September 2024

Complete Guide to Restaurant Loans

by Wil Rivera10 minutes / September 30, 2024

Owning a restaurant can be rewarding, but often comes with financial challenges. Restaurants may experience irregular or seasonal revenue, while they must continue to make payroll, maintain equipment, and stock pantries, coolers, and bars.

Whether you’re launching a new restaurant concept, expanding an existing restaurant, or just need working capital to keep the bills paid when revenue fluctuates, a restaurant loan could be the answer. Restaurant loans can help restaurants grow and maintain operations without straining their finances.

What are Restaurant Business Loans?

A restaurant loan is a small business loan used by restaurant owners. The business loan provides financing that a restaurant business owner can use to support their restaurant operations. There are a variety of different ways that a restaurant loan can be structured, such as varying loan amounts and terms, depending on the needs of the restaurant and its owners.

How do Restaurant Business Loans Work?

Restaurant business loans work just like any other business loan – where the lender gives the restaurant owner a lump sum of money and the borrower will repay the loan with interest in agreed-upon monthly payments. These payments are fixed, making them easy to account for on a regular basis.

There are other types of financing that a restaurant owner could choose depending on their needs. For example, if the restaurant needs a dining room renovation, a lump-sum loan may be the right choice to purchase the equipment. But if the restaurant just needs available working capital to tap into when revenue is slow, another option, such as a business line of credit, may be the best option.

Restaurant Loan Benefits

A restaurant loan can offer a number of benefits for owners, including:

Cash flow flexibility

Most restaurants face unexpected expenses from time to time. Food prices may spike temporarily, or an oven or dishwasher may need a major repair or replacement. Rather than worrying about how you’ll have the cash flow flexibility to cover unexpected expenses, a restaurant loan can ease your mind and help you manage those costs.

Financing for growth

Business growth and expansion can become unmanageable if it occurs faster than you can finance it. Restaurant owners may use small business loans to help finance the growth of their business by purchasing new equipment, hiring and training more staff, buying additional inventory, leasing more space, or ramping up marketing. Loan financing may also pay for renovations to an existing space or equipment upgrades if needed to plan for future business growth.

Meet seasonal needs

In many cases, restaurants are seasonal businesses where the amount of revenue coming in fluctuates throughout the year. Restaurant owners may need extra funding to prepare for the upcoming season or to keep the bills paid during the slower seasons.

A restaurant loan could help with hiring and training seasonal staff, purchasing inventory, and creating seasonal advertising to prepare for the busiest time of the year. This funding may also help business owners during a slow season by covering costs to meet immediate needs.

Restaurant Loan Drawbacks

A restaurant loan can help you run your business smoothly, but it may also have drawbacks, such as:

Potential collateral requirements

Some restaurant loans require business owners to provide collateral to qualify for financing. That may mean securing the loan with funds in the business account, the restaurant’s building or food truck, or even the owner’s personal house, car, or retirement funds.

Consistent payments despite inconsistent revenue

Even though a restaurant’s revenue may be seasonal or inconsistent, payments on a restaurant loan must be made consistently. It’s important to plan how the payments will be made before taking out a loan.

Restaurant Loan Uses

A restaurant loan can be used for almost any expense a restaurant has, such as:

Restaurant growth – A restaurant loan could fund one or more new locations or the expansion of a current restaurant location.
Equipment purchases or repairs – Every restaurant needs equipment, but purchasing, maintaining, and repairing that equipment can be expensive. A restaurant loan can help cover the costs.
Payroll and other regular expenses – A restaurant loan can make it possible to meet payroll obligations and cover other monthly bills when cash flow is tight.
Food inventory – Stocking the restaurant pantry and freezer can be expensive. A restaurant loan can finance food costs so that your restaurant is ready to serve a crowd of customers.

Note that some business lenders will set stipulations for what the loan funds can be used for. Make sure that your planned purchases are approved before you accept a loan offer.

Types of Business Loans for Restaurants

There are a variety of different types of loans available for restaurant owners. The one that works best for you will depend on your specific needs.

Term Loan

With a small business term loan, a restaurant receives funding upfront and pays it back in installments — plus interest — over time. The loan must be paid back with regular payments within an agreed-upon term, such as one year, five years, or 10 years. Lenders may consider business and personal financial history and credit score for qualification

SBA Loan

An SBA loan is a flexible financing solution for a restaurant. Because a portion of an SBA loan is guaranteed by the U.S. Small Business Administration, lenders can typically provide these loans to borrowers with more favorable terms and interest rates than conventional loans. That may mean restaurant owners can take advantage of greater accessibility, lower down payments, and longer repayment terms than other financing options. However, SBA loans are difficult to qualify for and are not a viable option for every restaurant owner.

Restaurant Financing Alternatives

When a traditional loan isn’t the right fit for your restaurant, there are alternative types of financing that might work, including the following.

Line of Credit

A business line of credit for a restaurant allows access to a predetermined amount of funds whenever you need it, allowing you to only pay interest on the amount drawn from the total. The funds become available to borrow again as you pay down balances.

Business Credit Card

A business credit card works like a personal credit card, allowing a business owner to charge purchases up to a certain limit. Carrying your statement balance beyond the payment due date can incur interest charges. When the card has a balance, the business owner must make a monthly payment that includes both principal and interest owed.

Grants

Business grants are funds that are granted to a small business free of charge, with no need for repayment. Many different organizations offer small business grants, including government agencies, nonprofit organizations, and some large corporations. Typically, small businesses must complete an application and go through a competitive process to win a grant.

Equipment Financing

Equipment financing allows small business owners to purchase the equipment they need to keep their businesses moving ahead, without tapping into savings or working capital. Restaurants may be able to get a tax deduction when they use equipment financing, too, though you should connect with an accountant before filing your business taxes.

Invoice Factoring

If your restaurant provides catering or other services that involve invoicing customers, you could consider invoice factoring, which is a way of accessing capital by selling invoices to a third party. In return, the restaurant business would receive an advance based on a percentage of the total value of the invoices. In some cased, the third party factoring company may then assumes responsibility for collecting payments from the customers who owe the outstanding balances.

Crowdfunding

Many small businesses have accessed funding through crowdfunding on platforms like Kickstarter and gofundme. If your restaurant business has a unique or touching story that might attract the interest and support of a wide variety of individuals, crowdfunding may be a good option.

How to Get a Restaurant Loan

The specifics may vary based on the type of loan you want, but most restaurant loans require the following when applying:

Personal and business credit scores
Revenue of the business
Length of time in business
Size of the business
Collateral (if required)
Business Checking Account
Previous year’s tax returns and/or bank statements

From there, you should compare multiple lenders and restaurant loan options to find the best fit for your business.

Where to Get a Restaurant Loan

Restaurant loans are usually offered by traditional banks, credit unions, and online lenders, each of which comes with benefits and drawbacks.

A traditional bank loan may come with lower rates, making it the most affordable option. However, banks often set strict eligibility requirements, and loan applications can take a while to process. Once approved, loan funds could take longer to disperse than other options.

Credit unions are excellent local resources for small businesses. They offer competitive rates and a more personalized service than many banks, though loan limits are typically lower than with banks. Credit unions can also have lengthy approval processes.

Online lenders provide a quick alternative to banks and credit unions. Application approval and fund dispersal can take a matter of days for some online lenders. Online lenders also offer flexible loan options, letting you find a restaurant loan that fits your business. However, many online lenders come with higher rates than banks or credit unions.

How to Choose a Restaurant Loan

To select the best restaurant loan for your situation, look for a lender that has experience working with restaurants. It’s also a good idea to compare lenders and rates and consider a variety of different products before choosing the one that works best for you.

When shopping around with different lenders, compare terms such as:

How much you’ll be able to borrow
How long you’ll have to repay a loan
The interest rate and fees
Collateral requirements
Personal guarantee requirements

Restaurant Loan FAQs

Is it hard to get a restaurant loan?

Most restaurant owners have a wide variety of business loans that are now available to them, especially through online lenders. Eligibility for a loan comes down to personal and business credit scores, the business’s financial health, and collateral if needed.

Do banks lend to restaurants?

Some banks make loans to restaurants, depending on the restaurant’s length of time in business, performance record, and financials. Restaurants that are not able to get a loan from a bank have plenty of other options for raising capital with online lenders and nontraditional finance companies.

How big of a loan can you get for a restaurant?

The size of a restaurant loan will depend on the lender and the qualifications of the borrower. Some new restaurant owners might qualify for a loan of $50,000, while more experienced restaurant owners might qualify for a loan that is much larger. Check with lenders to see what your restaurant business qualifies for.

Wil Rivera

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Why Should Small Businesses File Taxes Early?

Manage Your Money

by Wil Rivera9 minutes / September 28, 2024

Filing business taxes early is rarely a bad idea. If you’re expecting a tax refund, filing early means you’ll receive the refund sooner.

But that’s not the only benefit, and there are plenty of advantages to filing taxes early. Keep reading to learn some of the reasons to get ahead of the game and file before the deadline next year.

6 Reasons to File Business Taxes Early

The life of a business owner is usually very busy, and it probably seems difficult to find time to focus on organizing your business financial information and filing your business tax documents. However, making time to do that sooner than later offers plenty of benefits.

