discount is available if paid within 10 days.

•  Credit limit: The maximum amount a supplier allows a buyer to purchase on credit at one time.

•  Invoice: A detailed bill issued by the supplier outlining goods or services provided and the payment due.

•  Grace period: The extra time allowed beyond the due date to settle the account without incurring penalties.

Types of Trade Credit

The three main types of trade credit include:

1.   Open Account: The most common form, where the supplier delivers goods or services and the buyer agrees to pay by a specified date, usually 30 to 120 days later.

2.   Promissory Note: A formal written agreement where the buyer promises to pay the supplier by a certain date, often used when open accounts are not available.

3.   Trade Acceptance: The buyer signs a formal agreement accepting the supplier’s terms and acknowledging their obligation to pay at a future date. Trade acceptance is sometimes used for larger or international transactions.

Who Uses Trade Credit?

Business trade credit is very common in the B2B ecosystem. Businesses that use trade credit include:

•  Accountants/bookkeepers

•  Advertising/marketing agencies

•  Construction/landscaping companies

•  Food suppliers

•  Restaurants

•  Manufacturers

•  Wholesalers

•  Retailers

•  Cleaning services

Pros and Cons of Trade Credit

Pros and Cons of Trade Credit for Buyers

Pros of trade credit for buyers include:

•  Frees up cash: Because payment is not due until later, trade credits improve the cash flow of businesses, enabling them to sell goods they acquired without having to pay for those goods until a future date. It can be a good option for companies expanding into a new market or that have seasonal peaks and dips.

•  Possible discount: Depending on the trade credit agreement, if the buyer pays the invoice within a certain amount of time, they may receive a discount on the goods or services they purchase.

•  0% interest: The cost of capital can be a burden on some small businesses. If the buyer can settle the invoice within the agreed upon time frame, there is no interest charged on this type of financing.

Cons of buyers using trade credit include:

•  Short payment period: The length of the trade credit payment term varies, but they are often 120 days or less, which is shorter than most types of small business loans. For a growing small business, this may not be enough time. Companies that need a longer repayment period may want to look into other types of debt instruments.

•  It’s easy to over-commit: With discounts and wholesale prices, it can be tempting to buy too much of a particular good. Not only does this create excess inventory, but it also creates a bigger debt obligation.

•  Possible penalties for late payments: Depending on the trade credit agreement, there may be negative consequences for late payments, such as interest or a fine. In addition, the company might report your late payment to the credit bureaus, which could damage your business’s credit score.

Recommended: Getting a Cash Flow Loan for Your Small Business

Pros and Cons of Trade Credit for Sellers

Pros of using trade credit for sellers include:

•  Beat out competitors: Companies offering trade credit may be able to gain an advantage over industry peers that don’t offer trade credit. Because it can be difficult for some small businesses to get a bank loan, they may seek out suppliers offering trade credit.

•  Develop a strong relationship with clients: Offering trade credit increases customer satisfaction, which can lead to customer loyalty and repeat business.

•  Increase sales: Trade credits are still sales even if payment is delayed. Trade credit can also encourage customers to purchase in higher volumes, since there is no cost to the financing. Therefore, a trade credit can provide the opportunity for growth and expansion.

Cons of trade credit for sellers include:

•  Delayed revenue: If your business has plenty of cash, this may not be an issue. However, if budgets are tight, delayed revenue could make it difficult to cover your operating costs.

•  Risk of buyer default: Sometimes customers are unable to pay their debts. Depending on the trade credit agreement, there may be little to nothing the seller can do other than sell the debt to a collection agency at a fraction of the cost of the goods provided.

•  Less profit with early payment discounts: If the seller offers a discount for early payment, they will earn less on the sale than they otherwise would.

Recommended: Understanding Business Liabilities

Trade Credit Accounting

Trade credit needs to be accounted for by both buyers and sellers. The process, however, will vary depending on the company’s accounting method — specifically, whether they use accrual vs cash accounting.

With accrual accounting (which is used by all public companies), revenue and expenses are recorded at the moment of transaction, not when money actually changes hands. With cash accounting, on the other hand, a business records transactions at the time of making payments.

A seller who offers trade credits and uses accrual accounting can face some complexities if the buyer ends up paying early and getting a discount or defaulting (and never paying). In this case, the amount received doesn’t match their account receivables and the difference becomes an account receivable write-off, or liability that must get expensed.

Trade Credit Instruments

Typically, the only formal document used for trade credit agreements is the invoice, which is sent with the goods, and that the customer signs as evidence that the goods have been received. If the seller doubts the buyer’s ability to pay in the allotted time, there are credit instruments they can use to guarantee payment.

