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S Corp vs. C Corp: Which is Better for Your Business?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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When incorporating a business, you would have the option to choose an S corporation or C corporation structure. The entity you select determines how much you would owe in taxes and how shareholders would interact with your business.

Although other corporate structures are also available, like B corporation and nonprofit corporation, S corp and C corp are common options for business owners. A C corp is the standard, default corporation that separates owners from the company. An S corp is also an individual entity separate from the owners, but S corps must follow different tax and shareholder guidelines.

Keep reading to learn about S Corp vs. C corp and how to choose the right corporate entity for your business.

S corp vs. C corp: The differences

Both types of businesses must be incorporated in the same way. You would need to register the business with state agencies wherever you conduct business, as well as file your articles of incorporation with your state’s secretary of state office. Corporations are also required to have bylaws, which act as the governing documents for the business, and file annual reports.

Also, an S corp and a C corp both protect owners from personal liability. Any type of corporation acts as an individual entity with its own rights and liabilities. Corporations can enter into contracts, get sued and sue others just as business owners can.

From there, S corps and C corps have distinct differences. Next, we’ll discuss what sets one type of corporation apart from the other.

Taxation

S corp: An S corp is considered a pass-through entity, meaning all company profits and losses would be passed through to the owner’s personal income. The business owner would pay taxes based on their personal income tax rate. S corps are not subject to corporate income tax. To become an S corp, the business would need to submit IRS Form 2553 and include signatures from all shareholders.

Under new tax laws that went into effect in 2018, owners of pass-through businesses can deduct up to 20% of their qualified business income. However, service- or trade-based businesses may be excluded from being eligible for the deduction. Companies that produce tangible goods, such as manufacturing companies, are more likely to qualify.

C corp: Unlike S corps, C corps must pay corporate income tax on profits. C corps are often subject to double taxation – the corporation itself is taxed and shareholders must pay taxes on dividends on their personal tax returns.

The recent tax reform also brought changes for C corps. As of 2018, the top corporate tax rate is capped at 21%.

C corps and S corps may also be responsible for employment taxes and excise taxes, depending on the nature of the business.

Shareholder criteria

S corp: An S corp cannot exceed 100 shareholders, and all shareholders must be U.S. citizens. Other corporations or partnerships cannot act as shareholders in an S corp.

S corps can only issue common stock, and the limit on the number of shareholders could prevent the company from raising significant capital from shareholders. However, S corp shareholders are typically highly involved in the business and prefer to have a say in operations.

C corp: Unlike S corps, C corps are not limited in the number of shareholders who hold stock in the company. C corps have more flexibility to sell different types of stock, which would allow the company to raise capital through shareholders when needed.

C corp shareholders may not be as invested in the business as S corp shareholders. C corps often have a large number of shareholders who may have little interest in the day-to-day happenings of the business. Depending on the type of stock issued, some shareholders may have voting rights while others may not.

Public ownership

S corp: Because of the legal cap on the number of shareholders, S corps cannot become public companies. If the company wants to go public, it would have to convert to a C corp structure.

C corp: A C corp’s ability to have an unlimited number of stockholders makes it possible for the corporation to go public and raise investment capital.

Comparing S corps and C corps at a glance

Here’s a quick look at the main differences between an S corp and a C corp.

 S corporationC corporation
TaxationPass-through entity – Profits and losses are “passed through” to an owner’s personal taxes . Owners may deduct up to 20% of eligible income.Double taxation – Corporations must pay tax on profits and shareholders must pay tax on dividends. Corporate tax rate is capped at 21%
OwnershipLimited shareholders – Restricted to 100 shareholders who must be U.S. citizens.Unlimited shareholders – No cap on the number of shareholders. Shareholders do not have to be U.S. citizens or residents. Corporation may go public.
Shareholder rightsCommon stock – All shareholders receive common stock, as well as disbursements of company profit. Voting power is tied to the amount of stock a shareholder possesses.Varying types of stock – Shareholders can receive different types of stock, which would affect voting power. Shareholders also receive dividends.

Which corporate entity is right for you?