Avoid Paying Penalties

First, if you file early, you don’t have to worry about paying penalties for not meeting tax deadlines. For example, imagine you plan to complete and file your returns during the first week of April, to meet an April 15 deadline. If on April 1, you face an unexpected circumstance—your business is flooded due to a storm, your top employee quits or takes a leave of absence, or you receive a huge rush order for your product—and suddenly, you are preoccupied with other things. Your good intentions for tax filing may get cast aside, causing you to delay filing and potentially rack up penalties.

Not only does the IRS charge Failure to File penalties and Failure to Pay penalties, but it also charges interest on penalties. Those charges accrue by the month or partial month that a return is unfiled and unpaid and can add up quickly.

Get Refunds Faster

The IRS processes tax returns and pays tax refunds as they are received. If you’re expecting a refund, you’ll be more likely to receive it early if you filed your tax return early.

Most taxpayers file close to the deadline, which means the IRS has a large backlog of returns to process right around the filing deadline. By filing early, you can avoid the rush and expect the IRS to process your return faster and send your refund sooner.

Prepare for Next Year’s Taxes Sooner

You can’t file taxes until the tax year is complete. But that means your business is already operating in a new year before you start working on tax filing for the previous year. When you file early, you can go ahead and close the books on the previous year and focus all your attention on the current year.

When you don’t have to worry about last year’s taxes anymore, you’re free to focus on determining the right strategies to minimize your tax liability in the current year.

Avoid the Last-Minute Rush

Waiting until the last minute to complete any project often results in mistakes. Everyone does their best work when they can do so unhurriedly. By filing your taxes early, you can avoid the last-minute rush, take your time and make sure you’re getting all the figures right.

If you plan to hire an outside tax advisor or accountant (which is highly encouraged), you may also save money by filing early. Tax professionals also get overwhelmed during the last-minute rush and may charge extra fees for rush jobs.

Opportunity for Tax Planning Strategies

When you file taxes early, you have more time to take advantage of various tax planning strategies that may help reduce your tax bill. For example, if you complete your tax return early and find that you owe more money than expected, you may still have time to take advantage of tax credits and deductions that could help you reduce your tax bill.

Reduce Tax Stress

Most business owners (80%) feel at least some stress at tax time, according to a recent survey conducted by Freshbooks. More than half (60%) of small business owners said they’d rather do one or more of the following than do their taxes: hanging out with their mother-in-law for a day, getting a mullet haircut, getting a root canal, removing a nest of angry bees, or licking a pole on the subway.

For most business owners, all the stress is due to a lack of preparation and waiting until the last minute. By making a commitment to file early, you can reduce your tax-related stress.

How to File Business Taxes Online

The easiest way to file taxes today—and the quickest way to get a tax refund—is to file online. The IRS encourages business owners to file taxes online and makes it easy to file and pay taxes online. Follow these steps to file online:

Assemble the right documents. You’ll need records of business transactions during the tax year to calculate income, expenses, and deductions.
Locate the right IRS tax form, based on your business structure. If your business operates as a sole proprietorship or a single-member LLC, you can report all business income and expenses on a Schedule C attachment to your personal income tax return. But if your business is organized as a corporation or you choose to treat your LLC as a corporation, you’ll have to prepare a separate corporate tax return using Form 1120 for C-corporations or Form 1120S for S-corporations. Multi-member LLCs are considered partnerships and usually file Form 1065.
Complete the form. Using your business financial information, complete the correct form with the figures from the tax year.
Submit your tax return online. The IRS provides several options for submitting your return online. You can also pay any taxes that are due online.

While the IRS does try to make the tax filing process easy, it is highly encouraged that you don’t try to tackle your taxes on your own – invest in a trusted accountant and/or tax advisor who can help you avoid making any costly mistakes.

How Early Can You File Taxes?

Typically, the IRS will begin accepting tax returns in mid to late January following the tax year. For 2024 tax returns, the IRS has announced that it will begin accepting e-filed returns on Jan. 29, 2025.

What is the Deadline to File Taxes?

Your deadline to file business taxes will depend on your business structure and the type of tax return form you are required to file. If your business is a sole proprietorship or single-member LLC, you use a Schedule C. A Schedule C is part of your personal tax return (Form 1040) and has no separate filing deadline. It’s subject to the same April 15 deadline as your personal return.

If you’re taxed as a C-corporation and file a Form 1120, you must file it by the 15^th day of the fourth month following the close of the tax year. For most taxpayers, that’s April 15.

If your business is an S-corporation or a partnership, you need to file a Form 1120S or Form 1065. These forms are due by the 15^th day of the third month following the close of the tax year, which is March 15 for most taxpayers. This form cannot be sent to the IRS with your personal income tax return; it must be sent separately.

Tips for First-Time Business Tax Filers

Filing taxes early is always a good idea. If you’re filing small business taxes for the first time, you may also benefit from these additional tips:

File the right forms. The form you should file depends on your business structure. If your business is a C-corporation, you need to file a Form 1120, and if it’s an S-corporation or partnership, you need to file Form 1120S or Form 1065. If you operate your business as a sole proprietorship or a single-member LLC, you’ll file a Schedule C with your personal tax return.
Separate business and personal expenses. It’s always wise to keep business and personal expenses separate, and if the IRS ever audits you or your business, blended personal and business expenses will be a red flag. Using a dedicated business account and funneling all business expenses through that account can be good ways to keep expenses separate. You should also have separate credit cards, loans and other types of financing for your business and personal credit as much as possible.
Explore deductions. Tax deductions decrease your taxable business income, which allows you to have a lower tax liability. Most small businesses qualify for many deductions, including business mileage, business interest and bank fees, legal and professional fees, business insurance, home office expenses, and business travel expenses.
Contact a tax professional. It’s a good idea for business owners to connect with a tax professional who is familiar with the federal tax laws as well as in the states and localities in which the business operates. The right tax professional can help you make wise decisions that can help limit your tax liability and ensure that your business remains compliant.

FAQs for Filing Business Taxes Early

At what point does a small business need to file taxes?

A small business must file taxes when it has earned $400 or more during a calendar year. The business owner must typically file taxes by March 15 or April 15 of the following year, depending on the type of business structure they operate.

What is the penalty for filing business taxes late?

The IRS charges failure to file penalties starting at 5% of unpaid taxes per month or partial month that the tax return is late. It also charges monthly failure to pay penalties when taxes are owed and unpaid. The IRS also charges interest on both the tax liability and the penalties.

What are the biggest tax mistakes business owners can make?

Some of the biggest tax mistakes business owners can make include failure to file returns, failure to pay taxes when due, and failure to separate business expenses from personal expenses.

Can you save money by filing business taxes early?

You may save money by filing business taxes early, as you will not have to pay rush fees to a tax preparer when you start the process early in the season. Also, by paying early, you can save money on any potential penalties you may have had to pay by filing late. If the IRS owes you a refund, filing early may also help you get the refund earlier.

What documents do you need to file taxes early?

To file business taxes early, you need the same documents you would need to file at any time. That includes business financial records that document all revenues and all expenses from the tax year.

Wil Rivera

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Does Business Credit Affect Personal Credit?

Manage Your Money

by Wil Rivera8 minutes / September 27, 2024

business credit impact on personal credit

As a business owner, financing can play a significant role in expanding your business operations, managing cash flow, and exploring growth opportunities. Many business owners rely on various forms of financing, such as business loans and credit lines, to fund their business ventures. So, understanding the relationship between business and personal credit is essential, as it influences your ability to secure business financing and maintain financial health.

What is Business Credit and How Does it Work?

Business credit refers to the creditworthiness of a business entity. It functions similarly to personal credit but is specific to the business’s financial activities.

Business credit is established when a company borrows money or opens credit accounts with suppliers and lenders. These activities are reported to business credit bureaus, which compile credit reports and generate business credit scores.

Business credit is vital for various purposes, including securing loans, obtaining favorable terms with suppliers, and building a solid financial reputation. Lenders and vendors often assess your business credit to determine the risk of extending credit or loans. A strong business credit score might lead to better financing options and lower interest rates.

Why is Business Credit Important?

Business credit is essential for obtaining financing and managing business growth effectively.

For small business owners, a good business credit score could be the key to securing a small business loan, line of credit, or corporate credit card. This financing can be used to purchase inventory, hire staff, or invest in marketing and expansion.

Strong business credit could also help separate your personal and business finances, reducing the risk of personal liability for business debts.

How to Check Your Business Credit Score

Checking your business credit score is a straightforward process. There are several websites which allow you to check your business credit report. These sites include:

Dun and Bradstreet
Experian
Equifax
Nav
Data Axle
CreditSafe
Tillful

These platforms provide detailed reports on your business’s credit history, helping you understand your credit standing and identify areas for improvement.

Business Credit vs Personal Credit

While business credit and personal credit share some similarities, they operate differently in several key areas. Here’s a comparison of the two:

	BUSINESS CREDIT	PERSONAL CREDIT
REPORTING AGENCIES	Dun and Bradstreet, Experian, Equifax Business	Experian, Equifax, TransUnion
SCORE RANGES	0-100 (D&B PAYDEX), 300-850 (Experian, Equifax)	300-850
USES	Business Loans, Supplier Credit	Personal loans, Credit Cards, Mortgages
LINK TO PERSONAL SSN	No	Yes
IMPACT ON PERSONAL CREDIT	Indirect, if personal guarantee is required	Direct
LIABILITY	Business Liability	Personal Liability

How Does Business Credit Affect Personal Credit?