Promissory Note

A promissory note, or IOU, is a legal document where the borrower agrees to pay the lender a certain amount by a set date. While it’s usually used for repaying borrowed money, it can also be used to pay for goods or services.

Commercial Draft

One hitch with a promissory note is that it is typically signed after delivery of the goods. If a seller wants to get a credit commitment from a buyer before the goods are delivered, they may want to use a commercial draft.

A commercial draft typically specifies what amount needs to be paid by what date. It is then sent to the buyer’s bank along with the shipping invoices. The bank then asks the buyer to sign the draft before turning over the invoices. After that, the goods are shipped to the buyer.

Banker’s Acceptance

In some cases, a seller might go even further than a commercial draft and require that the bank pay for the goods and then collect the money from the customer. If the bank agrees to do this, they must put it in writing — which is called a banker’s acceptance. It means that the banker accepts responsibility for payment.

Trade Credit Trends

Trade credit is widely used worldwide. In fact, the World Trade Organization estimates that 80% to 90% of all world trade relies on trade credit in some capacity. It’s so widespread that it’s given rise to a type of financing called accounts receivable financing (also known as invoice financing).

With invoice financing, a company that offers trade credit can get a loan based on their outstanding invoices, effectively enabling them to get paid early. When they receive payments from their customers, they give that money (plus a fee) to the financing company.

Recommended: Understanding Business Liabilities

The Takeaway

Trade credit in business is very common and occurs when one company purchases goods or services from another company but doesn’t pay until a later date.

Essentially an interest-free loan, trade credit can be particularly rewarding for young businesses or seasonal businesses that may find themselves occasionally strapped for cash. A key drawback of trade credit, however, is that the buyer is generally expected to pay the invoice relatively quickly, sometimes within a month or two. For many small businesses, that may not be enough time, and they might be better served by getting a small business loan.

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

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

FAQ

What is an example of trade credit?

Let’s say a restaurant offers kobe beef on its menu and gets its beef from a food supplier in Japan. The supplier offers them a 5/30, net 60 trade. This means that the restaurant has 60 days to pay for a shipment of beef. If they pay the invoice within 30 days, however, they will receive a 5% discount on the purchase price.

Are there any benefits to trade credit?

Yes, benefits of trade credit include interest-free financing for buyers, improves cash flow for buyers, increases sales volumes for sellers, and it builds strong relationships and customer loyalty for sellers.

When do businesses typically use trade credit?

Businesses use trade credit either when they do not have the capital on hand to make a purchase or they need to temporarily free up cash for other expenses. Trade credit is also a good option for young businesses that may not qualify for other forms of business financing.

Photo credit: iStock/Hiraman

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


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

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

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

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Apache is functioning normally

Accounts payable are bills and other short-term debts that a business needs to pay. It includes all of a company’s current liabilities (due within one year), making it a key component of small business accounting.

Understanding accounts payable and having a dependable accounts payable system is essential to running a successful small business. Here’s what you need to know.

Key Points

•   Accounts payable (AP) represent a company’s short-term obligations to suppliers for goods or services received but not yet paid for.

•   AP appears under current liabilities on the balance sheet.

•   Examples of accounts payable could include licensing costs, leasing costs, subscription services, and installment payment plans.

•   The four steps of the accounts payable process include capturing the invoice, approving the invoice, payment authorization, and payment execution.

•   Investors and lenders may look at accounts payable when deciding whether to invest in your company or approve you for a small business loan.

What Is Accounts Payable (AP)?

When a business buys goods or services from a vendor or supplier on credit that needs to be paid back in the near term, the accounting entry is known as “accounts payable.” On a balance sheet, accounts payable appears under current liabilities.

Accounts payable differs from a loan payable in that accounts payable does not charge interest (unless payment is late) and is typically based on goods or services acquired. Loan payables, such as balances on various kinds of small business loans, generally charge interest and are based on the prior receipt of a sum of cash from a lender.

In a company, the term “accounts payable” is also used as the name of the department responsible for handling vendor invoices and bills — from recording them in the general ledger to making payments to suppliers and other third parties.

Recommended: Guide to Vendor Financing

Is Accounts Payable an Asset or Liability?

In small business accounting, accounts payable is a liability since it is money owed to vendors and creditors. The account grows larger when more money is owed to vendors. When accounts payable increases, a business will typically have more cash on hand because of the delay in paying amounts owed. This typically results in a temporary increase in liquidity.

The short-term debt in accounts payable can help keep cash on hand to pay for other items, but eventually creditors will require payment.

Accounts payable differs from business expenses in that accounts payable is shown on a business’s balance sheet, whereas business expenses are shown on the income statement.

