Small Business

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

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

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

Key Points

•   Depreciation and amortization deduct the cost of an asset over its useful life.

•   Depreciation applies to tangible assets (e.g., buildings, machinery), while amortization is for intangible assets (e.g., patents, trademarks).

•   Both depreciation and amortization provide tax benefits by allowing businesses to deduct asset costs over time.

•   Depreciation often uses straight-line or accelerated methods; amortization typically follows a straight-line schedule.

•   Depreciation reflects wear and tear on physical assets, whereas amortization accounts for non-physical assets’ value decline.

Amortization vs Depreciation

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

Similarities

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

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

Differences

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

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

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

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

Recommended: How to Read Financial Statements

What Is Amortization and How Does It Work?

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

Types of intangible assets a business may have include:

•   Patents

•   Trademarks

•   Copyrights

•   Software

•   Franchise agreement

•   Licenses

•   Organizational costs

•   Costs of issuing bonds to raise capital

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

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

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

Amortization Example

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

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

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

What Is Depreciation and How Does It Work?

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

•   Buildings

•   Equipment

•   Computers

•   Office furniture

•   Vehicles

•   Machinery

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

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

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

Recommended: Business Cash Management, Explained

Depreciation Example

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

$3,000 – $500 = $2,500

$2,500 / 5 = $500

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

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

The Takeaway

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

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

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

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

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

FAQ

Do buildings depreciate or amortize

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

Can an asset amortize and depreciate at the same time?

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

Is rent considered amortization?

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

Photo credit: iStock/Pinkypills

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


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

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

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

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Source: sofi.com

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Categories

Real Estate

October 3, 2024
by Mark Ferguson

The Federal Reserve recently cut interest rates more than expected. This is the first rate cut in four years, and it could significantly impact the housing market, inflation, and the broader economy. Let’s dive into what this means for real estate, inflation, and more.

Table of Contents

Video: Will the Fed Interest Rate Cut Increase Housing Prices?

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High Interest Rates and Inflation: A Misconception?

For years, I’ve advocated for cutting interest rates and argued against raising them. While many believe high interest rates help control inflation, I think they might do the opposite—and definitely don’t help with housing affordability. Studies suggest that high rates raise mortgage payments, making housing more expensive, not less.

A common belief is that high rates will force housing prices down, but I argue that high rates might actually make the situation worse by reducing supply. Fewer homes are built when borrowing costs are high, and existing homeowners are reluctant to sell, waiting for lower rates. This supply shortage pushes prices up, not down.

What is the Best Investment in a High Inflation Environment?

What the Fed Rate Cut Means for Mortgage Rates

The Fed’s interest rate decisions don’t directly affect mortgage rates, but they are closely related. The Fed sets the federal funds rate, which is what banks pay to borrow from each other. Mortgage rates, on the other hand, are determined by the bond market and overall economic conditions.

Typically, when the Fed cuts rates, mortgage rates also drop. But the relationship isn’t always linear. As we’ve seen recently, mortgage rates have been all over the place. Earlier this year, they were above 7%, but now they’ve dropped to around 5.7% for a 30-year mortgage, according to NerdWallet. That’s a significant drop, which makes homes more affordable by lowering borrowing costs.

Rental Property Cash Flow Calculator

Could Lower Rates Boost Housing Demand?

Lower rates could trigger a surge in homebuying. Many renters and homeowners have been sitting on the sidelines, waiting for rates to drop. When they do, these buyers may jump back into the market, driving prices up. We could see a short-term price increase due to a spike in demand.

However, lower rates also make it easier to build new homes. Increased construction would boost supply, potentially stabilizing prices over time. Currently, there’s a significant housing shortage, and more building is necessary to meet demand. So while prices may rise in the short term, more construction will help create a more balanced housing market in the long run.

Future Value Inflation Calculator

The Argument for Lower Rates Stabilizing the Market

Some people argue that lowering rates will bring more homes onto the market, as current homeowners who have been holding off on selling will finally list their properties. This could increase supply, but those same sellers are also buyers. So, while more homes might come on the market, there will still be buyers ready to snatch them up, including renters who have been waiting for a better deal.

In fact, with more buyers than sellers, we could see even higher demand than supply, leading to an imbalance favoring buyers. Lower rates, combined with strong demand from immigrants and other demographics, could lead to a more pronounced housing boom.

What is the Best Way to Invest in Real Estate?

Job Growth, Immigration, and Housing Demand

Another factor driving housing demand is immigration. Recently, there’s been significant job growth, but most of it has been among foreign-born workers. Data from the Census and the Social Security Administration shows a substantial increase in employment for foreign-born individuals, while employment for native-born workers has decreased. With more immigrants entering the workforce, housing demand is likely to rise, adding pressure to the housing market.

Many predict that population declines will lead to a housing crash, especially as baby boomers age. However, immigration is offsetting those declines. The U.S. population is still growing, which means more demand for housing, both for homeownership and rentals. Coupled with lower interest rates, this could result in continued upward pressure on home prices.

Why High Rates Don’t Necessarily Lower Prices

There’s a misconception that raising interest rates automatically leads to lower prices, whether for housing or goods. While higher rates can reduce demand, they also reduce supply, which can keep prices elevated. Fewer homes are built, fewer people sell their homes, and businesses cut back on production. In the housing market, this stagnation leads to a supply-demand mismatch, propping up prices rather than reducing them.

Studies from the 1970s and 1980s, when interest rates were at their highest, show that housing prices still rose dramatically. In fact, during the 1970s, prices tripled, and in the 1980s, they doubled. High rates simply don’t curb housing prices as much as people think.

Do Higher Rates Actually Cause Inflation?

Another controversial idea is that high rates can lead to inflation. Many people think raising rates controls inflation by reducing demand, but it doesn’t consider the supply side. When borrowing costs are high, businesses slow down production, which reduces supply. This supply contraction can lead to higher prices for goods and services, as companies are forced to raise prices to cover their costs.

For example, I own a small business. If my costs increase due to higher interest rates, I can’t just lower my prices to compensate for reduced demand. I still need to cover my fixed costs, so I might raise prices instead. This is how high interest rates can cause prices to rise, counterintuitively contributing to inflation rather than reducing it.

Conclusion: Why Lower Rates Are Good for the Economy

In summary, I believe lower interest rates are better for the economy and the housing market. Lower rates encourage building, make borrowing cheaper, and can help stabilize housing prices in the long run. While some fear that lowering rates will cause prices to surge, the alternative—keeping rates high—only prolongs the problem by restricting supply.

Additionally, the data shows that high rates don’t automatically lead to lower prices and, in some cases, can even cause inflation. As we move forward, it will be interesting to see how the Fed’s rate cuts impact the economy and the housing market in the months to come.

What do you think? Let me know in the comments below!

Source: investfourmore.com

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Whether it’s to manage finances, accept payments or reach new customers, more small-business owners are optimizing their business operations with digital tools — leaving them increasingly vulnerable to digital security breaches and cyber attacks.

Exposure to cyber attacks topped the list of the biggest worries small-business owners face, even surpassing concerns about inflation and other economic issues, according to a 2023 report on cybersecurity released by Hiscox, a business insurance company.

