Every small business owner occasionally runs into a cash flow crunch. 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.
There are several types of small business loans, and each one has unique advantages depending on your business needs:
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.
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.
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.
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.
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.
Whether the flexibility of a Line of Credit will help you best prepare for the changing needs of your business, or you're looking for a Term Loan to provide a specific amount of credit to purchase assets or meet specific financing need, PNC has a variety of borrowing options to meet your needs.
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