Recommended: Small Business Balance Sheets with Examples

How Accounts Payable Works

When a business purchases goods or services from a supplier on credit, also known as trade credit, payment isn’t made immediately. Typically, it will be due within 30 or 60 days, sometimes longer.

Here’s how it works:

A business will send the supplier a purchase order. The supplier will then provide the goods or services the business purchased, along with an invoice requesting payment by a certain date. The person or department responsible for accounts payable will verify the invoice against the purchase order and ensure the goods or services were received before issuing payment to their vendors.

If amounts owed to suppliers and other third parties are not paid within the agreed terms, late payments or defaults can result.

The sum of all outstanding payments owed by a business to third parties is recorded as the balance of accounts payable on the company’s balance sheet. Any increase or decrease in accounts payable from one accounting period to another will appear on the cash flow statement.

Recommended: How to Calculate Cash Flow

4 Steps of the Accounts Payable Process

Managing business finances is one of the most important aspects of running a small business. The accounts payable process has four key steps. Going through this defined process helps avoid errors and missing a payment deadline to a vendor.

1. Invoice Capture

The accounts payable process generally begins when a supplier or third party submits an invoice to the accounts payable department. After receiving the invoice, the accounts payable clerk will verify the invoice is valid and not a duplicate, code the invoice to the general ledger, and, depending on the company’s process, conduct a two-way match (in which invoices are matched to purchase orders) or a three-way match (in which invoices are matched to purchase orders and receiving information).

2. Invoice Approval

Once all the data is entered, an invoice must be approved. This involves an individual from the accounts payable department routing the invoice to the appropriate person (or people) in the company to get the necessary approval(s).

3. Payment Authorization

After an invoice is approved, the accounts payable clerk may need to get authorization to make a payment. The authorization will typically include the payment amount, method of payment, and date the payment will be made.

4. Payment Execution

Once payment is authorized, the invoice can be paid. Payment should be processed before or on the bill’s due date and may be done by check, electronic bank-to-bank payment, or credit card. Once the invoice is paid, it can be closed out in the accounting system.

Recommended: Debt-to-EBITDA Ratio Explained

Internal Controls and Audits

Internal controls are standardized operating procedures used by companies in their accounts payable process to reduce the risk that a business will pay a fraudulent or inaccurate invoice, pay a vendor invoice twice, and/or fail to pay an invoice on time.

These controls often include:

•  Purchase order approval

•  Invoice approval

•  Two-way matching (in which invoices are matched to purchase orders) or three-way matching (in which invoices are matched to purchase orders and receiving information)

•  Auditing for duplicates (which involves checking files manually or with an accounts payable automation platform to make sure duplicate payments aren’t made)

Accounts Payable Examples

Generally, any items bought on short-term credit fall under the accounts payable umbrella. This includes:

•  Licensing costs

•  Leasing costs

•  Subcontractor bills

•  Amounts owed for raw materials and fuel

•  Products and equipment received but not paid for

•  Subscription services

•  Installment payment plans

Accounts Payable vs Accounts Receivable

Accounts receivable is basically the opposite of accounts payable. While accounts payable is the money a company owes to suppliers and vendors, accounts receivable is the money that is owed to the company, generally by its customers. If two companies make a transaction on credit, one records it to accounts payable, while the other records it to accounts receivable.

Here’s a side-by-side comparison of accounts payable vs accounts receivable:

Accounts Payable Accounts Receivable
Money you owe to a vendor or other third party Money owed to you from customers
Recorded as a current liability on the balance sheet Recorded as a current asset on the balance sheet

When a business owner needs an influx of cash, accounts receivable financing is a type of financing that enables them to receive early payment on outstanding invoices. The owner must then repay the money (plus a fee) to the financing company when they receive payment from their customers.

Recommended: GAAP Explained

Trade Payables and Accounts Payables

Though they sound similar, trade payables are actually slightly different from accounts payables.

Trade payables are amounts a company owes its vendors for inventory-related goods, such as business supplies or materials that are part of the company’s inventory. Accounts payables, on the other hand, includes trade payables, as well as all other short-term debts.

The Takeaway

Accounts payable is a current liability on a company’s balance sheet. It includes all of the short-term credits extended to a business by vendors and creditors for goods or services rendered but not yet paid for. Accounts payable also refers to the department or person in a firm that records and handles purchases and payments.

Lenders and potential investors will often look at a company’s accounts payable, as well as their accounts receivable, to gauge the financial health of a business. Mismanagement on either side of the equation can have a negative impact on your business’s ability to get credit or get approved for a small business loan, and could also put your business at risk.

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

What are examples of accounts payables?

Any good or service that is purchased by the company on short-term credit should be listed as accounts payable on the balance sheet. Some examples include:

•  Leased vehicles

•  Subcontractor services

•  Equipment

•  Materials

•  Business supplies

•  Subscription services

What is the purpose of accounts payable?

