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When you’re exploring business financing options, you’ll likely come across two common types of funding: business installment loans and revolving loans. Both types of loans are viable ways to fund your business, but it’s important to understand how each option works so you can choose the one that best fits your business needs.
Small business loans can be installment or revolving
Installment loans offer lump-sum loan proceeds and equal repayments. Revolving loans offer lines of credit that you can draw on as needed, and the funds replenish as you pay them back.
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What are installment business loans and how do they work?
Installment business loans — also known as term loans — are loans where you receive the entire loan amount in a lump sum and pay it back in monthly installments for a set period. Installment loans usually come with fixed interest rates, meaning your payments are predictable throughout the loan term and consist of both principal and interest charges.
Business installment loans can be secured with collateral or unsecured. Secured loans typically have lower rates. In some cases, the lender may require you to put up collateral to qualify for the loan. Or, you can use collateral as a way to qualify for a lower interest rate.
Types of installment business loans
Several types of loans fall into the installment business loan category.
Business term loans. A term loan can be either short- or long-term, with longer term loans typically having higher borrowing limits and lower rates.
SBA loans. Loans backed by the Small Business Administration (SBA loans) are business loans offered by banks and credit unions but guaranteed by the federal government. They usually come with better rates than other business loans but can be hard to qualify for.
Equipment loans. When you need to finance large fixed assets, such as construction equipment, vehicles or machinery, you’ll usually take out an equipment loan, which is secured by the asset you purchase.
Commercial real estate loans. A commercial real estate loan is simply a mortgage on property used for business purposes, such as a warehouse, factory or office building.
Microloans. Business microloans are smaller business loans — up to $50,000 — usually offered by non-profit community-based lenders to support businesses in underserved areas or women or minority-owned businesses.
Pros and cons of installment business loans
Consider the advantages and disadvantages of installment business loans:
Pros
Potentially larger loan amounts. Installment loans typically offer higher loan amounts than you can get with revolving credit.
Predictable monthly payments. Repayment amounts and dates are always the same, making them easier to budget for.
Longer loan terms. You typically have longer to repay an installment loan than with revolving loans.
More loan options. Installment loans encompass a wide variety of loan types, whereas revolving loans have fewer options.
Cons
Not renewable. Installment loans are disbursed in a lump sum, so you can’t pay back a portion of it and borrow again like you can with a revolving loan.
Strict repayment schedule. There is no flexibility on your monthly payments if your business hits a slow patch.
Might require collateral. You may be asked to put up collateral to secure the loan, which makes it riskier for you.
Have to pay interest on the full amount. With revolving loans, you only pay interest on what you spend, but installment loans charge interest on the full amount.
May have prepayment penalties. Some lenders charge fees for paying your loan off early.
When an installment loan makes the most sense
There are several circumstances where an installment loan may be the best move.
You know exactly how much you need. If you have a specific expenditure in mind — and know exactly how much it costs — an installment loan might make the most sense.
You prefer predictable payments. Knowing your exact monthly payment can make budgeting easier.
You want a longer loan term. Installment loans typically give you longer to repay the loan than revolving credit. This extended time frame can give you some breathing room, especially if it’s a larger loan.
You need a large loan. Loan amounts are typically higher for installment loans than revolving.
What are revolving business loans and how do they work?
A revolving business loan is a type of loan that works much like a credit card. You’re approved for a preset limit that you can draw on as needed, up to the limit. As you pay it back, the funds are replenished, and you can continue borrowing.
Unlike installment loans — which typically come with fixed interest rates — revolving loans usually have variable rates, meaning they fluctuate with market changes. Another key difference between revolving and installment loans is you only pay interest on the funds you use with revolving loans, not the maximum borrowing limit.
Types of revolving business loans
There are basically three types of revolving business loans.
Business lines of credit. Banks, credit unions and online lenders offer business lines of credit, which typically have loan terms of six months to two years.
Business credit cards. Business credit cards can be easier to qualify for than other types of business funding — and may offer additional perks — but interest rates are typically high.
SBA CAPlines. SBA CAPlines is an SBA program that provides business lines of credit to help small businesses meet short-term or seasonal working capital needs.
Pros and cons of revolving business loans
Revolving loans offer more flexibility than installment loans, but there are drawbacks as well.
Pros
Flexible borrowing. With revolving loans, you can borrow as much — or as little — as you need up to your credit limit.
It’s renewable. As you repay some or all the funds, they are replenished, and you’re free to borrow again and again.
Only pay interest on what you use. You only have to pay interest on the funds you use, whereas, with an installment loan, you pay interest on the full amount.
Flexible repayments. You may only have to make interest payments during the draw period, which can be less expensive up front than installment loans.
Cons
Smaller loan amounts. Credit limits for revolving loans are typically smaller than loan amounts for installment loans.
Shorter terms. Revolving loans often have shorter loan terms than installment loans, which may be limiting.
Variable rates. Revolving loans usually come with variable interest rates, so the loan could get more expensive if rates rise. It can also be trickier to budget for variable rate repayment terms.
Risk of overspending. Access to revolving credit can sometimes lead to borrowing more than you need.
When a revolving business loan makes sense
There are times when a revolving loan might make more sense than an installment loan.
You don’t know how much you need. When you have an ongoing project or temporary cash flow shortage, you may only need access to undefined loan amounts from time to time.
You want an emergency fund. A revolving loan can provide peace of mind, knowing you can draw on it immediately if you have an unplanned expense or emergency.
You prefer flexible repayments. Depending on the nature of your business finances, you may want the flexibility of lower required payments at times.
You want access to credit card rewards. Business credit cards often come with extra perks like cashback rewards or travel points that can add additional value to the loan.
Bottom line
Small business loans can be either installment or revolving loans. If you need a lump sum to make a major purchase, an installment loan might be a good choice. You may prefer a revolving loan if you have short-term financing needs or want an emergency fund to fall back on.
Whichever type of business loan you decide on, be sure to compare multiple lenders to find the best rates and loan terms.
Frequently asked questions
Can I get an installment loan or a revolving loan as a startup business?
It can be more difficult to qualify for any type of business financing as a startup, but that also depends on how recently you opened your business.
For example, if you’ve been in business for at least six months and can meet minimum revenue requirements, some lenders will consider your loan application.
Can I get a business loan with bad credit?
If you have bad credit, getting a business loan may be more difficult, but it’s not impossible. Some lenders, like Lendio and Credibly, offer business loans to people with credit scores as low as 500. However, you’ll most likely pay higher rates.
What is a no-doc business loan?
While there are very few truly “no-doc” business loans, it’s simply a business loan where the lender doesn’t require extensive paperwork to grant loan approval. Instead, no-doc lenders typically connect to your business bank accounts to assess your business’s financial health.
Lacey Stark is a freelance personal finance writer for Finder, specializing
in banking, loans, investing, estate planning, and more. She has 20
years of experience writing and editing for magazines, newspapers, and
online publications. A word nerd from childhood, Lacey officially got her
start reporting on live sporting events and moved on to cover topics
such as construction, technology, and travel before finding her niche in
personal finance. Originally from New England, she received her
bachelor’s degree from the University of Denver and completed a
postgraduate journalism program at Metropolitan State University also
in Denver. She currently lives in Chicagoland with her dog Chunk and
likes to read and play golf.
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