The consequences of these breaches can extend beyond the initial threat, as well. Twenty-five percent of business owners surveyed by Hiscox indicated that cyber attacks had an overall negative impact on their business’s brand or reputation, and 20% said they had trouble attracting new customers as a result.

Here‘s what your business needs to know about the vast and evolving landscape of digital security.

Even the smallest businesses are at risk

While it may seem more lucrative for cyber criminals to go after big corporations and larger firms, the Hiscox report indicates that smaller businesses are increasingly under threat. Cyber attacks on firms with fewer than 10 employees have risen 13% since 2020.

“Hackers don’t care how small your business is or what you do,” Shawn Waldman, CEO and founder of Secure Cyber Defense, a cybersecurity consulting company said in an email. “They want your money and your data. Often, they have no idea who you are in the first place.”

Although cyber attacks can happen to any business, certain industries may be more likely to be targeted — particularly those that access or store a lot of sensitive client or customer data or information. Shavon J. Smith, a Washington, D.C.-based business attorney and founder of SJS Law Firm, works with small management and IT consulting firms that contract with big businesses and are therefore given access to their information, but are viewed as less secure because of their size.

According to Smith, medical offices may also be a target due to their small staff sizes and access to a lot of personally identifiable client information.

It’s easier to prevent a digital security breach than fix one

Businesses should prioritize proactive measures they can take to prevent an event from happening in the first place. It’s uncommon to find your attacker or recover stolen money or data once it’s gone, according to Smith. Once a cyber attacker has what they want, they are “lost in the wind.”

Studies indicate, however, that 95% of breaches in digital security can be traced to human error, which means they are preventable through internal and employee policies. This starts with policies that promote ongoing system maintenance and security. Smith recommends an initial review to pinpoint your overall vulnerabilities.

“The first thing you want to do is just kind of assess, ‘Where are our open ports? Where are our opportunities for things to go wrong, for people to hack into our system, for employees to lose data?’” she says.

If your employees have company-issued devices, for example, then your employee policy should lay out parameters on how they are to handle those devices, Smith says. That might mean forbidding employees to vacation with their laptops or prohibiting them from taking their computers home entirely.

An employee policy should also dictate who has access to confidential company or client information, which Smith says can help to decrease the chances of a security breach.

Cheap solutions can cost you down the road

Building digital security into your business budget can be expensive, and there’s certainly no one-size-fits-all solution, but failing to invest in proper systems can also be costly. In 2023, the median cost of a cyber attack for businesses with 10 to 49 employees was $9,500, according to the Hiscox report.

A common mistake both Waldman and Smith see small businesses make is relying on free or disreputable antivirus software and failing to update that software regularly. On top of that, Waldman warns against transitioning to cloud email providers without enabling security controls or multi-factor authentication. Email was the single weakest point of entry for cyber attackers, ahead of cloud or corporate servers, according to the Hiscox report.

A response plan can determine how quickly you recover

Any actions you take in the event of an actual cyber attack or digital security breach are typically about trying to cover your losses. According to Smith, your business’s response plan should cover some key steps:

  1. Contact a cyber security specialist or legal counsel. Better yet, consult with specialists or lawyers when you first create your plan, so you already have a point of contact if an event occurs. 

  2. Notify your insurance company of a possible claim. When you purchase cybersecurity insurance, it’s important for your broker to understand your business and what it does, according to Smith. That can help them understand the scope of a breach and what it means for your clients or customers. 

  3. Contact law enforcement. Although it’s unlikely they’ll be able to do much right away, law enforcement may have investigations open, and any information of new attacks could be helpful to them. 

  4. Reach out to clients. In many cases, you may be contractually obligated to notify the businesses your company works with of a data breach, Smith says. 

  5. Alert your customer base. If you are a consumer-facing business, you should plan to alert your customers as soon as you have the full scope of the breach, and be prepared to offer compensation or free credit monitoring.

Source: nerdwallet.com

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Businesses that need cash quickly but don’t have strong credit will sometimes turn to an alternative type of funding called a merchant cash advance (MCA). With an MCA, a financing company gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee.

An MCA can be helpful for covering cash flow shortages or short-term expenses, but if you end up taking out more than one merchant cash advance, you can end up paying different (and potentially high) interest rates and fees for each. Plus, you have to deal with different payment schedules for each MCA.

A merchant cash advance consolidation is an option that lets you roll up all of those advance payments into one. Ideally, an MCA consolidation has the potential to reduce what you’re paying in interest and fees. Here’s what you need to know about this type of consolidation loan.

What Is a Merchant Cash Advance?

Not every business qualifies for a traditional bank loan. Perhaps it hasn’t been in business long enough to be eligible, or maybe it doesn’t meet the credit requirements for a small business loan. That’s when a merchant cash advance may be useful.

An merchant cash advance is not a loan, but rather an advance on future sales. To determine eligibility, MCA providers may not rely heavily on criteria like time in business and/or credit scores, but instead focus on revenues. That can make it easier to get than other types of financing.

How MCAs Work

When you get an MCA, you receive a lump sum payment. Typically, MCAs express the interest they charge as a factor rate (often ranging from 1.1 to 1.5) rather than as a percentage. The factor rate does not include any additional fees the merchant cash advance company may charge you, such as administrative or underwriting fees.

How MCA Repayment Works

The repayment on an MCA works differently than other types of business loans. Typically, the MCA provider automatically deducts a daily (or weekly) percentage of your debit and credit card sales until the advance is repaid in full. Repayment periods can range anywhere from three to 18 months. Generally, the more you make in credit card sales, the faster you’ll repay the advance.

The downside is that MCAs tend to have much higher fees and interest rates than traditional small business loans, making them a costly financing option.

When you convert factor rates plus fees into an annual percentage rate (APR), the APRs on merchant cash advances can run as high as 350%, depending on the lender, size of the advance, fees, business revenue, and how long it takes to repay the advance.

What Is Merchant Cash Advance Consolidation?

A small business owner might take out a merchant cash advance to see their way through a slow period. Then, when they struggle with repayments, they may apply for another MCA to help repay the first. This is a process known as loan stacking. The company could then end up with multiple repayment schedules and paying different factor rates and different amounts for each advance.

A merchant cash advance consolidation rolls multiple MCAs into a single new loan. The consolidation loan typically pays off your existing MCAs and allows you to make one payment, often monthly, to the consolidation lender. Ideally, the consolidation loan will have a lower interest rate than the average of the multiple advances.

Recommended: Loans for Sole Proprietors

Signs You Need Consolidation

Signs you need a merchant cash consolidation include:

•  Multiple MCA loans: If your business has taken out many MCAs, a consolidation loan can help you streamline your payments and possibly save money on interest.

•  High interest rates: MCAs often come with steep fees, so consolidating into a lower-rate loan could reduce overall costs.

•  Falling behind on payments: Missing or struggling with payments is a strong indicator consolidation is necessary.

However, there are a few things to consider before you jump into MCA consolidation. One is whether or not your existing MCA lenders will charge you a prepayment penalty fee if you pay off your advances early. You’ll also want to find out if there are any upfront fees you have to pay for the new consolidation loan, since this can eat into your savings.

If, after running all the numbers, it looks like you can save money and streamline repayment, it may be a good time to consider a merchant cash advance consolidation.