The purpose of accounts payable is to accurately track what’s owed to vendors and suppliers and to ensure that payments are properly approved and processed. Having accurate accounts payable information is essential to producing an accurate balance sheet.

What is accounts payable reconciliation?

Accounts payable reconciliation is a process in which the accounts payable department verifies that the detailed total of all accounts payable outstanding matches the payables account balance stated in the general ledger. This is done to ensure that the amount of accounts payable reported in the balance sheet is accurate.

Photo credit: iStock/Panuwat Dangsungnoen

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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Source: sofi.com

Apache is functioning normally

A debt instrument is a contract that enables one party to loan funds to another party, who promises to repay the loan plus interest. Debt instruments are also referred to as fixed income assets because the lender receives a fixed amount of interest during the lifetime of the instrument.

Debt instruments come in many forms. Some are obvious, such as mortgages and different types of small business loans; while others are less so, such as rental leases, bonds, and treasuries. With some debt instruments, you are the borrower, such as when you take out a mortgage or open a credit card. In other cases, you are the lender, such as when you purchase a bond or treasury.

Here’s what you need to know about debt instruments, the different types of debt instruments, how these instruments work, and the pros and cons of debt financing.

Key Points

•  Debt instruments are financial assets that represent a loan made by an investor to a borrower, typically involving fixed payments over time.

•  Common types of debt instruments include mortgages, small business loans, bonds, U.S. treasuries, and leases.

•  Debt instruments come with a defined maturity date when the principal amount must be repaid.

•  All debt securities are debt instruments, but not all debt instruments are securities.

What Is a Debt Instrument?

A debt instrument is a fixed income asset that legally binds a debtor to pay back any amount borrowed plus interest. Debt instruments can be issued by individuals, businesses, local and state governments, and the U.S. government.

Businesses often use debt instruments to raise capital to purchase additional assets (such as manufacturing equipment) or to raise working capital, while local governments may do so to fund the building of infrastructure (such as a new highway or a bridge). Debt instruments also give participants the option to transfer the ownership of debt obligation (or instrument) from one party to another.

Debt instruments can be short-term (repaid within a year) or long-term (paid over a year or more). Credit cards and treasury notes are examples of short-term debt instruments, while long-term business loans and mortgages fall into the category of long-term debt instruments.

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Debt Instruments vs Debt Securities

Debt instruments are broad financial tools representing a loan made by a lender to a borrower, including mortgages, business loans, and leases. They may or may not be tradable.

In contrast, debt securities are a specific subset of debt instruments that are tradable on financial markets, such as government and corporate bonds. Debt securities provide liquidity, allowing investors to buy or sell them before maturity.

The key difference is that all debt securities are debt instruments, but not all debt instruments are tradable securities, emphasizing market accessibility and liquidity for debt securities.

How Do Debt Instruments Work?

If you’ve ever taken out a loan or opened a credit card, you probably already understand the basics of how debt instruments work. Debt instrument contracts include detailed provisions on the deal, including collateral involved, the rate of interest, the schedule for interest payments, and the term of the loan (or timeframe to maturity).

While any type of vehicle classified as debt can be considered a debt instrument, the term is most often applied to debt capital raised by institutions, such as companies and governments. In this scenario, the investor is the lender: You issue money to a business, municipality, or the U.S. government. In exchange for capital, you are paid back the amount you loaned over time with interest. Examples of this type of debt instrument include U.S. treasuries, municipal bonds, and corporate bonds.

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Types of Debt Instruments

Below is a breakdown of some of the most common debt instruments used by individuals, governments, and companies to raise capital.

US Treasuries

U.S. Treasury Securities (also called treasuries) are government debt instruments issued by the U.S. Department of the Treasury to finance government spending as an alternative to taxation. Treasury securities are backed by the full faith and credit of the U.S., meaning that the government promises to raise money by any legally available means to repay them.

U.S. treasuries tend to be more affordable than many other debt instruments. Investors can buy them in increments of $100 either through brokerage firms, banks, or the U.S. Treasury website. There are three types of treasuries: treasury bills, treasury notes, and treasury bonds. Each treasury comes with its own maturity option.

Municipal Bonds

Municipal bonds are offered by various U.S. government agencies (towns, cities, counties, or states) to fund current and future expenditures. Programs often funded by municipal bonds include the building of schools, roads, and bridges. Think of a municipal bond as a loan an investor makes to a local government.

There are two types of municipal bonds: general obligation bonds and revenue bonds. General obligation bonds are not paid back by any revenue resulting from the completion of the project. Instead, they are paid back to investors through property taxes or overall general funds.