For business owners looking for limited liability, a corporate structure could be a good entity choice. Whether you choose an S corp or C corp would depend on your aspirations for the corporation.

  • If you don’t want to pay corporate taxes:
    An S corp structure would allow you to avoid corporate taxes. Instead, profits and losses would pass through to your personal taxes, and you could be eligible to deduct up to 20% of eligible income. Be aware that some states tax S corp shareholders, in which case you would be subject to double taxation.
  • If you want to go public:
    C corps can become public companies, while S corps cannot. Also, a C corp would be the better choice if you plan to raise capital through the sale of stock to shareholders. C corps do not face a limit on shareholders, while S corps must cap the number of shareholders at 100.
  • If you want shareholder input:
    Although S corps cannot have as many shareholders as C corps, S corp shareholders are typically heavily involved in the business. Shareholders may be employees who feel invested in the company and want a say in daily activities and decisions.

It is possible to change your business structure. You could change your entity at a later time if you want to switch between an S corp and a C corp. However, your state could impose restrictions when it comes to changing corporate structures. Consider seeking out a local business adviser, attorney or accountant to help you choose the right corporate structure for your business.

The information in this article is accurate as of the date of publishing. 

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Guide to Small Business Funding for Women

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Source: iStock

As the number of women-owned businesses grows across the U.S., women entrepreneurs are increasingly in need of funding for their businesses. While there aren’t specific small business loans for women, there are many lenders and organizations that offer small business help for women entrepreneurs, including SBA loans, term loans and business lines of credit, among other resources.

Small business loans for women: 3 options to consider

SBA loans

Best for: Businesses looking for long-term financing and businesses struggling to get loan approval.

The Small Business Administration (SBA) offers small business help for women that includes business training, counseling and assistance in accessing financing. The SBA can also help you if other lenders have deemed your business too risky. Since SBA loans are guaranteed by the Small Business Administration, lenders may be more likely to approve your application and even offer lower interest rates and longer repayment terms.

The SBA offers multiple loan types, with amounts ranging from $500 to $5.5 million. Requirements to qualify for each loan type are unique, and eligibility varies depending on the lender and the loan program. However, SBA loans are available for most business purposes.

Term loans

Best for: Businesses that can clearly project how much cash they’ll need or for startup capital when a business doesn’t want to forfeit any ownership to an investor.

A term loan is a typical loan arrangement that allows you to borrow a lump sum of money and pay it back in installments, with interest. Interest rates and other fees can vary greatly from one lender to the next, but you’ll likely need to present your business plan, expense sheet and financial projections in order to apply for a term loan at any bank or credit union.

Some lenders are committed to offering small business term loans to women. Learn more about these lenders and their loan product options below.

Business lines of credit

Best for: Businesses that need ongoing access to capital or that have an open-ended project.

A business line of credit is an account that allows you to draw money up to a set limit. Similar to a credit card, each time you pay down your balance you can draw up to the limit again, and fees and interest payments are based on your account balance. Unlike business credit cards, which generally have higher interest rates, business lines of credit tend to have lower interest rates and allow you to make cash withdrawals without any limitations and write checks from your account.

You can take out a business line of credit through a bank, credit union or online lender. Qualification is based on your personal credit.

5 best small business loans for women

To select the top five small business loans for women, we looked at a number of lenders and chose a mix of online and traditional bank lenders. While traditional lenders may be more difficult to qualify for, the two we have listed are among the most active SBA lenders, making them a potentially compelling option for women business owners.

Additionally, the lenders we selected had to meet the following criteria:

  • Transparent websites. These lenders clearly list necessary information on their websites so small business owners can easily find what they need.
  • Wide range of amounts and term lengths. Many of these lenders offer a range of loan products as well as amounts and term lengths, which means they can cater to a range of small business owners’ needs.
  • Lender credibility. These lenders have all been in business for at least a decade and have established themselves in the space through things like positive customer reviews and high approval counts.

1. Kabbage

Type of financing

Rate

Amount

Min. credit score

Best for...