Recommended: How Does Debt Consolidation Work?

What to Consider Before Applying

Before applying for a consolidation loan, you’ll want to look at what you’re currently paying in interest and what you’d qualify for with a new loan. Also, consider any fees for the new loan and any payoff penalties you’ll owe your current lenders. If, once you crunch the numbers, your total debt hardly goes down, there’s probably no sense in taking on a new consolidation loan.

When deciding whether it makes sense to do an MCA consolidation, you also want to look at the repayment period and what your payments with the new loan will be. A shorter repayment period can mean larger payments that you might not be able to afford. And, while a longer repayment period can mean smaller payments, it will likely mean paying more in total interest.

Examining the options can help you find the best path forward for your business.

Potential Drawbacks and Risks

Merchant cash advance (MCA) consolidation loans can provide relief, but they come with potential drawbacks and risks, including:

•  Extending the repayment period, which potentially increases the overall interest costs.

•  Paying high fees, which could negate the benefits of combining advances.

Additionally, if you’re consolidating to manage cash flow, it could be a sign of deeper financial issues, and relying on more debt may worsen the situation.

Refinancing vs Consolidation

If you’ve heard of business loan refinancing, you may think it’s the same as merchant cash advance consolidation, but these aren’t exactly the same.

It’s true that both can potentially lower your interest rate and/or change your payment term. However, when you refinance, you’re replacing one MCA with a new one or with a small business term loan. When you opt for an MCA consolidation, you’re rolling multiple MCAs into a new MCA or other type of business loan.

Recommended: Refinancing Your Student Loans While Starting a Business

Types of Consolidation Loans

Lenders may have different approaches to help you with consolidating your loans. Some will buy out the loan and pay it off directly, while others will lend you the money, after which it’s your responsibility to pay off your existing MCAs.The following types of loans can be used to consolidate your MCAs:

Merchant Cash Advance

If you’ve taken out multiple MCAs, it’s likely because your business doesn’t have great credit and may not qualify for other types of loans. If that’s the case, you might consider a new, larger merchant cash advance to consolidate your existing MCAs, ideally with more favorable terms.

Be aware that you will likely have a short repayment period, perhaps between a few months and three years.

Online Lenders

Another consolidation option if you don’t have excellent credit is taking out a consolidation loan with an online lender. Interest rates may be lower than with a merchant cash advance and repayment terms may be longer. A longer repayment term typically means your monthly payment will be lower; however, you’ll pay more in interest overall than with a shorter repayment term.

SBA Loans

SBA loans like the 7(a) program can be used to consolidate business debt that is approved by your lender, if you qualify. Repayment terms can be up to 25 years, and rates on SBA loans are among the lowest of any financing option for businesses.

Traditional Bank Loans

If you’ve been able to build your business or personal credit since taking out the MCAs, you may qualify for a bank loan with lower rates and longer repayment terms. You can then use the proceeds of the loan to pay off your existing MCAs.

The Takeaway

If you feel like you’re drowning because you’re paying too much, too often, for multiple merchant cash advances, consolidating with a new advance or small business loan may be a solution that could help you lower your costs and roll everything up into one monthly payment.

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 is a merchant cash advance consolidation?

A merchant cash advance (MCA) consolidation combines multiple merchant cash advances into a single MCA with more manageable repayment terms. Ideally, you’ll receive better rates and terms with your new merchant cash advance.

What happens if I don’t repay my merchant cash advance?

If you don’t repay your merchant cash advance (MCA), the lender may increase withdrawal amounts, freeze business accounts, or pursue legal action. Your personal and business assets could be at risk, and your credit score could be negatively impacted. This could affect financing options down the line.

Why consolidate your merchant cash advances?

The main reason to consolidate your merchant cash advance (MCA) is to simplify your payments. Rather than making multiple payments each week or month, you’ll only have to make one. Consolidating could also reduce your interest rate, saving you money over the life of the loan.

Photo credit: iStock/ipopba

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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Source: sofi.com

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If you’ve always dreamed of opening your own business, now may be the time. The entrepreneurial spirit is thriving in the U.S. as historic numbers of Americans start their own companies. In 2023, a record 5.5 million new business applications were filed, according to the U.S. Census Bureau. The trend started in 2020 during the pandemic and has accelerated ever since.

There are many reasons why new business is big business today. For some individuals, the allure of running their own enterprise is a motivation too strong to resist. Others see opportunity created by changing consumer tastes and needs. For yet other people, starting a business may be a way to start over after a job layoff.

Small businesses are the backbone of the U.S. economy, employing 46% of the workforce, according to the Small Business Administration (SBA). But of course, a new business needs to stay in business. And one of the key factors that can help determine its success: Location, location, location.

So then, where is the best place to start a business? In what cities can a new business not only find its footing but go on to flourish?

To discover the answer, SoFi looked at the 50 largest cities across the U.S. with populations of 500,000 or less, and ranked them on eight different criteria, including annual business applications, average cost of office space, unemployment rates, and cost of living. We assessed the criteria for each city on a 10-point scale for a possible total score of 80 points. (See below for the complete details about our methodology.)

What we found was that while businesses are starting nationwide, certain cities across the country seem to be particularly beneficial for new businesses. Read on to learn the 10 best cities to start a business in the U.S.

Key Points

As SoFi analyzed the data about each city, these important findings stood out:

•   The South is a hotspot for new businesses. Three of the top 10 cities on our list are in Florida, and all score high in self employment. Plus, Florida has increasing numbers of businesses owned by underrepresented groups. Atlanta, the Number 3 city overall, has a large population of working age people and ranks high for new business applications.

•   Cold-weather cities are offering new businesses a warm welcome. Minneapolis clinched the Number 2 spot on our list, and St. Paul, Minnesota and Madison, Wisconsin scored in the top 10. All three have large populations of working age people.

•   Texas is poised to become a new-business powerhouse. The Lone Star State has 2 of the top 10 cities on the list — Plano and Irving. Younger people are gravitating to Texas, giving new businesses in these cities plenty of working age adults to employ.

Our Findings

Reviewing the entire list of cities in the SoFi analysis reveals some important, even surprising, information for aspiring business owners. For instance, Miami is the city with the most new business applications and highest level of self employment, while Witchita, Kansas, offers the best prices for office space, and Cleveland has the lowest cost of living.

Check out how other top cities rank when it comes to opening a new business.