Revenue bonds are paid back by the issuer through either sales, taxes, or some other type of revenue generated by the project.

Municipal bonds are attractive to many investors because they are tax-exempt bonds — meaning the investor doesn’t have to pay taxes on any interest received.

Recommended: How to Buy Bonds: A Guide for Beginners

Corporate Bonds

A corporate bond is a debt security that a corporation can use to raise money. Funding is typically available to anyone who is interested. As with other bonds, corporate bonds are essentially an IOU from the company to the investor. It differs from stock in that, instead of being paid dividends when the company is profitable, investors are always paid regardless of whether the company is doing well.

Typically, corporate bond investors are paid interest until the bond matures. When it matures, the entire principal is paid back. For example, a $1,000 corporate bond with an interest rate (or coupon rate) of 5% would bring an investor $50 every year until the bond matures. This means that, after 10 years, the investor would see a gross return of $500.

With secured bonds, the company puts up collateral (such as property or equipment) as security for the bond. If the company defaults, secured bond holders can foreclose on the collateral to reclaim their money. With an unsecured bond, a holder may or may not be able to fully reclaim their investment.

Alternative Structured Debt Security Products

There are many types of structured debt security products on the market, many of which are issued by financial institutions. A common occurrence is for these institutions to bundle assets together as a single debt security product. By doing this, they are able to raise capital for the financial institution while also segregating the bundled assets.

Recommended: What Are the Different Types of Debt?

Leases

A residential or commercial lease is a legally binding contract between an owner of a property and a tenant, where the tenant agrees to pay money for a set period of time in exchange for use of the rented property. A lease is a type of debt instrument because it secures a regular payment from the tenant, thus creating a secured long-term debt.

Mortgages

Mortgages are a type of debt instrument used to purchase a home, commercial property, or vacant land. The loan is secured by the property being purchased, which the lender can seize if the borrower defaults on the loan.

As with many other consumer loan products, mortgages are amortized, meaning the borrower makes a series of equal monthly payments that provides the lender with an interest payment (based on the unpaid principal balance as of the beginning of the month) and a principal payment that will cause the unpaid principal balance to decrease each month so that the principal balance will be zero at the time of the final payment.

Recommended: What Is a Financial Instrument?

Pros and Cons of Debt Instruments

Understanding the pros and cons of debt instruments helps borrowers make informed decisions about their financing options.

Pros

Debt instruments can be mutually beneficial in that both parties become better off as a result. If a company takes out a small business loan and invests those funds wisely, for example, it can increase its profitability. Ideally, the increase in profits exceeds the cost of the loan, a concept known as leveraging in business. Borrowing money also allows a company to raise capital without losing equity.

Debt instruments also benefit individuals and governments. Without mortgage debt, many people would never be able to buy a house; without student loans, many individuals would not be able to go to college. For governments, debt instruments allow them to build infrastructure for the public good.

On the lender’s or investor’s side, debt instruments can provide a regular and guaranteed source of income and are considered a safe investment, provided the loan is secured.

Cons

But there are downsides to debt instruments, as well. Loans often come with restrictions on how they can be used and, if you don’t have good credit, interest rates can be high. Borrowing money also involves risk. Most commercial institutions will require you to put up collateral in the form of a property asset. If you lose your income or your business hits hard times and you cannot repay your loan, the lender can reclaim its debt by liquidating whatever you proposed as security, which means you can lose a valuable asset.

On the lender’s or investor’s side, debt instruments also come with risk. Unless you purchase a secured bond, you may not receive your principal back as the investor. Also, during periods of high inflation, bonds can actually have a negative rate of return. And, if you invest in corporate bonds, there is always the possibility that the issuer will default on payment.

Pros of Debt Instruments Cons of Debt Instruments
Allows companies to expedite their growth If a borrower has poor credit, interest rates can be high
Allows companies to raise capital without diluting equity Loans often come with restrictions on how they can be used
Enables individuals to buy a home or pay for college Loans often require collateral, which can be lost if debtor defaults on loan
For lenders/investors, secured debt is a safe investment Investors can lose money if bond value declines
For lenders/investors, debt instruments provide steady income Bond investors can lose money during periods of high inflation

The Takeaway

A debt instrument is a way for an investor to get a return on their money by loaning to either an individual, business, municipality, or the U.S. government. If you have a credit card or mortgage, or you own any bonds or treasuries in your investment portfolio, debt instruments play a role in your life.

Small business owners can also take advantage of debt instruments. You might not be able to issue corporate bonds at this stage of the game, but you may be able to access an affordable small business loan.

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 are some examples of debt instruments?

Common examples of debt instruments include personal loans, business loans, mortgages, leases, bonds, treasuries, promissory notes, and debentures.