The relationship between business credit and personal credit can be complex, especially for small business owners who may often find their financial worlds overlapping. Generally, business credit does not directly impact personal credit. However, there are several scenarios where the two can be connected, creating an indirect influence that can affect your overall financial health.

For example, when you start a business, your personal credit history might be used to secure initial financing. In this case, lenders often require a personal guarantee, which means you’re personally responsible for repaying the debt if your business fails to do so. If this happens, your credit score becomes a crucial factor in the approval process and the loan terms.

How Do Business Loans Affect Personal Credit?

When you apply for a business loan, lenders may assess your personal credit score, particularly if your business lacks a substantial credit history. This assessment helps lenders evaluate the risk of extending credit to your business.

If you personally guarantee a business loan, you become responsible for the debt. This personal guarantee means that if your business defaults on the loan, the responsibility falls on you, and your personal credit score can suffer as a result.

Repayment behavior on a business loan can also affect your personal credit. If the business loan is reported to personal credit bureaus, the loan amount and repayment status become part of your credit report, influencing your credit utilization ratio and overall credit profile.

How Credit Inquiries Affect Credit Scores

Credit inquiries occur when lenders check your credit report as part of the loan approval process. These inquiries can temporarily lower your credit score. It’s important to manage the number of credit inquiries to minimize negative impacts on your credit score.

How Business Credit Cards Show Up on Your Personal Credit Report

Your credit report is a thorough detailing of several pieces of your financial activity, which sometimes include business credit card information, such as:

New Inquiries

When you apply for a business credit card, the issuer may perform a hard inquiry on your credit report. This can temporarily lower your personal credit score by about five points or less.

Credit Utilization

Business credit card balances may appear on your personal credit report if you provide a personal guarantee. High balances can increase your credit utilization ratio — how much debt you’ve accumulated divided by the credit available to you — potentially lowering your personal credit score.

Payment History

Timely payments on business credit cards help build a positive payment history. Conversely, missed payments can negatively affect both your business and personal credit scores.

Personal Guarantee

Some business credit cards require a personal guarantee, meaning you’re personally liable for the debt. If the business cannot pay, the responsibility falls on you, impacting your personal credit.

How to Establish Business Credit

To establish business credit, follow these steps:

Register your business legally (LLC, corporation, etc.).
Obtain a Federal Employer Identification Number (EIN) from the IRS.
Open a business bank account.
Apply for a business credit card, line of credit, or loan.
Establish trade lines with suppliers and vendors.
Ensure timely payments to build a positive credit history.

How to Build Business Credit

Building business credit involves consistent financial management and strategic credit use. Here are some strategies:

Pay bills on time to build a positive payment history.
Keep credit card balances low to maintain a good credit utilization ratio.
Regularly monitor your business credit report for accuracy.
Establish multiple credit accounts to diversify your credit profile.

By understanding the nuances of business and personal credit, you should be able to effectively manage both to support your business’s growth and maintain your financial health.

Business Credit FAQs

Does business credit show up on your personal credit report?

Business credit generally does not appear on your personal credit report unless you have provided a personal guarantee.

Does having a company credit card affect my credit?

If you’ve provided a personal guarantee for the company credit card, its activity can affect your personal credit. Otherwise, card activity won’t impact your personal credit.

Can my LLC affect my personal credit?

Your LLC can affect your personal credit if you’ve personally guaranteed loans or credit accounts for the business.

Is a business credit score linked to my personal credit score?

While business and personal credit scores are separate, they can be linked through personal guarantees and shared financial responsibilities.

Wil Rivera

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Financing Options for Nonprofits

Manage Your Money

by Wil Rivera9 minutes / September 27, 2024

As a nonprofit owner, you likely understand that running an organization dedicated to a cause can be incredibly rewarding. However, one of the most significant challenges you may face is finding the necessary financing to sustain and grow your mission.

The financing process might seem complicated and fraught with obstacles, but rest assured, there may be more options available to you than you might realize. So, whether you’re just starting or looking to expand your nonprofit, understanding the various financing options available to you can make a substantial difference in your journey.

Is Nonprofit Financing Hard to Get?

The short answer is yes — securing financing for a nonprofit can be challenging. There are several reasons nonprofits might have a harder time obtaining funding than for-profit businesses.

One major hurdle is collateral. Nonprofits often lack substantial assets that can be used as collateral for traditional loans, making lenders hesitant to approve their applications. Nonprofits may also struggle to meet minimum revenue requirements set by lenders, as their income could be unpredictable and heavily reliant on donations and grants.

Despite these challenges, many financing avenues are available, tailored to meet the unique needs of nonprofit organizations.

Financing Options for Nonprofits

There are several financing options available for nonprofits, each with a set of benefits, drawbacks, and varying requirements.

Business Loans

Business loans can be a viable option for nonprofits seeking funding. These loans are similar to those offered to for-profit businesses, providing a lump sum that must be repaid with interest over a specified period.

Business loans could be used for various purposes, such as expanding your nonprofit’s operations, purchasing equipment, or covering operational expenses. One advantage of business loans is their flexibility in terms and loan amounts and relatively straightforward application process.

However, nonprofits may face challenges when applying for business loans. Lenders typically require a solid credit history, a detailed business plan, and collateral to secure the loan (though some lenders may offer unsecured business loans). Nonprofits often need help to meet these criteria, especially newer organizations without an established financial track record.

SBA Loans and Grants

The Small Business Administration (SBA) offers various loan and grant programs that can benefit nonprofits. SBA loans, such as the 7(a) loan program, provide financial assistance for multiple purposes, including working capital, equipment purchases, and real estate acquisition. These loans often come with favorable terms and lower interest rates, making them an attractive option for nonprofits. However, they can be incredibly difficult to qualify for.

In addition to loans, the SBA also provides grants specifically for nonprofits. These grants can be used to fund specific projects, programs, or initiatives aligned with the organization’s mission. While grants do not require repayment, the application process may be competitive and time-consuming. Nonprofits must demonstrate a clear and compelling need for the funds and present a detailed plan for using the grant.

Tips When Applying for Nonprofit Business Loans

When applying for a business loan as a nonprofit, it’s essential to be well-prepared and organized. Here are some tips to help you through the process:

Determine your financing needs: Clearly define how much funding your nonprofit requires and what it will be used for. This helps you present a strong case to lenders.
Try building business credit: Establish and maintain good credit for your nonprofit. This can improve your chances of qualifying for loans and securing better terms.
Prepare a detailed business plan: A comprehensive business plan that outlines your nonprofit’s mission, goals, and financial projections is crucial. Lenders often want to see that you have a clear strategy for using the funds.
Gather financial documents: Be ready to provide financial statements, tax returns, and other relevant documents demonstrating your nonprofit’s financial health and stability.
Research lenders: Look for lenders specializing in nonprofit financing or with experience working with organizations like yours. They may offer more favorable terms and conditions.
Highlight your impact: Emphasize your nonprofit’s positive impact on the community and the broader society. Lenders may be more likely to support organizations that make a difference.

Alternative Nonprofit Financing Options

In addition to traditional loans and grants, several alternative financing options could be available to your nonprofit. These options may provide more flexibility and cater to the unique needs of nonprofit organizations.

Business Credit Cards

Business credit cards can be a useful financing tool for nonprofits, offering a revolving line of credit that can be used for various expenses. They could help manage cash flow and cover short-term costs.

However, using credit cards responsibly is essential to avoid accumulating high-interest debt.

Pros:

Easy access to funds for day-to-day expenses
Can help build business credit

Cons:

High interest rates, if not paid off in full each month
Limited credit limits compared to other financing options

Revenue-based financing

Revenue-based financing could allow nonprofits to receive funding in exchange for a percentage of future revenue. This type of financing can be attractive because repayments are tied to the organization’s income, which may make it more manageable during slow periods.

Pros:

Repayment is tied to revenue
Reduced pressure during slow periods

Cons:

Can be more expensive in than traditional types of financing
Suitable for organizations with steady revenue

Business line of credit

A business line of credit provides access to a predetermined amount of funds to be drawn upon as needed. This flexible financing option may help you manage cash flow and cover unexpected expenses. Repayments are only required on the amount drawn, making it a more cost-effective solution.

Pros:

Flexible access to funds
Interest is only paid on the amount used

Cons:

Requires good credit to secure more favorable terms
May come with fees and higher interest rates than traditional loans

Crowdfunding

Crowdfunding has become popular for nonprofits to raise funds for specific projects or campaigns. By leveraging online platforms, nonprofits could reach a broader audience and solicit donations from individuals who support their cause.

Crowdfunding can be an effective way to generate funds quickly, but it requires a well-planned campaign and active promotion, which may be difficult if you’re strapped for time or don’t have the staff to be as active as necessary.

Pros:

Can reach a large audience
No need to repay funds

Cons:

Requires significant effort to promote the campaign
Success is not guaranteed

Nonprofit Grants

Grants specifically designed for nonprofits may provide essential funding without the need for repayment. Grants are often awarded by government agencies, foundations, and corporations. While the application process can be competitive, securing a grant could significantly boost your nonprofit’s financial health.