Ranking City Walkability Score Cost of Living Score Office Space Cost Score Household Income Score Unemployment Score New Business Score Self-Employment Score Working Age Score Total Score
1 Miami, Florida 8.85 3.74 0.44 4.46 5.14 10.00 10.00 9.50 52.13
2 Minneapolis, Minnesota 8.16 4.55 4.60 6.21 4.73 3.17 9.71 10.00 51.13
3 Atlanta, Georgia 5.52 4.14 2.65 6.32 4.05 9.75 7.88 9.99 50.30
4 Plano, Texas 4.71 3.43 3.79 8.60 6.22 4.26 8.68 9.21 48.89
5 St. Louis, Missouri 7.59 5.45 5.27 4.31 4.73 3.55 8.22 9.36 48.48
6 St. Paul, Minnesota 8.16 4.85 5.36 5.69 5.27 2.50 6.98 9.25 48.06
7 Orlando, Florida 4.71 4.44 2.88 5.39 5.14 7.05 8.66 9.74 48.01
8 St. Petersburg, Florida 4.94 4.75 3.23 5.72 5.95 5.62 8.77 8.99 47.97
9 Madison, Wisconsin 5.75 4.19 5.10 6.09 7.30 2.31 6.61 9.99 47.34
10 Irving, Texas 5.17 4.60 5.36 6.24 5.81 4.57 5.90 9.31 46.97
11 Lincoln, Nebraska 5.06 5.05 5.79 5.52 6.62 1.94 7.60 9.14 46.71
12 New Orleans, Louisiana 6.67 4.65 4.71 5.10 2.97 5.32 7.85 9.04 46.30
13 Jersey City, New Jersey 10.00 2.78 0.00 7.41 5.00 3.89 7.35 9.86 46.29
14 Lubbock, Texas 4.48 5.35 5.49 4.78 6.35 2.36 8.09 9.34 46.25
15 Omaha, Nebraska 5.52 5.15 5.59 5.71 5.81 2.85 6.58 8.89 46.10
16 Pittsburgh, Pennsylvania 7.13 5.20 4.28 4.90 5.41 2.43 6.61 9.63 45.58
17 Lexington-Fayette, Kentucky 3.91 4.90 5.69 5.38 5.14 2.86 8.31 9.20 45.39
18 Colorado Springs, Colorado 4.14 3.99 4.94 6.43 5.00 4.11 7.61 9.10 45.32
19 Virginia Beach, Virginia 3.79 4.14 4.86 7.12 6.22 3.84 6.12 8.94 45.04
20 Arlington, Texas 4.37 4.70 5.26 5.83 5.14 3.58 6.44 9.21 44.52
21 Tulsa, Oklahoma 4.48 5.45 5.53 4.61 4.46 3.21 7.75 8.80 44.30
22 Gilbert, Arizona 3.33 3.33 2.71 9.37 6.08 3.83 6.65 8.85 44.16
23 Santa Ana, California 7.70 2.27 3.94 6.85 5.27 2.99 5.56 9.42 44.01
24 Reno, Nevada 4.60 3.79 4.41 6.64 5.14 3.55 6.72 9.10 43.95
25 Aurora, Colorado 4.94 3.84 4.40 6.40 5.14 3.77 6.19 9.24 43.91
26 Durham, North Carolina 3.45 4.70 3.63 6.08 5.54 3.61 7.41 9.44 43.85
27 Long Beach, California 8.39 2.07 2.18 6.43 4.05 3.46 7.59 9.60 43.77
28 Chandler, Arizona 4.02 3.59 4.40 8.08 5.81 3.83 4.79 9.20 43.72
29 Anaheim, California 6.44 1.82 4.70 7.20 5.27 2.99 5.88 9.24 43.55
30 Corpus Christi, Texas 4.60 5.25 6.11 5.21 5.14 1.94 6.37 8.85 43.47
31 Tampa, Florida 5.75 4.60 0.23 5.43 4.86 5.61 7.43 9.54 43.45
32 Buffalo, New York 7.70 5.66 6.01 3.76 3.92 2.02 4.90 9.04 43.00
33 Irvine, California 4.94 0.00 2.04 10.00 5.41 2.99 7.89 9.72 42.98
34 Oakland, California 8.62 0.81 0.03 7.68 4.46 2.43 9.40 9.44 42.86
35 Wichita, Kansas 4.02 5.35 6.45 4.94 5.00 2.50 5.75 8.78 42.79
36 Honolulu, Hawaii 7.59 0.66 2.98 6.73 6.35 2.46 7.24 8.74 42.74
37 Raleigh, North Carolina 3.56 4.39 2.40 6.40 5.95 3.95 6.32 9.69 42.65
38 Henderson, Nevada 3.45 4.04 3.55 6.94 4.32 4.45 7.21 8.33 42.29
39 Cincinnati, Ohio 5.63 5.20 6.06 4.00 3.38 3.28 5.20 9.50 42.25
40 Fort Wayne, Indiana 3.68 5.45 6.19 4.74 4.73 2.67 5.83 8.52 41.81
41 Greensboro, North Carolina 3.33 5.30 5.16 4.48 4.19 3.55 6.57 9.20 41.78
42 Anchorage, Alaska 3.56 3.38 2.40 7.79 5.27 2.83 7.05 9.14 41.42
43 Toledo, Ohio 5.29 5.61 6.28 3.69 2.70 2.75 6.25 8.72 41.29
44 Riverside, California 4.94 3.13 4.68 6.79 4.46 2.34 5.33 9.44 41.11
45 North Las Vegas, Nevada 3.91 4.55 4.50 5.84 3.24 4.45 4.11 9.04 39.63
46 Chula Vista, California 5.29 2.12 2.66 8.29 1.62 2.57 6.95 9.14 38.65
47 Cleveland, Ohio 6.55 5.81 5.63 3.03 0.00 3.77 4.87 8.98 38.64
48 Newark, New Jersey 8.74 4.24 3.11 3.78 1.22 4.45 3.89 9.11 38.53
49 Stockton, California 5.06 3.69 5.22 5.82 3.38 2.11 4.44 8.81 38.53
50 Bakersfield, California 4.25 3.89 5.39 6.00 3.51 1.73 4.57 8.61 37.97

The Top 10 Cities to Start Your Own Business

The best cities for new businesses tend to be in the South and Midwest, our research found. But no matter where they are located, each of the cities in our top 10 has attributes that make them great locations for aspiring business owners.

1. Miami, FL

Score: 52.13

This vibrant metropolis combines the perks of big-city life, such as an exciting food and nightlife scene and renowned museums and art galleries, with beautiful beaches and warm, sunny weather. Miami’s population has increased steadily in recent years, making it one of the fastest growing cities in the country. And tourists from around the world flock to this oceanside oasis. In short, there are endless opportunities — and customers — for new business owners in Miami.

In SoFi’s analysis, Miami received top scores for new business applications and the number of self-employed individuals. It also rated highly for walkability and its large working-age population. Not only that, prospective business owners in Miami may be able to take advantage of small business grants in Florida that can help with start-up costs.

2. Minneapolis, MN

Score: 51.13

With its friendly midwestern vibe and cosmopolitan charm, Minneapolis has been experiencing population growth since the pandemic. Despite the cold winters, residents say it offers a good quality of life, access to nature, sporting events, arts and culture, and more. The city is also seeing a surge in new housing and economic development.

In the SoFi study, Minneapolis received a top score for its large working-age population. It also got high marks for the number of self-employed residents and the city’s walkability. Another potential selling point for entrepreneurs: The state of Minnesota works to cultivate small businesses, offering assistance and partnerships through its Office of Small Business and Innovation.

3. Atlanta, GA

Score: 50.30

Atlanta is another one of the fastest-growing metro areas in the country, according to Census Bureau data. The city has seen a boom in businesses opening and relocating there, from major corporations to smaller companies. Atlanta’s lifestyle amenities have flourished as well, making the city a draw for its vibrant entertainment offerings, diverse restaurants, and sporting events.

