Is A Small Business Loan Installment Or Revolving?

A small business loan can be either an installment or revolving loan—both are available to small business owners.

If you’re exploring financing options to fund your business, these loan types are very different, from how they are disbursed to their best uses. Before taking on any debt for your small business, it’s important to understand how these loans work so you know which loan is best for you.

What Are Installment Loans?

Installment loans are disbursed in a lump sum and are typically repaid monthly over a period of several years.

When you make payments, a portion of your payments will pay down your principal and the rest will pay interest charges. For instance, you borrow a $25,000 business installment loan at a 9% interest rate. Over the five-year term, you’d make monthly payments of $518.96. After the five years is up, you’d have paid back your loan in full, plus an additional $6,137.53 in interest.

You can find short-term and long-term business installment loans from various lenders, including banks, credit unions and online lenders. SBA loans are also offered as business installment loans, some with terms as long as 20 or 25 years and financing amounts up to $5.5 million.

To qualify for a business installment loan, you’ll have to meet certain lender criteria, such as a time in business, annual revenue and credit score.

When To Consider Installment Loans

There are several reasons why an installment loan may be better for your business than a revolving loan, including:

• You need a specific loan amount. An installment loan provides a lump sum of funding upfront, which could be useful if you’re looking to purchase a piece of equipment or finance another project with known costs.
• You prefer a lengthy repayment term. You can often find longer repayment terms on installment loans than revolving ones, which could be helpful if you’re looking to stretch out payments. Keep in mind, the longer you take to pay back your loan, the more you’ll pay in interest charges.
• You have predictable revenue. Installment loans often require fixed, monthly payments, which could work for your budget if your business has a steady income.
• Your business is well-established. If you have good credit and a well-established business, you may be able to qualify for a competitive interest rate on a business installment loan.

What Are Revolving Loans?

Revolving business loans function similarly to a credit card: You can withdraw money as needed and repay it on an ongoing basis. Often, these loans are business lines of credit or business credit cards.

Revolving loans have a preset credit limit and you can only borrow up to your maximum credit line. If you borrow funds, you’ll only pay interest on the amount borrowed and you’ll make payments regularly.

With some business lines of credit, you’ll make minimum payments through the draw period, or the time during which you can draw money from the line of credit. Once that period ends, you’ll enter repayment and at that time, you won’t be able to borrow any more money and will repay your borrowed amount.

For example, you open a line of credit for $25,000 for your small business. If you take out $10,000, you’ll make payments on that $10,000, plus any interest that accrues on it, on a regular basis. You won’t have to pay interest on the remaining $15,000 in your credit line if you don’t use it.

When To Consider Revolving Loans

Revolving credit can make sense for your business if:

• You prefer a flexible loan amount. With a revolving line of credit, you can withdraw the amount you need. You’ll only pay interest on the amount you borrow, so you won’t pay unnecessary interest charges due to over-borrowing.
• You’re in need of short-term financing. A business line of credit can act like an emergency fund if you run into unexpected expenses or a short-term cash flow issue.
• Your business revenue is inconsistent. Some business owners use a line of credit to cover fluctuations in income, particularly seasonal businesses.
• You want to earn business credit card rewards. A business credit card may benefit your business if you make use of its perks, such as cash back or travel rewards. Keep in mind, credit cards can have high APRs.

Installment Loans vs. Revolving Credit

While both installment loans and revolving lines of credit can help you meet your business goals, these two forms of financing have key differences.

Is an Installment or Revolving Loan Better for a Small Business?

Whether an installment or revolving loan is better for your small business depends on your needs.

An installment loan may be better if you’re looking for a set amount with predictable monthly payments over a long period. These loans could also be a good fit for established businesses with steady revenue and strong credit, allowing you to qualify for competitive loan rates and terms.

A revolving line of credit, on the other hand, may be better if your business needs flexible, short-term financing. A line of credit can help you cover a short-term cash shortage, handle unexpected expenses or stay afloat during a slow season for your business.

Whichever type of financing you choose, shop around to ensure you find the lowest rates available and make sure to read over your loan agreement carefully. Pay close attention to your interest rate, repayment terms and any associated fees, such as an origination fee or administrative fee that could add to your borrowing costs.