Every small business owner will run into a cash flow crunch, at some point. Sometimes customers are slow to pay their bills, unexpected expenses come up, big sales, projects, or contracts get delayed, and other circumstances beyond your control suddenly put your business in a short-term financial hole. When cash flow shortfalls arise, one way for business owners to stay afloat is by getting a small business loan, line of credit, or working capital loan. With the right type of small business loan, your company can meet its short-term cash flow needs or invest in bigger purchases for the future.
But with literally millions of websites promoting their version of the best small business loans of 2017, it’s important to realize that there is no such thing. More and more small business owners are getting burned by accepting one-size-fits-all, cookie cutter loans that make absolutely no financial sense for their particular business. It’s impossible to say what the best small business loan may be, as every small business has varying needs. There are several types of small business loans, and each one has unique advantages depending on your business:
Unsecured Term Loan
The traditional small business loan is typically a fixed-term loan. This means that it's a one-time source of money that requires a predetermined monthly payment amount, with equal payments each month over a fixed term of years. For example, you might borrow $100,000 and pay it back within five years (with interest), over 60 monthly payments. An unsecured loan does not require collateral, and you do not have to put up any of your business's assets or your personal assets to secure the loan. If you have strong credit history, an unsecured term loan can often provide lower interest rates than a business credit card.
Secured Term Loan
If your credit is less-than-perfect, you might need to go with a secured term loan. Unlike an unsecured loan, this type of loan requires collateral, which is a valuable asset that can be claimed and sold by the bank or lender in case you're unable to repay the loan. For example, many secured loans involve mortgaging the business's commercial real estate, or borrowing against the business's heavy machinery or other capital-intensive equipment. The terms of a secured term loan work in a similar manner to an unsecured term loan—but with the added element of risk of possibly having to give up your collateral in case of a default.
Small Business Line of Credit
A small business line of credit is also known as a revolving loan, which works similarly to a credit card. Instead of borrowing a fixed amount of money upfront and then pay it back in monthly installments, a business line of credit gives your company permission to borrow a certain amount of money up to a certain credit limit that's set in advance by the lender. A line of credit can be a very flexible option to access cash on an as-needed basis. Many companies choose to set up a small business line of credit in order to navigate short-term cash flow shortfalls and manage their operating expenses. With a line of credit, you can borrow as much or as little as you need each month, and then repay the money over time or all at once—as long as you make your minimum payments and manage your credit limit according to the conditions of the agreement with your lender.
Business Cash Flow Loan
Even if your small business is growing, you may find yourself needing extra cash to cover day-to-day expenses such as payroll, rent and inventory, or to pay for short-term projects that could grow your revenue in the long run. Uneven cash flow is one of the biggest challenges of small businesses throughout all industries. In a perfect world, you’d walk into your local bank and walk out with a business loan long before you wound up in a cash crunch. Well, those days are long gone! If you haven’t been in business at least two years, or lack good credit and collateral, chances are a traditional bank loan is never going to happen.
In order to deal with this shortfall, a cash flow loan may be your best option. For this type of business financing, lenders provide you funds and use your future expected cash flow as collateral for the loan. You’re essentially borrowing from cash that you expect to receive in the future by giving the lender the rights to a predetermined amount of these receivables. These are primarily used for working capital or take advantage of short-term ROI opportunities. Your credit scores will usually be checked, but they play less of a role. As the name indicates, the lender is more concerned with inspecting your cash flow (usually bank statements) to approve your application. Turnaround time is another great feature of a cash flow loan, as funding usually takes place in a matter of days.
Small Business Working Capital Loans
A recent development in small business finance has been the rise of “alternative lenders," or “platform lenders." These companies offer short-term working capital loans for small business owners that typically involve higher risk because of higher interest rates and smaller loan amounts than a traditional bank loan would offer. Startups and small companies with limited credit history or less-than-perfect credit—who cannot get approved from a loan or line of credit from a traditional lender—might be a good fit for a working capital loan. But be sure to do your research, understand all the various fees, read the fine print, and make sure you're working with a reputable lender.
ACH Small Business Loans
For starters, an ACH small business loan can also be referred to as a small business cash flow loan, small business revenue based loan or a small business merchant cash advance. The ACH designation really applies to how the lender is paid. ACH or Automated Clearing House, refers to the lenders ability to withdraw an agreed upon amount directly from your checking account at agreed upon intervals, typically daily or weekly. This is different from factoring your accounts receivable (A/R), because instead of billing your customers and collecting from them, they directly access your checking account in much the same way automated payments might go to you mortgage lender or a utility company from your personal checking account.
An ACH small business loan, much like factoring or an MCA loan, should be considered a small business short-term financing option. The cost of the capital is more expensive, in other words you’ll pay a higher interest rate, but you’ll be able to access that capital much quicker than a traditional term loan from the bank or other financial institution.
Because a small business ACH loan lender will be able to pull your payment directly from your checking account, it reduces risk to the lender making it possible for small business owners with a healthy checking account but less-than-perfect credit to get a loan.
Merchant Cash Advance (MCA)
MCA's or business cash advances can provide business borrowers with an upfront fixed amount of cash in as little as 24 hours. The funding amount is based upon a percentage of the businesses credit card receivables or daily cash balances using historical credit card receipts and bank statements to determine the initial advance. The business pays back the advance, plus a percentage, often referred to as a discount factor, from a portion of their credit card receivables or cash available plus a percentage which is often referred to as a discount factor. The remittances are drawn from the business customer on a daily, weekly or monthly basis until the obligation has been met. An MCA is not technically a small business loan and as such MCA's are not limited in what rates they charge or what terms they establish and therefore often have high interest rates. For this reason it is very important for a business owner to be completely aware of how the MCA product works and how it could affect their business. MCA's are good options for small business owners who may not have strong credit but have lots of credit card activity and need financing quickly.
There are several financing options available to help your small business navigate short-term cash flow shortfalls and make bigger capital-intensive investments. However, make sure you're getting the right loan or credit option that suits your business's needs. Ideally, a small business loan or line of credit should help you maintain your daily business operations—and set up your company for future growth.