It’s no wonder then that Atlanta has a robust population of working-age individuals, according to SoFi’s research. It also got a high score in our analysis for new business applications. For entrepreneurs, the city has support networks, incentives, and small business loans that make it an appealing place to set up shop.

4. Plano, TX

Score: 48.89

New businesses are popping up across Plano, making it a welcoming community for those ready to launch their own companies. Located less than 20 miles from Dallas, the city is a family-friendly place to live with easy access to a major metro area. People are drawn to Plano’s parks, cultural events, and restaurant offerings — something new business owners can both enjoy personally and benefit from professionally.

SoFi’s research found that Plano has a large working-age population and a high household income. It also ranks near the top of the list for self-employment. Plus, small business grants in Texas can make Plano a good choice for new business owners.

5. St. Louis, MO

Score: 48.48

Located on the Mississippi River and known for its iconic Arch, St. Louis is actively courting new businesses through incentive programs, tax credits, and enterprise zones. The city has a vibrant start-up scene, with business incubators and accelerators. St. Louis, which boasts a diverse culture, historic neighborhoods, and a fairly affordable cost of living, is a top area for job growth, according to recent data from the Federal Reserve Bank of St. Louis.

Indeed, SoFi’s report found that St. Louis gets high marks for its large working-age population, self-employment score, and household income.

6. St. Paul, MN

Score: 48.06

The state capital of Minnesota, and the other half of the famed “Twin Cities” (along with Minneapolis, the Number 2 city on our list), St. Paul is a mid-sized metropolis with a youthful vibe. There are a number of colleges and universities here, giving the city’s employers access to skilled graduates. In our research, the city ranked high for its large working-age population. In addition, St. Paul offers a number of resources for new businesses, including financial and technical assistance.

7. Orlando, FL

Score: 48.01

Home to Disney World and Universal Studios, among many other theme parks, Orlando is not only a coveted tourist destination but also a cosmopolitan city with a strong arts and cultural scene, good restaurants, and a bustling nightlife.

It also has a variety of employment opportunities to attract workers: Orlando is filled with big companies, such as AAA and Darden Restaurants, and it’s a growing technology hub. As a result, the city has a large working-age population, according to SoFi’s analysis. Orlando is welcoming to new businesses and offers many incentives to entrepreneurs.

8. St. Petersburg, FL

Score: 47.97

This Gulf Coast city is so beloved for its weather that it’s known as Sunshine City. St. Pete is appealing to employees and business owners alike for its working and lifestyle opportunities. Here, you’ll find pristine sand beaches and a walkable city with a dynamic business community. Companies like Raymond James and HSN are located in the city, as are a growing number of new businesses.

St. Petersburg has a booming working-age population and it scores high marks in self employment, the SoFi report found. It also offers tax benefits and incentives to new businesses.

9. Madison, WI

Score: 47.34

This state capital was recently rated the sixth best city in the U.S. to live in by U.S. News & World Report, thanks to its quality of life. Madison has a hot job market and it’s a hub for companies in technology, healthcare, and manufacturing. As a college town — the University of Wisconsin-Madison — it also has a diverse population and a dynamic downtown filled with boutiques, restaurants, bars, and coffee shops.

In SoFi’s report, the city rated highly for its working-age population. The unemployment rate in Madison is fairly low, which also makes it desirable. The city offers programs to help small businesses start and succeed, and there are small business grants in Wisconsin entrepreneurs can explore.

Recommended: Unemployment Rates by City

10. Irving, TX

Score: 46.97

Located near Dallas, Irving combines urban amenities with a suburban feel. It has many perks of city living, such as live music venues, ballet and symphony, art, movie theaters, and restaurants. For nature lovers, Irving has a number of rivers and lakes weaving through it, along with parks and nature trails.

Irving’s economy is strong — major corporations in industries such as technology, finance, and consumer goods are located there. SoFi’s research found that the city has a large working-age population, which can be beneficial to new business owners. Irving also offers incentives and resources for small businesses.

Tips for Small Business Owners

If you’re ready to start a small business, these are some important steps to take to help your venture become a success.

•   Choose the right location for your business.
Do your research to pick an area that best suits your business needs. Consider whether the area has the type of customer you’re targeting, a robust workforce, and real estate and operating costs you can afford.

•   Check out local resources, networks, and programs.
Does the location you’re considering offer incentives and tax credits for new and/or small businesses? The cities on our list do, as do many others. Be sure to check with the chamber of commerce, the city’s SBA office, if there is one, and local economic development centers and business incubators.

•   Find the right financing.
The city or state may offer grants or funding for new businesses — do your homework to find out if they do. Also investigate grants and funding programs from the SBA.

As you’re seeking financing for your small business, you may also want to consider a loan to help get your venture off the ground.

When you’re looking for a loan for your new business, SoFi can help. On SoFi’s marketplace, you can shop top providers to access the capital you need. Find a personalized small business loan option today within minutes.

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.

Methodology

To determine the best cities to start a business, SoFi looked at the largest 50 cities across the U.S. with populations of 500,000 or less. (“Population” refers to the city proper and is separate from surrounding urban areas.) SoFi analyzed eight key contributing factors, each assessed on a 10-point scale, in each city for an overall potential score of 80. These factors included:

Walkability

Walkability was determined by reviewing statistics from Walk Score, which were given on a scale of zero to 100. The higher the Walk Score, the higher a city’s walkability score.

Cost of Living

Using Area Vibes, SoFi reviewed the cost of living score — an index score compared to the national average. The lower the cost of living score in a city, the better the score we assigned.

Average Cost of Office Space

Using LoopNet, SoFi assessed all 50 cities using the following filters:

•   Type of space needed: office, retail, or restaurant

•   Number of employees: 10 (which equaled 1250 to 4000 sq. ft. of space)

SoFi averaged the price per square foot per year for the newest 10 results in each city. The higher the average cost, the lower the score.

Median Household Income

Using Data USA, SoFi assessed the median household income for each city. The higher the median income, the higher the score.

Unemployment Rates

Using Area Vibes, SoFi assessed the unemployment rate for each city. The lower the unemployment rate, the better the score.

Annual Business Applications

Using Census Burea data SoFi calculated the percentage of people who applied for a small business loan in the county where each city is located. The higher the percentage of new business applications, the higher the score.

Percentage of Self-Employed People

Using Census Burea data, SoFi calculated the percentage of people in each city who had self-employment income. The higher the percentage, the higher the score.

Working-Age Population

Using Census Burea data, SoFi calculated the percentage of people in each city who were between the ages of 15 and 64. The higher the percentage, the higher the score.

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

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Once your small business starts earning a profit, you have to decide if you should distribute those profits to yourself (and any other owners) or reinvest them back into the business.

While it can be tempting to pocket your company’s profits, funneling at least some of that money back into the business is worth considering.

For one, reinvesting can help improve the company or expand operations, leading to even higher profits down the line. For another, reinvested money is generally considered a business expense, which means you likely won’t have to pay income taxes on it.

Read on for a closer look at why you may want to reinvest a percentage of your profits back into your business, how this can impact your business taxes, and ways you might use profits to help expedite business growth.

What Constitutes a Business Profit?

Profit is the money a business pulls in after accounting for all expenses. Any profits earned funnel back to business owners, who can choose to either keep it as earnings, distribute it to shareholders as dividends, or reinvest it back into the business.