Pros:

No need to repay funds
Can provide significant financial support

Cons:

Highly competitive and time-consuming to apply for
Funds may be restricted to specific uses

Fundraising Events

Organizing fundraising events can be an effective way to generate funds for your nonprofit while engaging with your community and raising awareness for your cause. Events such as charity runs, galas, and auctions can attract donations and sponsorships.

Pros:

Engages the community and raises awareness
Can generate significant funds

Cons:

Requires extensive planning and resources
Success depends on event turnout and engagement

Corporate Giving Programs

Some corporations offer giving programs that provide financial support to nonprofits. These partnerships can be mutually beneficial, as corporations seek to enhance their social responsibility efforts while nonprofits receive the necessary funds to further their missions.

Pros:

Provides steady funding and resources
Can enhance your nonprofit’s visibility and credibility

Cons:

May require aligning with corporate goals and values
Competitive to secure partnerships

Earned Income Ventures

Nonprofits can generate revenue through earned income ventures, such as selling products or services related to their mission. This approach may allow organizations to diversify their income streams and become more financially sustainable.

Pros:

Creates a sustainable revenue stream
Reduces reliance on loans, donations, and grants

Cons:

Requires significant planning and resources to establish
May divert focus from your nonprofit’s core mission

Impact Investing

Impact investing involves securing funds from investors seeking financial returns and social impact. Nonprofits can attract these investors by demonstrating how their work contributes to positive social or environmental outcomes.

Pros:

Aligns with your nonprofit’s mission and values
Can attract socially conscious investors

Cons:

Requires demonstrating both financial returns and social impact
May involve complex investment structures

Where to Get Nonprofit Business Loans

Nonprofits can explore various institutions and platforms to secure financing, such as:

Banks

Traditional banks are a common source of business loans for nonprofits. However, securing a loan from a bank can be challenging due to stringent requirements, such as high credit scores and substantial collateral. Nonprofits with strong financial histories and collateral may find success with bank loans.

Credit Unions

Credit unions often offer more personalized service and flexible terms than traditional banks. They may be more willing to work with nonprofits, especially those with strong community ties. However, not all credit unions provide business loans, so do your research and find one that does.

Online Lenders

Online lenders can be convenient for nonprofits seeking quick and accessible financing. These lenders typically have a streamlined application process and may offer more lenient requirements. It’s important to carefully review the terms and interest rates, as they can vary widely from lender to lender.

Community Development Financial Institutions (CDFI)

CDFIs are specialized financial institutions that provide credit and financial services to underserved communities, including nonprofits. They often offer favorable terms, and a better understanding of the unique challenges faced by nonprofits.

While securing financing for a nonprofit can be challenging, there are many options that could be available to help you achieve your goals. Stay informed, be prepared, and continue positively impacting your community!

Nonprofit Business Loan FAQs

How does a nonprofit get a loan?

Nonprofits can obtain loans by applying through various financial institutions, such as banks, credit unions, or online lenders. The application process typically involves providing financial documents, a detailed business plan, and demonstrating the nonprofit’s ability to repay the loan. Building a strong credit history and establishing relationships with lenders may also improve the chances of securing a loan.

Can a nonprofit have a line of credit?

Yes, nonprofits can obtain a line of credit, which provides access to a predetermined amount of funds that can be drawn upon as needed. A line of credit offers flexibility in managing cash flow and covering unexpected expenses.

Does SBA help nonprofits?

Yes, the SBA offers loan and grant programs that can benefit nonprofits. SBA loans, such as the 7(a) loan program, provide financial assistance for various purposes, including working capital and equipment purchases. The SBA offers grants specifically for nonprofits, which do not require repayment. These programs can significantly support nonprofits in achieving their missions.

Wil Rivera

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What Is a Cash Flow Loan?

Manage Your Money

by Wil Rivera12 minutes / September 27, 2024

Cash flow plays an important role in helping businesses maintain day-to-day operations, and cash flow loans can be an essential resource for businesses, especially those businesses that prefer to primarily qualify for financing based on their past and expected future revenue. Cash flow loans generally help businesses manage their operational costs, seize new opportunities, and bridge gaps in their cash flow.

What Is a Cash Flow Loan?

A cash flow loan is any loan meant to improve cash flow. Technically, there isn’t a specific “cash flow loan.” However, many cash flow loans refer to revenue-based financing, where the business owner doesn’t need collateral and qualifies primarily based on proof of past revenue and future revenue forecasts.

This means that if your business has a strong and consistent revenue stream, you might access this type of financing with lower credit scores and no collateral. However, each lender sets its own requirements, something to note when comparing cash flow loans.

What’s the difference between cash flow and asset-based lending?

Cash flow lending and asset-based lending differ mainly in the criteria used for qualification and the type of collateral required.

Cash flow lending focuses on the actual cash flow your business generates, using this as a basis to extend financing. Asset-based lending relies on assets like inventory, equipment, or real estate as collateral.

Essentially, if your business has sustainable and regular revenue but lacks substantial assets, cash flow financing could be the better option for your business.

How Cash Flow Loans Work

Lenders will look at your historical revenue and future revenue forecasts to determine your eligibility.

Repayments are made either through regular fixed payments or through a fixed percentage of your sales. Payments can be daily, weekly, or monthly, depending on the agreement. This structure may help you manage cash flow by aligning repayments with your revenue cycle.

For instance, revenue-based financing often involves lenders advancing funds that are repaid through a percentage of your future sales, allowing for flexible repayment aligned with your business’s cash inflows.

How to Use a Cash Flow Loan

Cash flow loans are versatile and can be used in various situations to support your business:

Cover a cash flow gap: Smooth over periods of low revenue.
Opportunities for revenue: Invest in new projects or ventures to increase income.
Purchasing inventory: Buy the necessary stock to keep your business running.
Fulfilling Purchase Orders: Ensure you have the resources to meet large orders.
Maintaining seasonal operations: Manage expenses during off-peak times.
Invest in Marketing: Fund marketing campaigns to drive sales.
Unexpected Costs: Handle emergencies or unplanned expenses.

Cash Flow Loan Example

Imagine a small retail business experiencing a surge in demand during the holiday season. The business decides to take out a cash flow loan to purchase additional inventory. They borrow $50,000 at an annual interest rate of 12%. Over 12 months, fixed monthly payments should be around $4,441.

Note that the interest rate and terms can vary widely based on your lender, the term selected, and the financial health of your business.

Types of Business Cash Flow Loans

Below are some of the forms of cash flow loans available, along with their unique features and benefits to help you make more informed business financing decisions.

Short-Term Loans

Short-term loans are typically repaid within 6-18 months and can provide quick access to funds for immediate cash flow needs. They are ideal for covering temporary gaps or seizing short-term opportunities.

Bridge Loans

Bridge loans are short term funding options used to bridge the gap between financing needs. For example, they can help businesses cover expenses while waiting for long-term funding to come through.

Business-2-Business (B2B) Lending

B2B lending involves loans between businesses. It can be a good option for companies that have established relationships with their suppliers or other businesses. One company sells its products or services to another business, and they handle payments, terms, and financial agreements.

Unsecured Business Loans

Unsecured business loans do not require collateral, making them accessible for businesses that lack substantial assets. Qualification is primarily based on the business’s revenue and creditworthiness.

Other Types of Cash Flow Financing

Each type of financing offers unique benefits and is suited to different business needs. Here’s an in-depth look at some of the most common forms of cash flow financing:

Invoice Factoring

Invoice factoring involves selling your outstanding invoices to a factoring company at a discount. This process allows you to quickly receive cash instead of waiting for your customers to pay. In some cases, the factoring company will even take on the burden of collecting the payments directly from your customers.

Benefits:

Quick cash flow improvement
No need for collateral
The factoring company may handle collections

Drawbacks:

Higher cost due to factoring fees
Potential impact on customer relationships, as they may interact with the factoring company

Revenue-Based Financing

Revenue-based financing involves receiving capital in exchange for a percentage of your business’s future revenue. Depending on the type of business you run, revenue-based financing payments can mimic traditional business loan agreements with fixed repayments on a specific schedule, OR they can be based on a fixed percentage of your daily sales receipts, allowing them to fluctuate with your business’s income.

Benefits:

Payments align with your sales, reducing pressure during low-revenue periods
No collateral required
Suitable for businesses with fluctuating revenues

Drawbacks:

Potentially higher overall repayment due to revenue percentage
Can be relatively expensive if business revenue is consistently high

Business Line of Credit

A business line of credit provides access to a revolving credit limit, similar to a credit card. You can draw funds as needed up to the limit and only pay interest on the amount drawn.

Benefits:

Flexible access to funds
Pay interest only on the amount used
Can be used for various business needs

Drawbacks:

Variable interest rates can lead to higher costs
Potential fees for maintaining the credit line

Cash Flow Loan Benefits and Drawbacks

Cash flow loans offer numerous benefits to businesses looking to maintain smooth operations and capitalize on opportunities without significant financial strain. However, they also come with some drawbacks that businesses need to consider.

