Are Small Business Loans Installment Or Revolving

When considering financing options for your small business, you’ll probably come across two repayment plans. One arrangement might mandate that you pay back your debt in equal monthly payments. The alternative structure might enable you to make repayments on your own terms. Other terms may be used to describe the latter category, leaving you to wonder: Is a small business loan installment or revolving?

Is A Small Business Loan Installment or Revolving?

Small business loans can be either installment or revolving. For instance, business lines of credit are revolving, whereas SBA 7(a) loans are installment loans. Equipment loans and microloans come in both varieties.

What Are Installment Loans?

Any type of financing with a series of equal monthly payments is known as an installment loan. Compared to revolving loans, installment loans frequently have longer repayment terms and larger loan sizes.

Some installment loans have fixed interest rates, which maintain your recurring monthly loan payments. Others, such as SBA 7(a) loans, have variable interest rates. Even though your principal monthly payment stays the same, you’ll typically pay less in interest over the course of your loan if you do.

What Are Revolving Loans?

Revolving loans are any loans that give you access to a certain amount of money without requiring you to spend it all at once. A common example is business credit cards. You are not required to use the entire $50,000 credit limit on your card.

You may borrow the full amount of any revolving loan for a single purchase. The remaining money can then be used for other purchases or you can decide not to use any of it at all. On any money you don’t use, you won’t be charged any interest or fees.

Key Differences Between Installment and Revolving Loans

Installment and revolving loans have clear surface-level differences. However, these distinctions don’t entirely reflect the advantages and disadvantages of each. You should be able to determine which loan type best meets your needs by considering the differences between each loan that go beyond its surface.

In comparison to installment loans, revolving loans have the following advantages and disadvantages:

You can take out less money than the total loan amount. Let’s say you need $5,000 extra to cover payroll this month after bringing on a new employee. If you take out a revolving loan with a $10,000 credit limit, you can use just the $5,000 you need for payroll. You can leave the remaining $5,000 untouched without paying any fees on it.

You can take out money more than once. If you suddenly need the rest of that $5,000 credit line, you can easily access it at any time with a revolving loan. The only exception is if your credit line has an expiration date. In that case, you would need to pull that $5,000 before your credit account closes. Either way, you still won’t be charged for any money you didn’t borrow.

You can repay the loan on your own schedule. Revolving loans don’t come with required monthly payments. You can repay what you’ve borrowed in one lump-sum payment or make several smaller payments. As long as you repay everything by the due date, the choice of when and how you do so is up to you.

You can apply more easily. Some business lines of credit don’t require borrowers to have good business or personal credit scores. These credit lines are typically easy to apply for, meaning that you can get funding sooner than later to shore up your cash flow.

You can avoid collateral. Some small business loans are only accessible if you put up certain assets as collateral. This way, the lender can seize your assets and sell it to recoup any portion of the loan that you couldn’t pay. Some revolving loans lack these collateral requirements. They can be safer bets if you’re worried about losing your assets.

You can’t claim them as tax deductions. Some types of loans can lower your taxable income. Revolving loans typically don’t come with this advantage.

Your credit score can fall. Between the time you take money from your revolving credit line and repay it, your credit score can decrease. If you use most or all of your credit line and leave it unpaid for a while, your overall credit health may be impacted.

Your interest rates will be higher. In almost all cases, lenders charge much higher interest rates on revolving loans than installment loans. In fact, some business credit lines can have an APR as high as 99%. That could mean you wind up paying back twice the amount that you borrowed.

The pros and cons of installment loans are as follows.

You receive the entire sum upfront. With installment loans, $100,000 is $100,000 – no more, no less. That’s great if you need to immediately cover expenses of that amount. It also eliminates the possibility of not paying fees or interest on a certain portion of your loan. That said, certain SBA loans are fully amortized with variable interest rates, meaning their fees can be quite low.

You’ll know exactly what to pay and when. The contracts behind SBA and term loans – both among the most common installment loans – should clearly state your repayment schedule. You’ll know exactly how much you must pay each month and on what date. This predictability can help you better budget for loan expenses. It can also help you remember to repay your loans and avoid late payment penalties.

You’ll have access to more money. Often, installment loans offer an order of magnitude more funding than revolving loans. That means if you need lots of money for a specific purpose – say, buying commercial property – installment loans will suit you better.

Your fees will be lower. If you were to compare an installment and a revolving loan of the same size, you’d likely see that the installment loan has lower fees. Sure, the fees for any type of loan can vary depending on the lender, but even the highest installment rates typically fall below revolving rates. As mentioned earlier, some revolving loans have APRs of 99%, whereas the best installment loans have rates one-tenth that much.

You’ll face penalties for late payments. Since installment loans come with a set repayment schedule, you’ll face fees if you make payments after your deadlines. Some loans also come with prepayment penalties if you decide to pay off your full balance before the payment term ends.

You’ll face more challenges getting approved. Installment loans often have stricter qualification requirements. You’ll likely need a great credit score, and your business will likely need to have been in existence for at least two years. That said, many small business funding experts still advise any borrower who might qualify to pursue these loans.

You’ll need a long time to apply. Installment loans’ steep qualifications introduce lots of paperwork, meaning the application process can be lengthy. But that’s changing. Certain online installment lenders have developed digital applications that streamline the whole process.

Which Is Better for a Small Business Loan: Installment or Revolving?

The decision between an installment loan and a revolving loan will ultimately depend on two factors. You must first decide exactly how you will use the loan proceeds. Second, you must determine the most effective method of repayment.

Revolving loans may not be the best option if you need a loan to consolidate your business debts. They work best for covering wages, inventory, office supplies, and other tangible items. Installment loans are preferable for working capital, commercial real estate purchases, and debt consolidation

If you mark down predictable monthly payments in your business spreadsheets and budgets, installment loans are also preferable. Revolving loans should work for you if you have the flexibility to pay loan costs whenever and however you like.

In either case, you might favor installment loans if you’re more accustomed to losing money than making a profit. This is due to the fact that the best installment loans have minimal fees and interest rates that frequently drop over time. One excellent example is SBA 7(a) loans, which are simple to locate and apply for from your home or place of business.

How to Apply for an Installment Loan

Maybe you’re now ready for funding in large amounts that you can pay back over long periods with small monthly installments and low interest rates. You might also be worried about qualifying for such loans, dealing with a tedious application process, or waiting forever for funding. With SmartBiz®, you can quickly find out whether you qualify – and apply just as quickly for funding that arrives not long after. Just create a SmartBiz account to get started.

WHAT YOU NEED TO KNOW: SmartBiz Loans®’s Small Business Blog and other related communications are meant to give general information on important subjects for running small businesses. Be aware that this is not a thorough examination of the subject matter discussed and that it is not intended to offer advice specific to you or your company regarding the issues raised. Please consult legal and financial processionals for further information.

FAQ

Are small business loan secured or unsecured?

Depending on the type of loan and the specific lender you’re dealing with, a small business loan can be either secured or unsecured. While some lenders only provide one option, others provide secured and unsecured loans.

What type of financing do small businesses use?

Small businesses frequently use debt, equity, or a combination of the two types of financing. With debt financing, you borrow money from a third party and pay it back with interest. Contrarily, equity financing entails receiving funds from a financier in exchange for a portion of your company.

What is a small business loan considered?

Small business loans are forms of financing offered to businesses by various lenders for a variety of purposes. Numerous types of small business loans have developed over time to support entrepreneurs in achieving their objectives. So how a small business loan functions is determined by the type of loan being used.

What are the 3 most common types of installment loans?

Auto loans, mortgage loans, personal loans, and student loans are examples of common installment loan types.