Whether you own a small dog grooming business or a multinational corporation, the main goal of any business is to earn money. Thus, a business’s performance is based on profitability. For accounting purposes, companies will often report gross profit, operating profit, and net profit (the “bottom line”).

Recommended: How to Read Financial Statements: The Basics

What Are Businesses Taxed On?

Any profits that aren’t reinvested in a business are typically taxed as income. How that tax is paid depends on the structure of the business.

Most small businesses are pass-through entities, which means that the gains or losses are passed through to the owners on their personal income tax returns. Corporations, on the other hand, pay a flat tax on business profits.

Recommended: 10 Steps to Starting a Small Business

Types of Business Taxes

When we refer to “taxes” for a business, we’re actually using an umbrella term for many different types of taxes a business may have to pay. Let’s take a closer look.

Income Taxes

Income taxes are based on the net income of your business for the tax year. Net income is the same thing as profit (income minus expenses). If you share a business with others, the net income is divided among the owners based on your business agreement. Most small businesses pay both federal and state income taxes.

Estimated Taxes

Employees have taxes withheld from their paychecks, but as the owner of your business, no one is withholding taxes from the money you take out of the business.

Instead, you need to file estimated taxes throughout the year based on the income you have earned up to that point in the year. Typically, federal and state estimated tax payments are due on April 15, June 15, September 15, and January 15 for the previous tax year.

Self-Employment Tax

Employees generally have Social Security and Medicare taxes withheld from their paychecks. If you are a self-employed business owner, however, you must calculate and pay your own Medicare and Social Security tax through self-employment taxes.

Excise and Sales Taxes

Depending on which state you operate in and what type of goods or service you sell, you may need to set up a system to collect sales tax from your customers and report and pay that tax to your state.

You may also need to pay federal and local excise taxes. An excise tax is a legislated tax on specific goods or services, such as fuel, tobacco, and alcohol.

Payroll Taxes

If you have employees, you must withhold payroll taxes from their paychecks and pay applicable federal, state, and local taxes. The taxes usually withheld from employee paychecks include FICA (Medicare and Social Security taxes) and federal, state, and local income taxes. Employers and employees each pay half of the FICA tax.

Recommended: 3-Year Business Plan Structure

How to Reduce Taxable Income

As a business owner, there are many strategies you can use to reduce the portion of your business income (or profits) that can be taxed. Here are some you may want to consider.

Reinvesting Business Profits Into the Business

Reinvesting means retaining net profits (the income left over after all operating costs and overhead are paid) and investing them in activities or expenses that can help increase the value of the business. As a business expense, reinvested income generally isn’t taxable.

You may, however, want to reinvest only a portion of your profits and look for other ways to infuse capital into the business, such as applying for a small business loan. Interest paid on business loans is typically tax deductible as a business expense.

Finding Deductions

There are numerous business tax deductions you may qualify for and, when you add them all up, they can amount to a significant reduction in your taxable business income. Here are some of the most common small business deductions:

•  Inventory

•  Business property rent

•  Startup costs

•  Utilities

•  Company vehicle expenses

•  Insurance

•  Rent and depreciation on equipment and machinery

•  Office supplies

•  Furniture

•  Advertising and marketing

•  Business entertainment

•  Travel expenses

•  Interest paid on all types of small business loans

Tax Audits

As a small business owner, it makes financial sense to explore all your options for reducing your tax bill. However, when it comes to deductions, you need to be careful. It’s particularly important, for example, to keep your business and personal expenses separate. If your deductions look suspicious to the IRS, the agency could potentially audit your business.

Investing in Employees

One great way to reduce your company’s taxable income is to invest in your employees. Generally speaking, any wages, bonuses, or other compensation you pay your workers in a given year are tax deductible as a business expense. That includes any fringe benefits you offer — such as gifts, health plans, and employee discounts — as well.

Rewarding your workforce can do more than lower your tax liability, however. It can also help boost their morale, increase productivity, attract the top talent, and grow your business.

Choosing Purchases and Investments Wisely

While it’s clearly important to invest in your business, the question remains: Where should you focus your funds? Here are a few purchases and investments you may want to consider.

•  Equipment: It can be smart to reinvest profits into new machinery and equipment as your current assets age and become expensive to maintain. Upgrading equipment can increase efficiency and help you stay on the cutting edge of your industry.

•  Software: Investing in software, such as payroll and accounting software, can help streamline tedious tasks and free you up to focus on more important matters, such as growing your business.

•  Inventory: In some cases, using business profits to buy more inventory can be a smart business move. If you often sell out of popular products, for example, beefing up inventory can help you capture sales you’ve been missing out on.

•  More marketing: You might consider hiring a marketing professional or agency to help create buzz about your business, improve search rankings, and expand your customer base.

Recommended: Business Cash Management, Explained

Tax Planning Strategies

One of the best ways to make your business tax efficient is to pay attention to tax credits and not just deductions.

Tax credits are particularly valuable because, unlike deductions, which reduce your taxable income, credits reduce your tax bill on a dollar-for-dollar basis. For example, if your small business owes $25,000 in taxes, a $5,000 tax credit means you can subtract $5,000 from your tax bill and only owe $20,000.

There are a number of tax credits your business might qualify for, including:

•  Credit for Small-Business Health Insurance Premiums

•  Employer Credit for Paid Family and Medical Leave

•  Work Opportunity Credit

•  Credit for Increasing Research Activities

•  Disabled Access Credit

•  Credit for Employer-Provided Childcare Facilities and Services

•  New markets credit

The Takeaway

It takes hard work to establish and grow your business. Once you’re able to cover all your expenses, pay yourself a salary, and still have money left on the table, it may be time to consider putting that extra money into your business.

Reinvestment means pouring a percentage of your company’s profits back into your business. It can be a great way to increase the value of your company and to help your company grow. What’s more, reinvesting can reduce your business tax liability at the end of the year, for the ultimate win-win.

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

How much is a small business able to make before paying taxes?

A small business generally must pay taxes on any profit it earns, but the specific amount before paying taxes depends on deductions, credits, and the business structure. For self-employed individuals, income over $400 is subject to self-employment tax, while other tax obligations vary by income and state laws.

What does the 20% business tax deduction do?

The 20% business tax deduction, part of the Qualified Business Income (QBI) deduction, allows eligible small businesses to deduct up to 20% of their qualified business income from their taxable income. This reduces their overall tax liability, promoting business growth and investment.

What is a business write-off?

A business write-off is a tax deduction that allows businesses to subtract certain eligible expenses from their taxable income. Common write-offs include operating costs, rent, supplies, meals, startup expenses, employee salaries, and more. These deductions reduce the overall tax liability by lowering the business’s reported income.

Can you invest business profits to avoid taxes?

Yes, you can reinvest business profits into the company to reduce taxable income, but you cannot avoid taxes as a small business owner. While reinvesting can lower taxes, it doesn’t fully eliminate tax obligations, as profits are still subject to applicable tax laws and limits.

Photo credit: iStock/Andrii Yalanskyi

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.

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Source: sofi.com

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Do you want to get paid to give advice? A few years ago, I never would have thought that giving advice could turn into a way to make extra money. But after starting my website and sharing what I knew about personal finance, I quickly realized that I could make extra income. It’s amazing how…

Do you want to get paid to give advice?