Cash Flow Loan Benefits

Personal credit may be less important: These loans focus on revenue and business credit rather than personal credit scores, making them more accessible to business owners with less-than-perfect credit histories.
No collateral required: Businesses don’t need to risk assets or personal property to secure the loan.
Quick access to funds: The application and approval process is often faster than traditional loans, providing rapid access to capital.
Flexible use of funds: Funds can be used for various purposes, such as covering operational costs, purchasing inventory, investing in marketing, and handling unexpected expenses.
Helps manage seasonal fluctuations: Loans used for cash flow may provide necessary funds during off-peak periods, ensuring continuous operation.
Supports growth and expansion: These loans may help finance growth initiatives, such as launching new products or expanding facilities.

Cash Flow Loan Drawbacks

Higher interest rates: These loans often come with higher interest rates than other types of financing due to the increased risk to the lender.
Lower loan amounts: Cash flow loans may offer lower loan amounts compared to traditional secured loans.
Stringent eligibility requirements: Proof of consistent revenue is required, making it difficult for newer businesses with fluctuating revenue to qualify.
Potential for debt accumulation: Over-reliance on these loans can lead to debt, affecting financial health.

What Businesses Should Use a Cash Flow Loan

Cash flow loans can benefit various types of businesses, particularly those with consistent revenue streams.

Can a startup get a cash flow loan?

Yes, startups can qualify for cash flow loans, but it is rare and there are very specific conditions that must be met. Since startups typically have limited credit history and collateral, lenders focus on the business’s revenue streams.

Startups with strong, consistent revenue and solid future revenue forecasts often stand a better chance of securing a cash flow loan. These loans can help startups cover initial operational costs, invest in marketing, or expand their product lines.

However, the terms might be more stringent compared to established businesses, and interest rates could be higher to offset the lender’s risk. Also, many business lenders will still require startups to be in business for at least one year before becoming eligible for financing.

Can you get a cash flow loan with bad credit?

Possibly. Lenders look at your business’s ability to generate consistent income, which serves as a repayment guarantee. If you can demonstrate strong past revenue and promising future revenue forecasts, you might qualify for a cash flow loan despite a poor credit history.

This can be significant for businesses needing funds for operational expenses, inventory purchases, or unexpected costs, allowing them to stabilize and improve their financial health without the burden of credit requirements.

How do I Qualify for a Cash Flow Business Loan?

Qualifying for a cash flow business loan involves meeting specific criteria that demonstrate your business’s ability to generate consistent income. Lenders look for indicators of financial health and stability to ensure that the business can comfortably repay the loan.

Determining your business’s cash flow loan eligibility is the first step to getting a cash flow loan.

How to Get a Cash Flow Loan

Meet eligibility requirements, including:
- Minimum revenue: Lenders require proof of consistent revenue, typically through financial statements, bank statements, or tax records.
- Time in business: Some lenders prefer businesses operational for at least a year to 18 month as this demonstrates stability and resilience. However, it is important to note that many lenders require a minimum of two years of operational history. Before applying, it’s important to ensure you meet that lender’s time in business requirements.
- Personal credit score: While revenue is the primary focus, if you’re a small business owner you may be asked for your personal credit score. Good credit scores may improve your loan terms and interest rates.

Compare financing options and select the best fit
- Identify your needs: Determine the specific purpose of the loan, such as covering operational costs, purchasing inventory, or investing in marketing.
- Research loan types: Look into different cash flow financing options, including short-term loans, bridge loans, B2B lending, and unsecured business loans. Each type has its advantages and may suit different business needs.
- Consider repayment terms: Evaluate the repayment terms and schedules to ensure they align with your cash flow patterns. Fixed repayments might be preferable for predictable cash flows, while revenue-based repayments could suit seasonal businesses.

Compare lenders
- Interest rates and fees: Different lenders offer varying interest rates and fee structures. Compare these to find the most cost-effective option for your business.
- Reputation and reviews: Research lenders’ reputations by reading reviews and testimonials from other businesses. Reliable lenders with positive feedback are more likely to provide a smooth borrowing experience.
- Customer service: Consider the quality of customer service provided by the lender. Good customer service can be crucial if you encounter issues or have questions during the loan term.

Gather information/preparing your application
- Financial statements: Prepare up-to-date financial statements, including profit and loss statements, balance sheets, and cash flow statements. These documents help demonstrate your business’s financial health.
- Revenue documentation: Collect documentation that proves your business’s revenue, such as bank statements, sales records, and tax returns. Lenders may use this information to assess your eligibility and loan amount.
- Business plan: Having a well-prepared business plan could be beneficial. It should outline your business goals, strategies, and how you plan to use the loan.

Research cash flow loan options
- Online lenders: Explore online lending platforms, which often provide quick approvals and flexible terms. These lenders can be more accessible and faster than traditional banks.
- Traditional banks: While they might have stricter requirements, traditional banks may offer competitive interest rates and personalized service.
- Alternative financing: Look into alternative financing options, such as revenue-based financing and invoice factoring, which may be more suitable depending on your business model and needs.

Alternative Options to Cash Flow Loans

If cash flow loans aren’t the right fit, several alternative financing options might suit your needs better.

Business credit cards: Business credit cards offer flexible access to funds for short-term needs and can earn you rewards. However, they come with high interest rates if balances aren’t paid off in full and often have lower credit limits than other types of financing.
SBA loans: SBA loans generally provide lower interest rates and longer repayment terms, suitable for various business needs, but they can be more difficult to qualify for.
Traditional term loans: Traditional term loans offer lump sums with fixed rates and predictable payments, ideal for large expenses. However, if you have a weaker credit score, this route may not be the best option.
Equipment financing: Equipment financing helps you purchase or lease equipment, often using the equipment as collateral. It can be easier to qualify for but can have higher interest rates and is limited to equipment purchases.

Final Thoughts: Cash Flow Loans

Cash flow loans can be an excellent tool for businesses needing to manage their cash flow and take advantage of opportunities. However, it’s essential to understand the terms and conditions to ensure it’s the right fit for your business.

Cash Flow Loan FAQs

Are cash flow loans secured?

Cash flow loans are typically unsecured, meaning they do not require collateral. However, some types of cash flow loans may require collateral, so check with the lender before applying.

Is it hard to get a cash flow loan?

The level of difficulty of obtaining a cash flow loan depends on the business’s revenue and overall financial health. Businesses must also meet other requirements such as minimum time in business and minimum business and personal credit scores.

What are the interest rates on cash flow loans?

Interest rates on cash flow loans vary depending on the lender, business financials, and market conditions. It’s essential to shop around and compare rates from different lenders.

Wil Rivera

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Small Business Tax Tips

Manage Your Money

by Wil Rivera9 minutes / September 23, 2024

If you have questions about business taxes, you aren’t alone. Filing and paying taxes are dreaded tasks for many business owners. But with a little bit of planning and strategy, you can tackle your business taxes and even learn to find ways to save money along the way.

10 Tax Tips for Small Businesses

There’s a lot to know when it comes to small business taxes, but these are some of the most important tax tips to know to properly manage your business tax strategy.

Find a Trustworthy Accountant

Smart small business owners are always on the lookout for ways to minimize their tax liability. Finding a reputable and trustworthy accountant with whom you can partner to not just file your taxes, but to help you build and regularly adjust a tax strategy. Small business owners need more than just an accountant who will prepare financial statement and submit their taxes – you need a partner who can work with you throughout the year, tracking revenue and spend to help avoid cash flow problems. At the same time, they are giving regular advice and insight to ensure you are able to claim all credits and deductions available to you and your business while also helping you to avoid any pitfalls that could get you into trouble with the IRS.

Keep Your Business Finances Organized

For many business owners, managing taxes is stressful because of their lack of preparation and organization, according to a recent survey from Freshbooks. If you develop an organized system of tracking revenue and expenses, and stick to the system throughout the year, it will be much easier to pull the data you need when it’s time to file taxes. Using a financial and accounting software program or platform can be helpful for recording, tracking, and organizing your tax-related information.

Maximize Deductions

Tax deductions decrease your business’ recognized income, which allows you to pay lower taxes, and many small businesses qualify for many deductions, including:

Business mileage
Business interest and bank fees
Legal and professional fees
Business insurance
Home office expenses
Business travel expenses

By tracking all business expenses, you may be able to quickly lower your business’s taxable income, which will reduce the amount you’ll owe in taxes.

Consider Tax Credits

A tax credit is different from a deduction: Rather than reducing your taxable income, a tax credit allows you to subtract the amount of the credit from the amount of tax you owe. Small businesses may qualify for tax credits for employing workers from marginalized groups, purchasing an electric vehicle, providing childcare for employees, increasing energy efficiency in their buildings, and taking other actions. During the COVID-19 pandemic, the government offered tax credits for businesses that kept workers employed, and some businesses are still eligible for those Employment Retention Tax Credits.

Create a Plan for Paying Taxes

Most businesses are required to pay different types of taxes, including income tax, payroll tax, employment tax, excise tax, and state and local taxes. To keep all of your tax obligations straight, your business should have a plan for paying them and budget line items to ensure you have the funds available.

Consider Deferring Revenue and Expenses

Business owners can control the amount of tax they owe each year, to an extent, by adjusting revenue and expenses. For example, if you think your tax bill may be higher than you’re prepared to pay, you can defer some revenue to the following year by delaying the sending of an invoice or pushing a project to the next calendar year.

If your tax bill is manageable for the current year but may be higher next year, you can also defer expenses to the next year by waiting until January to purchase or finance new equipment, for example.