What is the difference between a debt instrument and an equity?

With a debt instrument, the investor does not own any portion of the company. With equity, the investor is buying a portion of the company.

What are the features of debt instruments?

Debt instruments have three characteristics: principal, coupon rate, and maturity. Principal refers to the amount that is borrowed. The coupon rate is the interest amount paid by the borrower to the lender. Maturity is the end date of the debt instrument. It refers to when the debt is completely paid off with interest.

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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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Apache is functioning normally

As Halloween approaches, it’s the perfect time to celebrate with our furry friends by throwing a spooktacular dog Halloween party. This festive occasion not only allows your dog to strut their stuff in style but also brings together fellow pet lovers for a day of fun and camaraderie. From spooky home decor to tasty, dog-friendly snacks, a Halloween party for your pooch is a delightful way to create lasting memories while embracing the spirit of the season. 

Whether you’re planning to host a pet-friendly Halloween party in your new home in San Diego, CA, searching for an apartment in Dallas, TX, or looking for a rental in Boise, ID, with this guide, get ready to make this Halloween a howling good time.

1. Bring on the decorations

Stephen and Kelly Newman, owners of pet apparel shop Luv the Paw, share some ideas to help ring in the festivities while keeping your dog out of harm’s way. “Use pet-safe decorations like Halloween-themed pillows, blankets, LED candles, and pet-friendly toys to set the scene,” says Stephen and Kelly. 

A few more ideas could be to opt for non-toxic materials like fabric, paper, or untreated wood, and avoid anything with small parts that could be swallowed. Creating pet-safe Halloween decorations is a fun way to celebrate the season while keeping your furry friends safe. With a little creativity, you can create a spooky atmosphere that everyone can enjoy.

2. Bake some homemade treats

Making homemade dog Halloween treats is a delightful way to include them in the festivities. With simple recipes using dog-friendly ingredients, it’s easy to whip up some tasty snacks. For a festive touch, use cookie cutters to create spooky shapes like bones or pumpkins. 

“Any space can become a dog’s dream when it comes to the right crew of dog besties trick or treating for dog treats,” shares Shea Russo, VP of marketing at Boss Nation Brands, a pet product company. “It’s so fun to see your dogs happily scurrying around while you watch them enjoy the fruitful (or should I say FRIGHTful) joys that come with the cozy fall vibes of Halloween.”

Make a trick-or-treat station

A trick-or-treat station is a great way to engage with the normal traditions of Halloween while still making it a fun activity for dogs to enjoy. Kiersten Rooney and Sarah Dollar, event producers at LB Events + Design, propose, “Consider making homemade treats such as yogurt and pumpkin bites using silicone molds shaped like ghosts and witch hats. Also, feel free to get creative with a trick-or-treat station that has bags for take-home goodies for humans and pups.”

Encourage pups to “trick” by performing simple commands for their goodies, making it an interactive and enjoyable experience for everyone involved.

Recipe inspiration 

Not quite sure where to start with making homemade dog treats? Morgan Kultala, the general manager at Fetch Pet Care, has you covered, “Start by combining 2 ½ cups of whole wheat flour, 2 large eggs, ½ cup of canned pumpkin, 2 tablespoons of pet-safe peanut butter, and ½ teaspoon of salt in a bowl. Once mixed, roll the dough to a thickness of ½ inch and cut out your favorite shapes.”

Kultala continues, “Bake the treats in the oven at 350°F on a baking sheet for about 40 minutes, or until they are golden brown and crunchy. Let them cool before the party begins, and get ready to celebrate with your pup.”

Just be sure to avoid ingredients like chocolate, xylitol, and anything toxic to dogs. Once baked, you can even decorate the treats with yogurt icing for a special Halloween flair that your pup will love.

3. Create a space for dogs to socialize

Creating a dedicated space for dogs to socialize at your Halloween party adds an exciting element for both pets and their owners. Set up an area with plenty of room for pups to mingle, complete with soft surfaces like blankets or pet beds for comfort in case some pups get overwhelmed.

Joel, owner of Paws to Consider, a dog walking service in Jamaica Plain, MA, suggests, “Create a safe, fun space where dogs can socialize while showing off their best doggie costumes, but don’t forget a cozy rest area for the pups to relax. With a little planning, you and your furry guests are sure to have a paw-some time.”

To ensure a safe space for socializing, make sure the area is securely fenced or enclosed to keep any escape artists from wandering off. Additionally, provide water bowls and designated spots for potty breaks to keep everyone comfortable and happy.

4. DIY dog Halloween decor

Halloween decorations can be pricey, so why not make your own with your pet? These unique decorations not only add a personal touch to your Halloween festivities but also showcase your furry friend’s personality.