Business line of credit

Monthly fee is 1.25% to 10.00% of principal

Up to $250,000

None

Ongoing access to capital

Although Kabbage often refers to its financing product as a loan, it is technically a line of credit, one the company says is commonly used by women business owners for inventory purchases, office expansion, marketing campaigns, equipment purchase and hiring employees. Kabbage’s monthly fees for business lines of credit start at 1.25% and are only charged based on the amount you draw.

Kabbage offers a simple online application process, and you can manage your line of credit account from a mobile device.

2. Smartbiz

Type of financing

Rate

Amount

Min. credit score

Best for...

SBA loans

5.04% to 10.29% APR

$30,000 to $5,000,000

650 for a $30,00 to $350,000 loan

675 for a $500,000 to $5 million loan

Faster processing on SBA loans

According to Smartbiz, 30% of its 7(a) SBA loans are granted to women-owned businesses. The national average is only 14% for SBA lenders.

Smartbiz helps expedite the application process by submitting your application to an online marketplace of multiple SBA lenders at once. Prequalification is available within five minutes, and funding is available in as few as seven days upon approval.

3. Wells Fargo Bank

Type of financing

Rate

Amount

Min. credit score

Best for...

Equipment Express Loan

5.50% to 9.50% APR for vehicle loans

6.00% to 12.25% for equipment loans

$10,000 to $100,000

Not disclosed

Purchasing vehicles or equipment

In 2013, Wells Fargo Bank committed to lending $55 billion to women-owned businesses by the year 2020. The bank offers several small business loan products, including its Equipment Express Loan. The interest rate on the bank’s secured vehicle loans starts as low as 5.50%.

However, you’ll need to be an existing customer of the bank to apply. Wells Fargo small business loans are only available to customers who have had a checking or savings account with the bank for a minimum of one year.

4. Celtic Bank

Type of financing

Rate

Amount

Min. credit score

Best for...

Express Loan

Variable

$20,000-$150,000

Not disclosed

Wide variety of loans

Celtic Bank is perhaps best known as an SBA lender, but the Utah-based lender offers a variety of loans well-suited to all types of businesses, small to large. The Celtic Express loan offers loans between $20,000 and $150,000 for up to 120 months.

To be eligible, the business must be a for-profit, owner-operated enterprise. Loan proceeds may not be used for construction or tenant improvements. Newer businesses are considered, but you must have a location identified and be able to start operations at funding.

5. OnDeck

Type of loan

Rate

Amount

Min. credit score

Best for...

Short-term loan

11.89% APR and up

$5,000 to $500,000

600

Business owners with lower personal credit scores

OnDeck is an online lender that has funded over $6 billion in small business loans for women. The lender offers business loans for women with bad credit, with a minimum credit score requirement of just 600. However, its APRs start relatively high, at 11.89% and up.

In order to qualify for a loan with OnDeck, your business must be at least a year old and earn at least $100,000 a year in revenue. Those who qualify may receive funding within as little time as 24 hours.

Alternative financing options for women-owned businesses

Grants for female business owners

Small business grants can provide you with funds to start or expand your business — and, unlike loans, they don’t have to be repaid. Grantors who fund women-owned businesses include the federal government, local governments and private funds. The amount of money available and the requirements to qualify will vary depending on the source of the funds.

Here are a variety of women-owned business grants to consider:

  • Amber Foundation Grant. Grants of $4,000 are awarded on a monthly basis to women-owned businesses of all kinds. Monthly grant winners are eligible for an additional $25,000 grant at the end of the year.
  • Cartier Women’s Initiative. This grant is for women-owned, women-run businesses focused on sustainable social and/or environmental impact. Applicants in a select group receive one-on-one business training and cash awards of $30,000 or $100,000.
  • Girlboss Foundation Grant. Grants are available up to $15,000 for women entrepreneurs working in the areas of design, fashion, music or the arts.
  • NASE Growth Grants. The National Association for the Self-Employed (NASE) offers $4,000 grants for female business owners. You must become a NASE member to apply.
  • SBA. Though there technically are not Small Business Administration grants for women (or anyone else), the SBA does facilitate federal grants for all types of business owners through the Small Business Innovation Research and the Small Business Technology Transfer programs.