Consider Accelerating Payments

If you want to reduce your taxable income and you have a business loan, consider accelerating payments on the loan. This means you make extra, voluntary payments to reduce the balance of your loan more quickly—and because interest on a business loan can be a deductible business expense, you’ll also reduce your taxable income while paying off your loan faster. Just be sure that the extra payments you make are not directly to the principal of the loan as principal payments are NOT deductible. One of the easiest ways to do this is, for example, make your standard January payment during the December before.

Remember Quarterly Payments

Business owners are typically responsible for making quarterly tax payments based on the business revenue during the previous quarter. Quarterly tax payment deadlines are in April, June, September, and January. If you miss required quarterly tax payments, the IRS will charge penalties and interest.

Note any Changes in National and Local Tax Laws

Tax laws change regularly, so it’s wise to stay informed about any changes in national and local tax regulations. If you have a tax advisor, they will probably be able to keep you posted on any changes that might affect your business.

Follow Tax Deadlines and Extensions

Your deadline to file business taxes will depend on your business structure

Sole proprietors and single-member LLCs would file a schedule C along with their Individual income tax returns. Individual returns are typically due April 15, unless this date falls on a weekend or holiday. Extensions can be requested by filing Form 4868 which would give you until October 15^th to file.
C-corps would file a Form 1120, which has a deadline of the 15^th day of the fourth month after the close of a tax year. For most c-corps that date falls on April 15^th. C-corps can also request an extension by filing form 7004.
Partnerships, multi-member LLCs and S-Corps filing deadlines will be March 15^th, unless you operate on a fiscal year basis. If you need to file an extension, you can request one using form 7004 which gives you until September 15^th.

More >> Why Small Business Taxes Should be Filed Early

Biggest Tax Mistakes for Small Business Owners to Avoid

Filing taxes correctly is important for both maintaining compliance and mitigating the risk of an IRS audit. Here are some of the biggest tax mistakes that business owners sometimes make and how to avoid them.

Not Separating Personal and Business Expenses

When you start a business, it may seem simple to purchase business supplies with a personal credit card or personal funds, and to mingle personal and business expenses. However, this is a mistake. Over time, as the business grows, earns revenue, and has more expenses, it will become increasingly difficult to separate personal and business expenses. As a result, it’s impossible to prove that business expenses qualify the business for tax deductions.

Misclassifying Employees

When a business has employees, the IRS expects to collect payroll taxes including Social Security, Medicare, and unemployment taxes. If you are paying workers without filing appropriate employment tax forms, you must ensure that you can justify that the workers qualify to be independent contractors according to IRS rules. If not, you may be required to pay employment taxes in arrears.

Failing to Keep Thorough Records

Without thorough financial records, it’s impossible to file and pay business taxes appropriately. Tax filing requires you to report accurate revenue figures, payroll figures, and other business expenses to make sure you qualify for any deductions and pay the appropriate amounts.

Small Business Taxes Checklist

When you’re ready to prepare for small business tax filing, use this checklist to make sure you don’t forget anything.

Gather financial information from the tax year.
Find the right tax form based on your business structure.
Consider tax deductions and tax credits that might apply to your business.
Consider deferring revenue or expenses.
Consider accelerating payments.
Remember to calculate any estimated tax payments into your final tax bill.
File by the tax deadline.

Small Business Tax Filing Requirements

Different types of business entities must meet different tax filing requirements. Here’s a look at the requirements for common small business structures.

Business Entity

Type of Tax

Tax Form

Sole Proprietor

Income tax

Form 1040/1040SR Schedule C or F

Self-employment

Form 1040/1040SR Schedule SE

Estimated tax

Form 1040-ES

Employment taxes

Forms 940 and 941, 944 or 943

Partnership

Annual return of income

Form 1065

Employment taxes

Forms 940 and 941, 944 or 943

Partner in partnership (individual)

Income tax

Form 1040/1040SR Schedule E

Employment taxes

Form 1040/1040SR Schedule SE

Estimated tax

Form 1040-ES

Corporation – C or S

Income tax – C corporation

Form 1120

Income tax – S corporation

Form 1120-S

Estimated tax

Form 1120-W (C-corp only)

Employment taxes

Forms 940 and 941, 944 or 943

S Corporation Shareholder

Income tax

Form 1040/1040SR Schedule E

Estimated tax

Form 1040-ES

Small Business Tax Tips FAQs

How do small businesses maximize tax returns?

Small businesses maximize their tax returns by taking all allowable tax deductions and tax credits to lower their tax burden as much as possible. They may also choose to defer revenue or expenses or accelerate owed payments (i.e. make your January payment in December) to further minimize their tax liability.

What business expenses are 100% deductible?

Many business expenses are 100% tax-deductible, including:

Furniture purchased exclusively and entirely for office use. Furniture must be deducted the year in which it was purchased.
Office equipment, including computers, printers, scanners, etc.
Business travel costs for lodging (hotels, motels) and transportation (car rentals, airfare, train fares, bus tickets, etc).
Business phone bills
Gifts to clients and employees up to $25 per person per year
Ordinary and necessary business-related bank fees
Advertising and marketing expenses
Employee training and education expenses

Is small business financing tax deductible?

The interest paid on small business loans is tax deductible for the business. However, the principal repaid on the loan is not a tax-deductible expense.

Wil Rivera

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How to Manage Business Taxes

Manage Your Money

by Wil Rivera13 minutes / September 22, 2024

For most business owners, handling business taxes is one of the most cumbersome and dreaded parts of business ownership. However, running a business requires paying attention to and complying with tax regulations. While business taxes are complex, managing them doesn’t have to be difficult. By taking steps to prepare for filing your taxes, business owners can simplify the process of maintaining tax compliance.

Understanding the various types of taxes small businesses may have to pay, as well as the steps business owners should take when preparing to file taxes will make the entire tax management easier…and maybe even a bit more tolerable.

Types of Small Business Taxes

Small businesses may be responsible for several different types of taxes. Some of the taxes your small business must pay will depend on the structure and location of your business.

Income Tax

The IRS requires all businesses except partnerships to file an annual income tax return. Partnerships are required to file an information return. The return form your business uses—and the way you pay income taxes—will depend on how your business is structured. For example, corporations are taxed separately from their owners, while sole proprietors report their personal and business income taxes using the same form.

Federal income tax is a pay-as-you-go tax. That means taxpayers must pay the tax as income is earned or received throughout the year. Many businesses are required to make estimated tax payments to cover income tax liability every quarter. It’s a good idea to talk to a tax professional to determine whether your business needs to make quarterly tax payments.

Payroll Tax

A business that has employees must pay payroll taxes as a percentage of employee payroll. Payroll taxes include Social Security, Medicare, and unemployment taxes. The taxes paid on Social Security and Medicare are together known as FICA taxes, named for Federal Insurance Contribution Act. They are split evenly between the employer and the employee, and the employer must withhold the employee’s portion from their paychecks.

Employers are responsible for paying unemployment tax at the federal level and at the state level if required by their state. Employees do not contribute to unemployment tax, with three exceptions. In Alaska, New Jersey and Pennsylvania both employers and employees pay state unemployment (SUTA) tax.

Employment Tax

If you have employees, you have employment tax responsibilities that include paying taxes and filing forms. As mentioned above, employment taxes include:

Social Security and Medicare taxes
Federal unemployment tax (FUTA)
State unemployment tax (SUTA)

In addition, employers are responsible for handling federal income tax withholding for employees. That means that you withhold the appropriate amount from employee wages for their personal income taxes, based on the employment forms they provide to you. Employers must also submit those funds to the federal government on their employees’ behalf and file forms such as W2 forms to report the amounts withheld.

Excise Tax

Some types of businesses must pay federal excise taxes, depending on the products they sell or the way they operate their businesses. Federal excise taxes include:

Environmental taxes
Communications and air transportation taxes
Fuel taxes
Taxes on the sale of heavy trucks, trailers, and tractors
Taxes on the sale or use of different types of items

Self-Employment Tax

Self-employment tax is the tax that self-employed individuals owe to the federal government to help fund Medicare and Social Security. Employees split these taxes with their employer, as each one pays half the FICA taxes. But self-employed individuals must pay the full amount, which is equal to 15.3% of their wages.

State and Local Taxes

Your business may need to pay state and local taxes, depending on its location and business structure. Check with state and local governments to learn your specific business tax obligations.

The most common types of state and local tax requirements for small businesses are income taxes and employment taxes. If your state charges income tax, your business structure will determine how you pay it. Like with federal income tax, corporations are taxed separately from their owners, while sole proprietors report their personal and business income taxes using the same form.

If your business has employees, you’ll have to pay state employment taxes, which might include worker’s compensation insurance, unemployment insurance, and temporary disability insurance. You may also need to withhold state income tax for your employees.

Many state and municipal governments also charge sales tax. If you’re responsible for paying sales tax, it will be based on a percentage of your sales.

How to File Business Taxes

To file business taxes, start by assembling all your business financial documents from the tax year. You’ll need records of business transactions to calculate income, expenses, and deductions.

You will also need to locate the right IRS tax form, based on your business structure. If your business operates as a sole proprietorship or a single-member LLC, you can report all business income and expenses on a Schedule C attachment to your personal income tax return. But if your business is organized as a corporation or you choose to treat your LLC as a corporation, you’ll have to prepare a separate corporate tax return using Form 1120 for C-corporations or Form 1120S for S-corporations. Multi-member LLCs are considered partnerships and usually file Form 1065.