“Make Howl-o-ween extra spooky by turning up the woof with some dog-friendly activities like creating their own decor,” Lindsey Quinn, doner and public relations coordinator at Oregon Dog Rescue in Portland, OR, recommends. “Pick up some pooch-friendly paint and let your furry friend put their paw print on their very own pumpkin.”

These creative touches will not only enhance your Halloween decor but also create lasting memories that you and your dog can cherish for years to come.

5. Host a costume contest

Hosting a costume contest for dogs is an exciting and adorable way to amp up the fun at your dog Halloween gathering. Joel I. at Abington Dog Care in Abington, MA. encourages pet owners to dress their dogs in creative, comfortable costumes and offer dog treats and prizes for the best-dressed pups.

“Host a pet Halloween costume contest and let your furry friends show off their style. Award the winners with lots of treats,” suggests Jennifer Hellams from Furryland, a mobile pet grooming company. “Don’t forget to capture the adorable moments with your camera to share.”

And the winners are…

Katie Hall Goodman with Best Day Ever LA Events shares her inspiration for the winning category titles, “Let the pets show off their costumes and win fun, pet-themed prizes for categories like ‘Best in Show-lloween’, ‘Creepiest Cutie’, ‘Most Fang-tastic’, and ‘Fur-ocious Fashionista’.”

With prizes for the winners, this event is sure to be a highlight of the celebration, bringing joy and laughter to both pets and their humans.

For pups not fond of costumes

If your pet isn’t into costumes, opt for Halloween-friendly pet accessories and apparel in classic hues like vibrant orange, black, and purple instead. Whether you go for a pumpkin orange dog harness or potion purple dog hoodie, your pet will turn heads in their spooktacular style and be the cutest trick-or-treater on the block.

6. Play pawsome games

At a dog Halloween party, games are a fun and thrilling way to keep the pups engaged and entertained throughout the festivities. Dog-friendly games are fantastic for promoting physical exercise and mental stimulation, helping to keep them healthy. Socializing with other dogs and their owners in a festive environment also enhances their confidence and reduces anxiety, making it a fun and beneficial experience.

Treat under the cup

Jessica Cooper-Keeble at Mutty Trails in Portland, OR, an adventure dog hiking service, shares her idea for a ‘Treat Under the Cup’ game. In this exciting competition, you’ll have a few cups or containers, and under one of them, you hide a tasty dog treat. The dogs take turns sniffing and nudging the cups to find their hidden prize, which encourages their natural foraging instincts and sharpens their problem-solving skills.

Bobbing for bones

Another fantastic idea for a game is shared by event planner Paola Franco, founder of Say I Do Details, “Set up a paw-some ‘Bobbing for Bones’ game with pet-safe toys and treats.” 

In ‘Bobbing for Bones’, dogs take the plunge into a kiddie pool filled with water and floating bones or toys. Pups use their noses and paws to retrieve the goodies, making it a fun and interactive way to keep them cool and entertained.

To wrap up the festivities, a fun agility course with Halloween-themed obstacles can get all the furry friends moving and having a howling good time.

7. Have a trick teaching contest

A trick teaching contest is a fantastic way to showcase your dog’s skills and creativity while promoting bonding between pets and their owners.

Debby McMullen, Certified Dog Behavior Consultant and owner of Pawsitive Reactions, recommends, “Consider a trick teaching contest using Halloween-themed cue words to see who learns a new trick fastest.”  

This friendly competition encourages both dogs and handlers to work together, boosting confidence and reinforcing positive training methods, all while providing a great opportunity for everyone to share laughs and celebrate their furry friends’ unique talents.

8. Don’t forget a photo op

A photo op at a dog Halloween party adds an extra layer of fun and festivity, allowing pups and their owners to capture memorable moments together. “Keep your guests entertained with a fun photo area with a spooky backdrop and fun props,” suggests Portland, OR local Tristan Worth with The Dog House Doggie Daycare and Wash. “Items made for babies are often the right size, more durable, and often made with nontoxic material (in case your pup has the need to chew).” 

A themed backdrop with Halloween decorations, like pumpkins, ghosts, and colorful banners, creates the perfect scene for adorable snapshots. You can even provide props like hats, capes, and silly glasses for an extra dose of charm.

Lisa, travel blogger at Traveling With A Dog, shares, “Throwing a pet-friendly Halloween party is all about spooky vibes and making sure your furry BFFs have just as much fun as you. This can be made with an Insta-worthy photo booth with Halloween props for those #DogMomGoals moments.” 

These photos not only celebrate the event but also serve as lasting keepsakes of the fun-filled day with furry friends.