Equity financing opportunities

Venture capital firms and individual investors, sometimes known as “angel investors,” differ from lenders. Instead of offering debt, these venture capitalists offer to make a long-term investment in your company in exchange for equity. They may also require some form of ownership and/or a seat on your company’s board of directors.

Here are some investing groups and firms that cater to women-owned businesses:

Additional resources for women-owned businesses

  • SBA Women’s Business Centers: The SBA offers over 100 office locations throughout the U.S. where women can receive free training, workshops, mentorship and more. Use the SBA directory to find your nearest location.
  • Women-Owned Small Businesses (WOSB) Federal Contracting Program: This federal program sets aside contracting opportunities for women applicants in industries where women’s businesses are underrepresented or disadvantaged. Those industries include construction, manufacturing, publishing and more.
  • National Women’s Business Council (NWBC): This federal advisory committee advises the president, the U.S. Congress and the SBA on matters affecting women entrepreneurs and women-owned businesses. The NWBC hosts round-table events around the country to gather input and promote women’s STEM-focused and rural-owned businesses.
  • DreamBuilder: This free online program offers interactive courses for women on how to start, build and finance your business. Courses are available in Spanish and English.
  • National Association of Women Business Owners (NAWBO): NAWBO is an advocacy organization that promotes networking events for women entrepreneurs, provides online resources and has local chapters throughout the U.S.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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How Does a Business Loan Work?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

In the course of day-to-day operations, many businesses discover they come up short on the necessary cash to pay expenses, employees and other business costs. To cover this gap, many business owners turn to business loans.

So, how does a business loan work? Business loans can provide much-needed capital to ease cash flow and help businesses stay on top of their bills. Especially helpful during slow seasons, business loans are a tool that business owners can use to keep business operations moving smoothly.

How do business loans work?

Business loans provide business owners with operating capital to pay expenses, payroll and other costs during slow times or when waiting for client payments to come in.

Most business owners rely on one of six types of small business loans to provide the cash they need. Deciding which financing option to choose depends on the individual needs and financial situation of the business. Some business owners need a small infusion of cash they plan to repay quickly, while others need a large amount of capital as well as time to repay that money.

6 types of small business loans

1. SBA loans

SBA loans are guaranteed by the Small Business Administration (SBA). These loans are not offered directly by the SBA but rather through SBA partners, such as banks, that agree to adhere to SBA guidelines for the loans. In general, the money can be used to pay expenses, cover rent or mortgage payments and buy equipment, among other costs. However, some loan programs do set restrictions on what the funds can be used for, so talk with an SBA-approved lender for specific requirements to determine if the loan fits your needs.

Because the SBA backs a portion of the loan, the risk for lenders is reduced, paving the way for them to offer larger loan amounts — ranging from $500 to $5 million — and more favorable terms. In general, SBA loans have lower down payments, do not require collateral and offer low interest rates, typically ranging from 5% to 10% depending on individual factors and financial needs.

Repayment terms are usually dependent on what the loan is used for, with maximum maturities set for SBA loans. For instance, the maximum maturity of a loan used for real estate is 25 years, while the maximum maturity of a loan used for equipment, working capital or inventory is 10 years. Like other loans, payments are usually made monthly.

To be eligible for an SBA loan, a business must:

  • Be located and operate in the United States or its territories
  • Be a for-profit business
  • Meet size standards based on the SBA’s definition of a small business
  • Have an owner who has invested equity into the business
  • Have exhausted all other financing options

2. Term loans

With a term loan, the business borrows a specific amount of money, which it must then repay over a set period of time with interest. These loans can be set up to be paid over the long or short term. The features of each loan, as well as your business needs and financial circumstances, will help determine which loan is right for your business.

Often used to cover equipment purchases or construction costs, long-term loans are paid over anywhere from three to 10 years, and sometimes longer. The interest rates of long-term loans tend to be lower compared to those of short-term loans. However, long-term loans can be harder to obtain, generally requiring collateral to secure the loan, a good business credit history and at least two years in business.

Short-term loans, on the other hand, are typically used to fill the cash flow gap for payroll, purchase office supplies or pay utility bills. They generally require repayment within three to 18 months and typically have higher interest rates. Unlike long-term loans, which may take quite a while to apply for and receive approval for, short-term loans have a much simpler application process that results in quicker funding, even for businesses that may not have a solid credit history.