Keep in mind that there are deadlines for filing your tax forms, and it’s important to meet them. If you use a Schedule C, it’s part of your personal tax return (Form 1040) and has no separate filing deadline. It’s subject to the same April 15 deadline as your personal return.

If you’re taxed as a C-corporation and file a Form 1120, you must file it by the 15^th day of the fourth month following the close of the tax year. For most taxpayers, that’s April 15. If your business is an S-corporation or a partnership, you need to file a Form 1120S or Form 1065. These forms are due by the 15^th day of the third month following the close of the tax year, which is March 15 for most taxpayers. This form cannot be sent to the IRS with your personal income tax return; it must be sent separately.

When in doubt, contact a tax professional to help your business get started on filing taxes.
MORE >> Why Small Businesses Should File Taxes Early

Withholding Taxes

Withholding tax is the amount of money that an employer deducts from an employee’s gross wages and pays directly to the government. The amount withheld is a credit against the income taxes the employee must pay during the year. If too much is withheld, the employee will receive a tax refund after filing their tax return. If too little is withheld, the employee will have to pay the IRS more money when they file their return.

Estimating Taxes

If a person is self-employed or earns extra income in addition to employer-paid wages, they don’t have an employer making adequate tax payments on their behalf through withholding for that additional income. In that case, the person is responsible for estimating taxes based on their income and making estimated taxes to the government each quarter throughout the year. By estimating taxes, an individual or business can meet the IRS requirement of paying-as-you-go for income taxes—and avoid a huge tax bill at the end of the year.

Paying Federal vs Paying State and Local Taxes

Federal taxes are the same wherever you live in the United States, but state taxes can vary significantly. Some states charge a flat tax, and others use a progressive system that taxes high-income taxpayers more than others. While all federal taxes must be paid to the IRS, state and local taxes must be paid to state and local taxing authorities.

Small Business Tax Planning Strategies

There are several ways you can plan for—and potentially reduce—taxes. Consider the following strategies to help you prepare and minimize your tax liability.

Choose the Right Business Classification

Your business structure will determine not only the IRS form you use to file taxes, but also the amount you’ll have to pay. For example, some business structures, including sole proprietorships, LLCs, and S-corporations, are known as pass-through entities, which means the business income “passes through” to the business owner. The business owner pays taxes on the business’s earnings at their individual federal income tax rate. The business does not owe taxes separately, but the business owner may be responsible for paying self-employment taxes.

A C-corporation, on the other hand, must pay taxes on its taxable income at the business level. The U.S. federal corporate income tax rate is currently 21%. An owner of a C-corporation pays their own taxes separately from the business.

Separate Business and Personal Expenses

To file business taxes appropriately, it’s crucial to keep business expenses and personal expenses separate. That way, you can track business expenses and deduct them from your business earnings to lower your taxable business income.

The easiest way keep business and personal expenses separate is to have both a business and a personal bank account and credit accounts. ONLY use the bank and credit accounts you’ve assigned to your business for business expenses; and only use the bank and credit accounts assigned to personal expenses for personal expenses.

Maximize Deductions

Tax deductions decrease your taxable business income, which allows you to pay lower taxes. Most small businesses qualify for deductions, including business mileage, business interest and bank fees, legal and professional fees, business insurance, home office expenses, and business travel expenses.

Establish Employee Retirement Plans

If you have employees, you may be able to lower taxes by establishing employee retirement plans. Most businesses can take advantage of tax deductions when they contribute to retirement plans for employees.

Hire a Tax Professional

Trying to do taxes on your own can be overwhelming, time consuming and prone to mistakes – after all you’re not in the business of tax preparation so it’s unlikely you’re going to know the ins and outs of tax codes. Partnering with a tax professional can save you time and money, eliminating (or at the very least reducing) the hassle that comes with filing.

One small mistake on your tax forms could lead to a very expensive problem on your hands. Working with a reputable tax professional can reduce your risk of an audit and they can handle communications with the IRS if they come knocking on your door asking questions. In addition, a tax professional can ensure you’re getting all of the tax credits and deductions available to you. Often, just one missed deduction on your end could cover a significant portion of the fee that comes along with working with a tax professional. Added bonus: if you’ve filed your business taxes on your own in the past, a tax professional can look through these past returns and if any deductions were missed, they can amend them for you.

Tax Deductions and Credits for Small Businesses

If your business qualifies for tax deductions and tax credits, use them to decrease the amount of taxes you owe.

Business Expenses

Most business expenses are tax-deductible, such as postage, mileage, marketing and advertising, payroll and benefits, and other costs of doing business.

Tax Credits

A tax credit is different from a deduction—rather than reducing your taxable income, a tax credit allows you to subtract the amount of the credit from the amount of tax you owe. Small businesses may qualify for tax credits for employing workers from marginalized groups, purchasing an electric vehicle, providing childcare for employees, increasing energy efficiency in their buildings, to name a few.

Depreciation

When you purchase business equipment, the IRS allows you to take the deduction through depreciation, deducting a portion of the cost over several years, or to take the entire deduction in the year you purchase or finance the equipment.

Tax Filing Information for 2024

The tax filing deadline for tax year 2024 is April 15, 2025 for sole proprietors, LLCs and C-corporations. The tax filing deadline is March 15, 2025 for S-corporations. If you owe taxes, they are due on these dates, even if you file an extension, which will typically give you another six months to file the return. If you don’t have the funds to pay your tax bill by the due date, you might want to consider a business loan to cover your taxes, however doing so should be weighed VERY carefully and done only in certain circumstances.

Quarterly estimated tax payments for the 2024 tax year are due April 15, June 17, and September 16. The final payment is due January 15, 2025.

Small Business vs Large Business Tax Differences

Small businesses and large businesses typically experience some differences in paying taxes. Most of these differences are attributed to a difference in business structure. Large businesses are typically organized as C-corporations, which involve more paperwork and different tax filings. Smaller businesses are typically organized as sole proprietorships, LLCs or S-corporations, which have different tax filing obligations.

Deductions and Credits

Businesses of all sizes can take tax deductions and credits. However, some tax credits require major expenditures, which make them more common for larger businesses. These include credits for research and development and advanced energy projects. Small business owners may be more likely to take deductions for business mileage and home office expenses.

Filing Requirements

Filing requirements also vary based on the size and structure of your business. Owners of sole proprietorships and single-member LLCs report business income on a Schedule C, which is added to their personal tax return and due on April 15 after the tax year in question.

If you’re taxed as a C-corporation, you must file a Form 1120. For most corporate taxpayers, the 1120 is due by April 15 following the close of the tax year.

If your business is an S-corp or a partnership, you need to file a Form 1120S or Form 1065. These forms are due by March 15 following the close of the tax year for most taxpayers.

FAQs for Managing Small Business Taxes

What is an EIN?

An EIN, Employer Identification Number, is a federal tax identification number. Like a Social Security number for an individual, an EIN is a unique number assigned to a business so that the IRS can easily identify it for tax reporting purposes.

How much do small businesses pay in taxes?

Small businesses pay an average of 20% of their revenue in taxes, which is inclusive of all taxes owed. However, this percentage can fluctuate depending on your state, business structure, income, expenses, and deductions.

Should I do small business taxes myself?

Choosing whether to file business taxes on your own or rely on a tax advisor is a personal decision, and a business decision. Many business owners choose to work with a tax advisor to help them make sure they are compliant with all tax laws. As a bonus, the money you pay for professional tax services is deductible on your tax return.

How much can a small business make before paying taxes?

A small business can earn up to $400 before paying taxes. If a small business earns more than $400 in a calendar year, it must report and pay taxes on that income.

Wil Rivera

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What is Payroll Tax?

Manage Your Money

by Wil Rivera7 minutes / September 21, 2024

Payroll tax is a tax paid on the wages of employees to fund social programs like Medicare, Social Security, and unemployment benefits. For most employers, payroll is one of the biggest items in the budget—and payroll tax is a significant portion of that line item.

How Payroll Taxes Work

Employers are required to withhold a percentage of employees’ paychecks to cover payroll taxes. These taxes cover the employee’s portion of FICA taxes, named for the Federal Insurance Contributions Act. FICA taxes are about 15.3% of an employee’s pay, and the employee and employer are each responsible for half of that amount. Additional payroll taxes will vary based on the state, county, and municipality in which your business is located.

In addition to withholding the correct amount of payroll tax from each employee’s paycheck, an employer is also responsible for paying its own portion of payroll taxes. This portion includes the remaining half of FICA taxes for each employee, as well as state and federal unemployment taxes.

What’s the Difference Between Payroll and Income Tax?

Payroll tax is a tax the government charges to employers and employees, and income tax is levied on individuals’ salaries, wages, and other incomes.

Payroll tax is sometimes confused as income tax because employers typically withhold both payroll tax and income tax from an employee’s paycheck. However, employers withhold income tax as a service to employees to help them pay their income tax bill incrementally throughout the year, while employers are required to withhold payroll taxes.