A few years ago, I never would have thought that giving advice could turn into a way to make extra money. But after starting my website and sharing what I knew about personal finance, I quickly realized that I could make extra income.

It’s amazing how your skills, whether they’re in medicine, cars, law, tech, relationships, or anything else, can become a profitable business. I love helping others and, at the same time, earning money from what I enjoy!

In this article, I’ll go over:

  • Ways to get paid to give advice
  • Type of professionals that get paid to give advice
  • How to get paid giving advice online

How To Get Paid To Give Advice

Here’s a list of 16 ways to get paid to give advice.

1. JustAnswer

JustAnswer is a site that pays people to give advice and answer questions in different fields such as legal, tech, medical, veterinary, antique appraisers, and more.

If you’re an expert in a field that people usually have questions in, you can monetize your expertise on JustAnswer by sharing your expert opinion.

You may be wondering what kind of questions are asked on JustAnswer. Here are a few examples:

  • How much is my antique worth?
  • How can I lower my business taxes this year?
  • What can I do if a sinus infection won’t go away?
  • How do I fix my car’s alternator?

To get started on JustAnswer, you need to go through an application process (with a background check) and get verified that you’re an expert by providing proof of qualifications like degrees, certifications, or other relevant experience.

Recommended reading: 21 Ways To Get Paid To Answer Questions

2. Start a blog

I run a personal finance blog and share advice all the time (and I get paid for it!). Starting a blog is one of the best ways to share your expertise while creating a reliable source of income.

Sharing your expertise and knowledge with a blog is a great way to diversify your income. You can make money blogging by:

  • Affiliate marketing (where you get a commission when people make purchases through your links)
  • Advertising revenue
  • Sponsored content
  • Selling services like coaching
  • Selling products like books or courses

One of the keys to successful blogging is choosing a niche or topic that you’re both passionate about and that has an audience who wants to learn more.

Here are some popular blog niches you can try, depending on your expertise:

  • Education and career – If you have experience in teaching or career coaching, this niche can focus on helping others with their career goals, job interviews, or study techniques.
  • Personal finance – Share tips on budgeting, saving, investing, and side hustles. Many people are looking for ways to improve their finances.
  • Health – Topics like fitness, nutrition, mental health, and self-care are helpful.
  • Travel – If you love traveling, you can start a travel blog, sharing tips on budget travel, destination guides, family travel, or even remote work opportunities.
  • Parenting – This niche covers a wide range of topics, from newborn care and toddler tips to advice for teenagers. You can also write about balancing parenting and work or homeschooling.
  • Food – Share recipes, meal planning tips, or diet-specific content (e.g., vegan, keto, gluten-free).
  • DIY and crafts – Whether it’s home improvement, crafting, or upcycling projects, this niche is popular among creative individuals looking for inspiration and guidance.
  • Lifestyle – A lifestyle blog covers several areas like home decor, fashion, personal growth, and productivity.
  • Tech – If you’re knowledgeable about tech, you can give advice on the latest gadgets, software, app reviews, and even tutorials for beginners.
  • Beauty – This is a highly popular niche where you can share makeup tips, skincare routines, and product reviews.
  • Relationships – Help readers improve their relationships or personal growth by sharing advice on communication, self-improvement, or career development.

You can learn how to start a blog in the free How To Start a Blog Course.

3. Create an online course 

If you’re looking for a passive way to make money by giving advice, creating an online course is a great way to do so.

My sister runs a popular online course and has done very well with it. Over the years, she has helped thousands of people with her business advice for website owners.

You can create a course on topics such as:

  • Meal planning and prep – Teach people how to plan meals, prep ingredients, and create healthy, budget-friendly meals.
  • Parenting tips – Help with topics like raising toddlers, managing screen time, or improving sleep.
  • Home organization – Help people declutter, organize their homes, and create better living spaces.
  • Fitness and wellness – Share workouts, stretching routines, or mindfulness practices like meditation or yoga.
  • Photography basics – Teach people how to use their camera or phone to take better photos. I recently saw a course teaching parents how to take better family photos with their phone, and it looked so helpful!
  • Gardening for beginners – Guide people through starting a garden, caring for plants, and growing their own fruits and veggies.
  • DIY home projects – Sell lessons on simple home improvement or crafting projects, like building furniture or making home decor.
  • Travel planning – Share tips on planning budget-friendly vacations, packing efficiently, and finding fun destinations.
  • Pet care – Teach new pet owners how to care for their animals, including training, nutrition, and grooming tips.

You can sell your online course on your website or course websites like Udemy, Skillshare, or Teachable (Teachable is my favorite course platform).

4. Answer surveys

You won’t get rich by answering surveys, but it’s an easy way to make money by giving your opinion.

Market research companies pay survey sites to find users to complete surveys for them. These paid online surveys help companies make better products and services.

Here are some of the recommended survey companies to sign up for:

  1. American Consumer Opinion
  2. Swagbucks
  3. Survey Junkie
  4. InboxDollars
  5. Branded Surveys

Recommended reading: 12 Best Online Surveys For Gift Cards

5. User Interviews

User Interviews stands out from most market research companies because, rather than paying for typical online surveys, it specializes in focus groups.

This means they seek more detailed feedback from participants on different products and companies. Their studies are usually conducted via phone or video interviews, with the average study paying over $65.

Large companies like Spotify, Pinterest, GoPro, and Amazon use User Interviews to collect market insights. The platform runs over 2,000 studies each month, and last year alone, more than 77,000 participants were paid.

Michelle (my sister as well as the owner of this blog) participated in a focus group through User Interviews and earned $400 for just one hour of work. She said it was simple, and the entire process was completed online through a video call.

You can click here to sign up for free with User Interviews.

6. Financial advisor

Financial advisors are trained professionals who give financial advice to clients. You can make money as a financial advisor by charging fees for your services, receiving commissions on financial products, or both. 

A financial advisor may help with financial planning, retirement, wealth management, insurance, investments, savings, and more.

To become a financial advisor, you need a combination of education and certifications. To get started, you’ll need a bachelor’s degree in finance, economics, accounting, or related field. You’ll also need an internship or entry-level job in finance, banking, or financial planning to get hands-on experience. Most importantly, you’ll need to get certified as a Certified Financial Planner and pass the licensing exams.

As of this writing, the average Certified Financial Planner’s salary is between $66,000-$122,000 a year.

7. Business consultant

One way to make money by giving advice is to start a consulting business and become a freelance consultant.

A business consultant is someone who uses their expertise to help companies improve their business, income strategy, and profitability.

Consultants get paid either by hourly rate, project-based fees, or retainer agreements. Business consultants can also make money by conducting training sessions and workshops for more money.

Business consultants are in high demand as businesses are always looking for ways to improve and make more money.

8. Personal trainer

If you love fitness and working with people, you can try making money as a personal trainer.

Getting a NASM personal trainer certification, which is one of the top certifications in the field is helpful. This is where you’ll dial in form, workout routines, and many other important fitness-related skills.

As a personal trainer, you can make money with one-on-one sessions, group classes, and even online training programs. Trainers typically charge per session or have package deals for multiple sessions. You can also make money by creating workout programs that people can purchase online.