Photo courtesy of Traveling With A Dog

9. Finally, keep the pups safe

While having fun at a dog Halloween party is essential, ensuring the safety of all furry guests is equally important. Prioritizing safety allows everyone to enjoy the festivities worry-free, ensuring that the party is a fun experience for both dogs and their owners.

To keep in mind during planning

“Safety is paramount when planning a dog-friendly event,” reports Christy Caplan, blogger at Wag and Cluck. “Opt for a daytime gathering instead of Halloween night to keep stress levels low and a large, fenced and dog-friendly backyard with a quiet area allows for relaxation.”

Additionally, have a first aid kit on hand for any minor accidents, and make sure all dogs are up-to-date on vaccinations to promote a healthy environment.

Ingredients to keep an eye out for

Common holiday treats, like chocolate, raisins, and certain nuts, are harmful to dogs, so it’s important to keep these out of reach and ensure all snacks are dog-safe. 

“Keep all candy, especially chocolate and sugar-free treats containing xylitol, well out of your dog’s reach,” states the team at DJANGO, a small business specializing in dog accessories. “Make sure guests know not to leave their candy and treats unattended and discard any wrappers.” 

By staying informed about these hazards, you can create a festive atmosphere without compromising your dogs’ safety.

Set up a quiet area

Brad Pauer, co-founder of The Dog Vacation, an organic pet shampoo bar company, advises, “Focus on creating a safe, festive environment with fun activities, but make sure to designate a quiet area for pets to retreat to if they become overstimulated and always supervise them during the event.”

Setting up a quiet space for dogs to relax during the party is essential for their comfort and well-being. Designate a cozy corner with soft blankets, calming music, and some familiar toys to create a soothing atmosphere. This area allows shy or overwhelmed pups to retreat and recharge away from the festivities, ensuring they don’t feel stressed.

With these precautions, you can foster a joyful and safe atmosphere for every furry guest.

Dog halloween party: Wrapping up the celebration

Hosting a dog Halloween party is a fantastic way to celebrate the season while creating unforgettable memories with your furry friends. From cute costumes to tasty treats and fun games, this festive occasion brings together the joy of Halloween and the love we have for our pets. So, gather your fellow dog owners, embrace the spooky spirit, and let your pups enjoy a day filled with tail-wagging fun. With a little creativity and preparation, you’ll be sure to throw a howling good time that your dog—and their friends—will remember for years to come.

Source: rent.com

Apache is functioning normally

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

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

Key Points

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

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

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

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

How Small Business Grants for Minorities Work

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

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

•  Startup costs

•  Equipment

•  Marketing

•  Payroll

•  Office space

•  New product line

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

Recommended: Survey of Hispanic-Owned Businesses

Private Small Business Grants for Minorities

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

1. NAACP Black-Owned Business Grants

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

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

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

2. GrantWatch

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

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

3. Galaxy Grants

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

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

Recommended: Small Business Loans for Women

4. First Nations Development Institute

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

5. IFundWomen

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

6. Amber Grant

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

7. Comcast RISE

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

8. FedEx Small Business Grant

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

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

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

10. Asian Women Giving Circle Grant

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

Recommended: 30 Small Business Grants for Women

Federal Grants for Minority Small Business Owners

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

Grants.gov

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

Recommended: Small Business Grants in Arizona

United States Department of Agriculture (USDA) Grants

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

How Do I Apply for a Small Business Grant?

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

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

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

•  Employer Identification Number (EIN)

•  DUNS number

•  Revenue history

•  Organizational chart, including the number of employees

•  Bank statements

•  Tax returns

•  List of contracts your business holds

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

Recommended: 6 Step Guide to Getting a Small Business Loan

Other Resources for Minority Business Owners

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

National Minority Supplier Development Council

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

SBA Microloan Program

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

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

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

Operation Hope’s Small Business Development Program

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

SBA’s 8(a) Business Development Program

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

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

Alternatives to Small Business Grants

Small Business Loans

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

Business Line of Credit

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

Microloans

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

Recommended: Microloans for Women-Owned Small Businesses

The Takeaway

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

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

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

FAQ

What is the best source of funding for small businesses?

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

Does the government give money to startups?

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

What organization helps small business owners borrow money?

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

Photo credit: iStock/mapodile

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


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

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

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

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Source: sofi.com

Apache is functioning normally

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.

Key Points

•  LLCs protect owners’ personal assets from business debts and liabilities.

•  An LLC loan is a small business loan that is given to a corporation as opposed to an individual.

•  Types of business loans that LLCs can apply for include business term loans, SBA loans, business lines of credit, merchant cash advances, and more.

•  Common loan requirements include financial statements, tax returns, and business plans.

•  To qualify for an LLC loan, most lenders require a minimum business history, credit score, and annual revenue.

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.

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.

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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Source: sofi.com