3. Equipment financing

Equipment financing refers to business loans used to purchase equipment for the business, such as vehicles, commercial kitchens and construction machinery. The equipment itself serves as collateral for the loan, meaning the lender can repossess the equipment if the business defaults.

Business owners repay this loan over an agreed-upon period of time with a relatively low interest rate. Qualifying for equipment financing tends to be much easier compared to other types of business loans because the business does not have to be established for a specific period of time nor does the business owner need valuable assets or excellent credit.

4. Invoice financing

Invoice financing, also called accounts receivable financing, refers to a loan that works like a revolving line of credit. However, instead of basing the loan amount on assets or real property collateral, this financing arrangement is based on a company’s average invoice volume. The lender examines the company’s weekly volume of invoices and then may offer between 70% and 90% of the average invoice volume.

This type of financing often is used to provide needed cash flow that will cover payroll expenses, utility bills or the purchase of office supplies. Business owners are not obligated to take the entire loan amount at one time as with a traditional loan. Instead, they can draw out only the amount of funds needed at any given time, similar to a line of credit.

As with other business loans, invoice financing terms include interest rates and repayment terms. While fees and interest rates vary, companies often charge a processing fee of approximately 3% of the total invoice amount as well as a factor fee based on how long it took the client to pay the invoice. The factor fee usually is taken weekly and equates to approximately 1% of the total invoice amount.

Qualifying for invoice financing typically requires a good credit history as well as a proven record of invoices.

5. Business lines of credit

A business line of credit is a business loan that works like a credit card. Once approved for a predetermined credit limit, business owners can access the cash they need when they need it rather than taking out the entire amount at one time. They can use these funds to cover payroll, hire new employees, purchase goods or even grow and expand their business.

Once the borrowed amount is repaid, the business owner can access the full amount once again. When repaying the borrowed amount, business owners will pay interest only on the amount borrowed. Interest rates on lines of credit can be higher for those with a poor credit history.

Applying for a line of credit is similar to applying for a traditional loan. You’ll need to complete an application, provide financial documents and go through a personal credit check. In addition, you may need to sign a personal guarantee or provide collateral to receive approval.

6. Merchant cash advances

A merchant cash advance provides cash to business owners in exchange for a specific percentage of their future debit or credit card payments. Funds obtained through this financing option often are used to purchase new equipment, obtain seasonal merchandise to supplement regular inventory or even pay for building expansion or remodeling.

With a merchant cash advance, the lender — usually a non-bank lender — issues a set cash amount, and as you process debit or credit card payments, the lender takes a percentage of each payment and applies it to your loan balance. As such, payments are based on daily sales, so your payments will fluctuate based on what those sales are.

Because a merchant cash advance is not a traditional loan, it is not regulated like a regular business loan. Therefore, interest rates can be extremely high. In addition, these companies may start collecting payments — including interest — the next business day after the receipt of your funds. As such, lenders that offer merchant cash advances often seek out businesses with poor credit histories that cannot qualify for other types of business loans.

The high interest rates and frequent payments can be difficult for some businesses to pay as required, driving them further into debt. However, this can be an attractive option for many businesses given approval can happen in as little time as 24 hours.

How to repay business loans

Repayment for business loans depends on the type of loan obtained. You could make payments through installments, or regular payments, made weekly, monthly or even quarterly. Or payments could be made on a revolving basis, meaning you repay what you borrow. In some cases, payments may be taken out per purchase or business transaction.

Here’s how you can expect to make payments depending on which type of business loan you get:

  • SBA loans, term loans and equipment financing: The borrower makes regular payments as agreed upon with the lender. These could be weekly, monthly or quarterly.
  • Invoice financing and business lines of credit: These are revolving financing options, which means you are preapproved for a set amount that you can borrow against. When you repay the amount borrowed, you can then borrow those funds again, and the cycle continues.
  • Merchant cash advances: The borrower repays this business loan by giving the lender an agreed-upon percentage of each debit or credit transaction it completes until the loan has been repaid.