9. Online coach

You can make money working as an online coach through digital platforms.

Some areas that you could coach on include:

  • Life coaching
  • Relationship coaching
  • Business coaching
  • Fitness coaching
  • Career coaching

As an online coach, you can make money with one-on-one coaching sessions, group coaching, or self-paced courses that people can buy directly from you. You can charge people one-time fees, package deals, or ongoing membership subscriptions for continued access to your guidance.

To grow your income, you can use social media platforms to build your brand and get people to trust you, such as by sharing helpful free tips in graphics or captions.

10. HelpOwl

HelpOwl is a platform where you can get paid to give advice online to individuals seeking help with different topics.

To get started with HelpOwl, register on the website and set up your profile. Your profile should showcase your expertise, skills, qualifications, and areas of advice.

You can also determine your fee structure for providing advice whether it’s per session or question.

11. Quora

You’ve likely heard of Quora since it’s a goldmine for getting any kind of question answered, but did you know you can make money with Quora?

Yes, it is possible to make money on Quora through a few different strategies.

Quora has a partner program that lets you make money by asking questions that generate high traffic and engagement to their website. You can get paid based on the ad revenue generated from the questions you ask.

Quora’s partner program is great for anyone who wants to become an online advice giver as you can share your honest opinion or answer a question in a simple comment.

12. Start a podcast 

You can make money selling advice through a podcast.

This method of selling advice takes a lot of work but can be worthwhile if successful.

If you want to start a podcast to give advice, there are many great topics to choose from. You could talk about personal finance, relationship advice, or career coaching. Health and wellness podcasts are popular too, where you can cover fitness, mental health, and self-care. Parenting tips for new parents, small business advice, or life coaching are also good ideas. You could even share tech help, home improvement tips, or legal advice.

Whatever you pick, your podcast can help people improve their lives.

Once you build up your following, you can make money with ads and different sponsorships on your podcast episodes, along with affiliate links. 

13. Start a YouTube channel 

Starting a YouTube channel is another great way to get paid for giving advice, especially if you enjoy talking on camera.

I turn to YouTube all the time when I’m looking for answers and advice. It’s a helpful resource where I can find detailed explanations on just about any topic. Whether I need tips on personal finance, blogging, or even tech solutions, there’s usually a video that walks me through the steps. I love how I can watch experts in action, and it’s a great way to learn something new quickly and visually.

With YouTube, you can create videos in your area of expertise and build an audience of subscribers who value your knowledge. Whether you’re skilled in personal finance, cooking, fitness, or any other niche, there’s probably an audience looking for advice in a YouTube video.

To make money on YouTube, you can monetize your channel through:

  • Ads: Once you reach YouTube’s eligibility requirements, you can earn money from ads that play during your videos.
  • Sponsorships: Brands may pay you to promote their products or services in your videos.
  • Affiliate marketing: Include affiliate links in your video descriptions, earning a commission when viewers make purchases through your links.
  • Selling products or services: You can also use YouTube to promote your own products, courses, or consulting services.

Consistency is key on YouTube, so creating valuable, engaging content that resonates with your audience will help grow your channel and income over time.

14. Share advice on Fiverr

Fiverr is a great spot to sell your advice if you’re looking for an online job.

I searched on Fiverr and found 2,200 listings where people were offering to give advice. The topics included things like relationship advice, tax advice, fantasy football advice, blog advice, business advice, and more.

You simply create a profile and a listing where you share the type of advice you specialize in.

15. Website testing (such as with UserTesting)

Website testing is a simple way to make money by sharing your advice and providing feedback on the website user experience.

There are several well-known website testing sites including UserTesting, TryMyUI, and Userlytics. These sites connect you with people looking for user feedback on their websites and apps. 

By using website testing platforms, selling expert advice, and building a strong reputation, you can successfully make money through website testing and sharing your insights.

16. Mystery shopping

Mystery shopping is a fun way to give your advice and feedback on a customer service experience, product, or store operations. 

As a mystery shopper, your feedback tells companies how well their employees are treating customers, if customers are happy, and if any operational problems need fixing.

There are three different ways to make money mystery shopping including:

  1. Cash and reimbursement (you’ll get paid to do the mystery shop, plus get the service/product for free).
  2. Cash payment (an example would be a phone call mystery shop when you don’t buy anything).
  3. Reimbursement (an example would be a restaurant secret shop – these typically don’t pay any money except for receiving free food).

BestMark is one of the biggest mystery shopping companies with a great reputation, and they have many different kinds of mystery shopping jobs available. Ath Power Consulting is another well-known mystery shopping company that has over 500,000 secret shoppers. They complete over 10,000 mystery shops each month, and they work with many popular companies.

Recommended reading: Want To Make An Extra $100 A Month? Learn How To Become A Mystery Shopper

Frequently Asked Questions

Below are answers to common questions about how to get paid to give advice.

Can you get paid for giving advice? 

Yes, you can get paid for advising in many ways such as consulting (people pay for advice on specific topics), coaching (people paying for expertise in a certain area, like business, relationships, career, and life), and content creation (monetize your advice through blogs, podcasts, social media).

What type of professionals make money by giving advice? 

The kinds of professionals getting paid to give advice include:

  • Consultants
  • Coaches
  • Financial advisors
  • Legal advisors
  • Counselors
  • Health experts
  • Tutors
  • Real estate agents
  • Educators
  • Creative professionals
  • Entrepreneurs
  • Public speakers

As you can see, the list is endless. By using the skills and knowledge you have, you can likely get paid to provide practical and personalized advice to people.

Can I sell life advice?

You can sell life advice if you have valuable life experiences that other people find helpful to learn from. People tend to hire life coaches, mentors, and advisors to help them with life challenges, achieve goals, and find purpose in their lives. 

You can make money selling life advice in several ways including:

  • One-on-one coaching sessions
  • Online courses
  • Books
  • Blogs
  • Podcasts
  • Social media accounts

It’s important to identify your niche and who you want to help. For example, your target audience may be women looking for a career change or people who need help with relationship advice. Focusing on a specific niche will help you stand out from others and market your services more efficiently.

How can you get paid to give advice online?

There are many ways to get paid to give advice from your laptop. JustAnswer is a great way to get started getting paid to give advice and connect you to people seeking help in your field.

If you’re looking for a passive way to make money giving advice, create an eBook, course, blog, or podcast. You can make money by selling your products, advertising, using affiliate links, or creating sponsored content.

Can you get paid to give relationship advice online?

You can get paid to give relationship advice and dating advice by working as a relationship coach through platforms like BetterHelp (as a therapist) or via your own website. You’ll need specific credentials to work on sites like BetterHelp and Talkspace, whereas having a relationship blog doesn’t require certifications, but may be harder to make money at the beginning of starting your business.

How To Get To Give Advice – Summary

I hope you enjoyed this article on how to get paid to give advice.

If you have knowledge in a specific area, you can turn that into a business by giving advice. Whether it’s in fields like medical, legal, tech, personal finance, or relationships, there are many ways to get paid for your skills.

Plus, you can do this either part-time or full-time, so you can choose what kind of hours you want to work.

Do you want to get paid to give advice?

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Source: makingsenseofcents.com