Are Business Loans Installment or Revolving?

Small businesses often need to turn to loans to address financing needs, whether they are start-ups or long-standing. Typically, most traditional business loans are installment-driven, with a fixed amount of money to be repaid over a set period. However, revolving credit loans also give businesses more flexibility, allowing them to borrow, repay, and borrow again up to a certain limit (kind of like a line of credit).  

Below, we will look at the differences between these two types of business loans, their advantages and disadvantages, and help you decide which financing option is right for your small business. 

An installment loan is a type of financing where a borrower receives a lump sum of money upfront and repays it in fixed, regular payments over a predetermined period. These loans can be either secured, backed by collateral, or unsecured, without collateral. Installment loans are commonly used by small and medium-sized businesses (SMBs) to finance expenses such as equipment purchases, expansion projects, or operating costs.  

Typical loan characteristics include varying loan amounts, terms ranging from months to years, a fixed repayment schedule, competitive interest rates, and specific eligibility requirements based on the borrower’s finances. 

Unsecured Business Loans 

Unsecured business loans do not require collateral, making them accessible based on the borrower’s creditworthiness and financial history. Due to the higher risk for lenders, these loans typically come with higher interest rates and stricter eligibility criteria. Key features include faster approval processes and no asset forfeiture in case of default. However, you need strong credit scores to qualify for these loans. 

Secured Business Loans 

Secured business loans are the opposite of unsecured as they are backed by collateral, offering lower interest rates and higher borrowing limits. The key difference between secured and unsecured loans lies in the collateral requirement, which reduces the lender’s risk.  

Common types of collateral include real estate, equipment, inventory, and accounts receivable. These loans are often used for substantial investments and provide more favorable terms, making them a popular choice for businesses with valuable assets to pledge. The collateral serves as a safety net for lenders, ensuring they can recover their funds if the borrower defaults. 

Installment loans are common for small businesses needing a substantial amount of capital for specific purposes. These loans provide a lump sum that is repaid over a fixed period with regular, predictable payments. 

Pros: 

• Ability to secure larger loan amounts 
• Longer repayment terms 
• Predictable, fixed monthly payments 
• Competitive interest rates for established businesses 
• Cost-effective for substantial investments 

Cons: 

• Limited flexibility in repayment 
• Challenging if the business cash flow fluctuates 
• Potential prepayment penalties 
• Risk of default with severe financial consequences if payments are missed 

When To Consider Installment Loans 

Consider installment loans when your business requires a specific loan amount for significant expenses, such as purchasing equipment or funding expansion projects. These loans are good if you prefer a lengthy repayment term that aligns with your financial planning and can ensure predictable revenue to cover monthly payments. They are particularly suitable for well-established businesses with stable income. 

A revolving loan is a type of financing that gives businesses a credit limit they can draw from, repay, and draw from again as needed – think of it like a lower-interest-rate credit card. It offers flexibility in borrowing, allowing businesses to access funds up to a certain limit without reapplying for a loan. Like revolving credit for consumers, revolving loan facilities cater to larger amounts, making them ideal for managing short-term cash flow needs and operational expenses. 

Business Line of Credit 

A business line of credit differs from an installment loan in several ways. With a line of credit, businesses receive a credit limit and can withdraw funds as needed, whereas installment loans provide a lump sum upfront. Repayment obligations for a line of credit are based on the amount borrowed, with interest charged only on the withdrawn funds. Installment loans have fixed repayment schedules and terms, while a line of credit offers more repayment and fund usage flexibility. 

Business Credit Card 

Business credit cards have many benefits, including separating personal and business expenses, and simplifying accounting and tax preparation. Paying the balance in full each month avoids interest charges. Additionally, business credit cards allow for maintaining an ongoing approved balance, providing quick access to funds for operational needs. 

Revolving loans provide businesses with the flexibility to borrow, repay, and borrow again up to a set credit limit. This is great for managing variable cash flow needs and short-term expenses. 

Pros: 

• Flexibility to borrow as needed up to a set credit limit 
• Ideal for managing unpredictable cash flow 
• Quick access to funds 
• Lower monthly payments since interest is charged only on the borrowed amount 

• Can be renewed for ongoing access to capital 

Cons: 

• Higher interest rates compared to installment loans 
• Variable interest rates can lead to unpredictable costs 
• Risk of over-reliance on credit, potentially leading to financial strain if not managed carefully 

When To Consider Revolving Loans 

You should consider revolving loans as a business when you need short-term financing to manage cash flow gaps or operational costs. They’re suitable when there are inconsistent revenue streams, to give more flexibility to borrow and repay as needed. They’re beneficial when access to on-demand capital is necessary, like for inventory purchases or emergency expenses. They’re also great for those wanting low monthly payments and the ability to renew credit lines. Additionally, if your business needs a credit card for routine expenses, these revolving credit options can be good for maintaining liquidity and operational efficiency.  

The main differences between an installment loan and a revolving line of credit include the loan amount, fund disbursement, repayment obligation, interest charges, and terms. Installment loans provide a lump sum that is repaid in fixed installments over a set period with fixed interest rates. In contrast, revolving credit allows businesses to withdraw funds as needed up to a credit limit, with variable interest rates and flexible repayment terms, charging interest only on the borrowed amount. 

Where to Get Installment Business Loans 

Business owners can get business installment loans from various sources, including banks, credit unions, online lenders, and the Small Business Administration (SBA). Banks and credit unions typically offer larger loan amounts and longer repayment terms, often requiring strong credit and extensive documentation. Online lenders provide quicker approval processes and more flexible requirements, though sometimes with higher interest rates. The SBA offers loans with favorable terms and lower interest rates, which is especially beneficial for small businesses, though the application process can be lengthy. 

Where to Get Revolving Business Loans 

You can get business revolving credit loans from banks, credit unions, online lenders, and specialized financial institutions. The process typically involves submitting an application, providing financial statements, and undergoing a credit review. Approval is based on your business’s creditworthiness and financial health, with credit limits set according to these factors. These sources offer various terms and interest rates, catering to different business needs. 

When choosing between installment loans and revolving lines of credit, small business owners should consider several factors: 

• Business Needs: Assess the purpose of the loan. Installment loans are ideal for large, one-time expenses like equipment purchases or expansion projects. Revolving credit suits ongoing operational costs or unpredictable expenses. 
• Repayment Ability: Evaluate your ability to meet repayment obligations. Installment loans require fixed monthly payments, providing predictability but demanding consistent cash flow. Revolving credit offers flexibility, with payments based on the amount borrowed, which can be adjusted to match revenue fluctuations. 
• Capital Cost: Consider the total cost of borrowing. Installment loans usually have lower interest rates and fixed terms, making long-term planning easier. Revolving credit may have higher, variable rates, increasing the cost if the credit line is frequently utilized. 
• Risk Tolerance: Understand the financial risks involved. Installment loans present a fixed debt obligation, potentially straining cash flow if revenue decreases. Revolving credit, while flexible, can lead to over-borrowing and higher interest expenses if not managed carefully. 
• Credit & Eligibility: Check your business’s credit profile and eligibility criteria. Installment loans often require strong credit scores and collateral, whereas revolving credit might have more lenient requirements but higher interest rates and lower limits. 

By carefully evaluating these factors, you, as a business owner, can choose the financing option that best suits your financial situation and growth objectives.