Business loan requirements: How to get a business loan

1. Build your personal and business credit scores

Because business loan requirements may look at both your personal and business credit score, you need to build your credit scores by making regular, on-time payments on your existing loans and credit cards, as well as keeping your debt level low.

2. Research lenders and check requirements

Getting a business loan that’s right for your business means finding a lender and loan qualifications that align with your needs and financial situation. Most business loans require a minimum number of years in business, a good credit score and a strong financial history. Some financing options also require collateral.

With regard to SBA loans, the qualification requirements are a bit different. While SBA loans do take into account a business’s ability to repay the loan, lenders also look at how the business makes money, where it operates and if it meets SBA size standards as a small business.

3. Gather documents

To get a business loan, you typically will need to provide the following documents:

  • Loan application form
  • Resume
  • Business credit report
  • Income tax returns
  • Accounts payable and receivable
  • Financial documents, such as bank statements, balance sheet, income statement and cash flow statements
  • Legal documents, such as articles of incorporation, business licenses, commercial leases, franchise agreements and any contracts with third parties
  • Business plan

4. Provide collateral if necessary

While not all business loans require collateral, for those that do, be prepared to provide a collateral document. This should list the cost or value of all personal and/or business property that you are prepared to offer to secure the loan.

Where to get a business loan

Banks

Large commercial and community banks offer a wide array of business loans, often with terms that fit your needs as well as lower interest rates than other lenders. However, their requirements may be stricter and the application process can be lengthy, requiring a lot of paperwork and documentation as well as a long time for review and approval.

Because they are generally smaller, community banks can sometimes offer more personal service and be more willing to work with a business to get approved for a loan than a larger commercial bank.

Online lenders

Small business loans through online lenders, such as Rapid Finance and OnDeck, often are easier to get approved for because these lenders are more likely to work with borrowers that have less-than-perfect credit, have not been in business for very long and/or don’t have large annual revenues. Additionally, the application process is typically quick, sometimes taking just a day, with funding received in as little time as one to two days after approval.

On the flip side, online small business loans often have higher interest rates, shorter repayment terms and lower borrowing limits than traditional lenders.

Bank lenders backed by the SBA

The SBA works with major lenders, such as Wells Fargo and Chase, to provide loans to businesses at lower rates with long repayment terms. These lenders take on these loans because they are guaranteed by the SBA, which will pay off a portion of the loan should the borrower default. However, businesses must meet a unique set of eligibility requirements to receive an SBA loan, which can be hard to do.

Peer-to-peer lending sites

Peer-to-peer loans are loans between an investor, rather than a bank, and the borrower. Examples of peer-to-peer lenders include Upstart and Peerform.

Peer-to-peer lending can be a good option for new businesses or those with poor credit.

Qualification requirements vary by lender. Upstart, for example, requires a minimum credit score of 620, while Peerform requires a minimum score of 600. It’s important to check with different lenders for exact qualifying requirements.

While approval may be easier, these loans also may have very high interest rates and origination fees.

FAQ and other things to know

Loan approval can range from just a few days when applying with an online lender to one to two months when applying for a term loan through a bank or SBA-approved lender. Loan approval for a merchant cash advance also can be quick, while approval for a line of credit may take a week or more.

Business loan terms vary based on the type of loan you have. For instance, long-term loans may be for up to 10 years, while short-term loans range between three and 18 months. SBA loans also may have long terms, while invoice financing and merchant cash advances have short terms.

The amount of funding that a small business can get varies based on the type of loan and the individual business’s financial standing. Traditional loans can be for very large amounts — the SBA offers loans up to $5 million — while short-term loans, invoice financing and merchant cash advances have much lower borrowing limits. For instance, invoice financing is based on your outstanding invoices, so if you have an average amount of $2,000 in outstanding invoices each month, your loan would be based on this amount.

Getting a business loan that fits your needs depends on a number of factors. Traditional business loans and lines of credit usually require a solid credit history, several years in business and, in some cases, collateral. Other financing options, such as invoice financing and merchant cash advances, are more likely to provide loans to newer businesses and those with less-than-perfect credit.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.