Types of Payroll Taxes

Payroll tax is an umbrella term that refers to multiple taxes like self-employment, social security, and unemployment taxes. Here are common types of payroll taxes:

Self-Employment Taxes

Social Security Payroll Taxes

Social Security taxes are 12.4% of an employee’s wages. Employed individuals split this tax with their employers, so each is responsible for paying 6.2%. Employers are required to withhold the employee’s Social Security tax, equal to 6.2% of their pay, from each paycheck.

Medicare Payroll Taxes

Medicare taxes are 2.9% of an employee’s wages. Employees split this tax with their employers, so each is responsible for paying 1.45%. Employers must withhold the employee’s Medicare tax, equal to 1.45% of their pay, from each paycheck and pay it to the federal government.

Unemployment Taxes

The federal unemployment tax (FUTA) rate is 6% of each employee’s wages. Employers are responsible for paying this amount to the federal government with each payroll.

State and Federal Taxes

Most states also levy payroll taxes on employers, in addition to their federal payroll obligations. Many employers must pay state unemployment taxes (SUTA), and some may have to pay additional taxes, depending on their state regulations.

In some cases, employers that must pay state unemployment taxes may receive a credit on federal unemployment taxes.

How to Calculate Payroll Taxes

Calculate payroll taxes by starting with an employee’s gross pay and multiplying it by each tax rate (Social Security, Medicare, FUTA, and SUTA). Here’s how it works:

Social Security tax formula: Employee income x 6.2% = Social Security tax
Medicare tax formula: Employee income x 1.45% = Medicare tax
FUTA tax formula: Employee income x (FUTA tax rate – state credit reduction) = FUTA tax
SUTA tax formula: Employee income x SUTA tax rate = SUTA tax

After calculating each of these taxes, the employer must pay 50% of the Social Security and Medicare taxes and 100% of the FUTA and, in the majority states (47 of the 50) SUTA totals. The employer must also withhold the remaining 50% of Social Security and Medicare taxes from the employee’s paychecks.

Payroll Tax Withholding Example

As an example, imagine an employee earns $100,000, or $4,166.67 of gross pay per semi-monthly pay period. To determine Social Security tax, multiply $4,166.67 by .124 (12.4%). The resulting Social Security tax is $516.67. Because the employer and the employee split that total, each will be responsible for paying $258.33 each pay period.

To determine Medicare tax for the same employee, multiply $4,166.67 by .029 (2.9%) for a total of $120.83. The employer and the employee will both pay half, or $60.42 per pay period. The employee’s total FICA responsibility, including Social Security and Medicare, will be $318.75.

FUTA and SUTA taxes for this employee would depend on the employer’s location and the state taxes to which it is liable.

Additional Payroll Tax Requirements

In addition to withholding payroll taxes, employers must also deposit the payroll taxes withheld and the employer’s payroll taxes based on IRS regulations. Employers are required to make federal tax deposits via electronic funds transfers.

When an employee’s wages and compensation exceed $200,000 in a calendar year, employers are responsible for withholding the Additional Medicare Tax from the employee’s paychecks. Additional Medicare Tax is equal to 0.9% of the employee’s wages. There is no employer match required for the Additional Medicare Tax.

Payroll Tax Credits

During the Covid-19 pandemic, employers were able to qualify for payroll tax credits if they kept workers employed throughout the pandemic. However, payroll tax credits may not be available for everyone moving forward, something for business owners to consider.

Many small business owners are looking for ways to reduce their tax burden and payroll tax credits could provide some relief. While there is not a significant number of available credits related directly to payroll, there are a number of other credits that small business owners should consider. Speak to your accountant to see if any of the following credits are relevant for your business:

Work Opportunity Tax Credit
Credit for Employer-Provided Childcare Facilities and Services
Child and Dependent Care Credit
Credit for Small Employer Health Insurance Premiums
The Premium Tax Credit
Retirement Plan Startup Costs Tax Credit
Plug-In Electric Drive Vehicle Credit
Research and Development Tax Credit

How Payroll Tax Credits Works

If you qualify for a payroll tax credit, you can directly subtract the amount of the credit from the amount of taxes you owe. That means if your business owes $10,000 in taxes and you qualify for a $7,000 payroll tax credit, you will only be responsible for paying $3,000.

Payroll Tax Credits vs Deductions

While tax credits can be subtracted directly from the taxes you owe, deductions work a little differently. Tax deductions allow you to reduce your taxable income, which will also lower your tax bill. It’s possible for a small business to qualify for both tax credits and tax deductions. Talk to your tax professional to make sure you’re maximizing all your potential credits and deductions to lower your tax liability.

Payroll Tax FAQs

What is the FICA tax rate?

The FICA tax rate, named for the Federal Insurance Contributions Act, is 15.3% of an employee’s wages. For employed individuals, the responsibility for paying FICA taxes is split evenly between the employee and the employer, so each one pays 7.65%. Self-employed individuals have no employer with whom to split FICA taxes, so they are responsible for paying the full 15.3%. This amount is referred to as self-employment tax.

Is payroll tax based off net or gross income?

Payroll tax is based off an employee’s gross income, the original wage amount before any withholdings.

Who pays payroll taxes?

Employers pay the payroll taxes, but the money comes from both the employer and the employee. The employer withholds 7.65% of the employee’s wages from their paycheck to cover the employee’s portion of FICA taxes. The employer matches that amount, paying the additional 7.65% of the employee’s pay for the employer portion of FICA taxes. The employer also pays federal and state unemployment taxes.

Wil Rivera

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Interest Rates Were Cut – Should I Apply for a Business Loan Now?

Manage Your Money

by Wil Rivera5 minutes / September 20, 2024

Small business owners finally got some good news from the Federal Reserve Bank on Sept. 18, when Fed chairman Jerome Powell announced that the federal funds overnight rate will be lowered by one half of one percent (50 basis points) to 5%, marking the first time that the rate has been cut in more than three years. Small business owners have been suffering through rate hikes nearly every quarter over the past year-and-a-half as part of an effort to try to tame inflation.

This is expected to be the first of several rate cuts to come as inflation hikes have cooled over the past year. The good news for small business owners is that they can expect the cost of capital – as well as lending requirements, to begin to ease over the next several quarters.

It’s Been Tough for Borrowers

Many small businesses depend on financing to operate. Lending products such as loans and business lines of credit help them grow, launch new products, purchase equipment and meet operating expenses throughout the year. Both SBA 7(a) loans and term loans charge a fixed interest rate based on the overnight rate, while other products such as business lines of credit charge a variable interest rate on the borrowed money.

After the overnight began to rise in mid-2022, the average approval rates on small business loans from traditional banks dipped to below 20% according to Statista, but rose slightly for alternative lenders that often lend to borrowers that have been rejected by traditional banks. Lending requirements also began to tighten when interest rates rose, as traditional banks saw a higher-interest loan as riskier than a lower interest one.

How will Lower Rates Help Small Businesses?

When it comes to borrowing money, lower interest rates will help small businesses in two main ways. First, lower rates means a cheaper cost of capital on most lending products, such as SBA loans, bank loans, business lines of credit and equipment financing loans. Even financing products that charge factoring fees, such as invoice factoring, will get a little cheaper.

Second, as the overnight rate continues to be cut, traditional banks and alternative lenders will begin to loosen their lending requirements, making it slightly easier for small business owners to obtain financing. Since mid-2022, when the Fed began hiking the overnight rate, traditional banks, alternative lenders and SBA lenders began demanding more stringent requirements such as slightly higher credit scores and longer profitability statements to justify taking the risk of approving high-interest loans.

If you use a variable-rate lending product such as a business line of credit, you can also expect to see the interest rate slightly decrease on the money that you’ve borrowed against it.

Is it Time to Borrow?

While a rate cut is generally considered positive for small businesses looking for financing, it’s important to remember that this rate cut is just the initial cut, so waiting for further cuts before applying for financing may be the prudent move.

While it’s impossible to predict how many times the Fed will cut rates, many economists are predicting that the aim is to lower them to the 2.25% to 2.50% target that we saw in 2022 to help the economy rebound from the inflation spike seen over the past three years. It is fair to assume, however, that the cost of capital for fixed-rate lending products, such term loans, especially those being offered by traditional banks, will continue to lower.

Small business owners who qualify for the most popular SBA-backed loan, the 7(a) loan, are hoping that the interest rate on the popular loan will eventually go back to the 5.5% to 6.5% range that they saw at the beginning of 2022. The rate on term loans from both traditional banks and alternative lenders are also based in part on the overnight rate, so expect the rates on those loans to decrease over time as well.

Refinancing Options

Small businesses that have outstanding SBA 7(a), term loans or equipment loans may look to replace their loan with a cheaper one or renegotiate the terms of the current loan as interest rates go down. This will especially be effective if your credit score has improved since taking out your loan.

The bottom line is that if you have an outstanding loan and you’re seeking to take advantage of falling interest rates, most lenders will be willing to renegotiate or refinance. You may, however, want to wait until rates drop even further.

Play the Waiting Game

While this initial interest rate cut is generally good news for small business owners, most economists agree that more will be on the way. You may want to hold off on the temptation to refinance your existing loan or take out a new one right away. Keep checking the news for further rate cuts and read economic forecasts on how many more cuts are on the way. Waiting for the lowest possible overnight rate before you take out a loan could save your small business a considerable amount of capital down the road.

Wil Rivera

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How big of a loan can you get for a restaurant?

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