Is a Small Business Loan Installment or Revolving Credit?


Depending on your company’s needs, there are two funding options you can choose from: a revolving line of credit (such as a business credit card or certain types of loans) or an installment loan (such as an equipment loan). Revolving small business loans are often useful to handle short-term cash-flow needs, whereas installment loans can be more useful for large purchases or when you need a lump sum of money to expand your business.

Most small business owners find themselves borrowing money at some point, often either to help cover operational costs during slow periods or to grow their business. If you find your business is in need of capital, there are a number of financial institutions you can reach out to that offer multiple business financing options. Lender options for small business owners include banks, credit unions, online lenders, and the Small Business Administration (SBA).

Keep reading to learn about two common types of small business loans (installment and revolving credit), how they differ from each other, and when it makes sense to choose one business loan option over the other.

Installment loan vs. revolving credit

Both installment loans and lines of credit can be used to grow your business, solve cash-flow problems, or handle long- and short-term needs. However, there are a few key differences between these types of small business loans that you as a business owner should be aware of before you decide which loan is right for your organization.

Installment LoansRevolving Credit
Loan amountsFixedAny amount within credit limit
Interest ratesUsually fixedUsually variable
PayoutsOne-time lump sumWithdraw as needed (up to credit limit)
Required monthly paymentsFixed paymentsVariable based on balance and interest

Installment loans

Small business installment loans, also known as term loans, provide the entire loan amount in a single lump sum payment, which you pay back with interest over a set period of time in equal monthly payments. An installment loan typically comes with a fixed interest rate, and your monthly payment consists of both principal and interest payments.

It should be noted that, unlike revolving credit, an installment loan cannot be “replenished” automatically, says Shana Peterson-Sheptak, head of business banking at PNC Bank. Simply put, if you require more funds, you’ll need to apply for a new installment loan.

“Installment business loans provide a lump sum upfront and come with fixed monthly repayments, great for specific uses and predictable budgeting. However, once these loans are used up, they don’t replenish.”

Some examples of small business installment loans include equipment loans, commercial real estate loans, term loans from the Small Business Administration (SBA), and microloans. Business installment loans can be secured or unsecured. For example, a small business may put up company assets as collateral for a secured loan, which may also help secure a more favorable interest rate.

Revolving lines of credit

Unlike like an installment loan, which gives you a lump sum of money upfront, a revolving loan allows you to withdraw as much or as little money as you want up to a predetermined credit limit. When you take out a revolving line of credit, you only pay interest on the money you’ve borrowed rather than on the entire credit limit.

Revolving credit loans usually have variable interest rates, meaning your payments will vary depending on the market interest rate. Like with a credit card, you have the choice to pay as much as you want each month — for example, you can choose to always make only the minimum payments, or you can choose to pay more than the minimum whenever your business has a profitable month.

“Revolving lines of credit offer flexibility, allowing businesses to access funds as needed, and typically have lower payments of a fixed amount of the balance owing or interest only on utilized amounts, depending on the size of the line of credit. Yet they often have variable interest rates, which can make budgeting more difficult,” explains Peterson-Sheptak.

Examples of revolving line of credit loans include business lines of credit, SBA line of credit loans, and business credit cards. Like an installment loan, a revolving loan can either be an unsecured or a secured loan.

Pro Tip

“The right product depends on the business’s needs, but as a general rule, an installment loan is an appropriate tool for any use that will take longer than one year to repay. As a rule of thumb, a revolving line of credit is the right product for business uses that are more short-term in nature.” —Jeff Lisle, banking center president of Vista Bank

Which is better: an installment loan or a revolving line of credit?

Choosing between installment loans and revolving credit isn’t so much a matter of which is “better” as it is a matter of how you plan to use the small business loan funds, as well as how you prefer to pay them back.

Consulting with experts who deal in small business loans — both installment loans and revolving loans — can help you to determine which type of lending is best for you. They can also tell you what you need to do to get approved for a business loan.

The following are a few scenarios to consider when deciding between an installment loan or a business line of credit:

When to apply for installment loans

Here are some cases in which taking out an installment loan may be the smartest move for your business:

  • You prefer a lump sum: If a business owner knows exactly how much funding they need, such as for a one-time purchase, a term loan may make more sense than a line of credit. You may also get a better interest rate with a term loan than you would with a revolving loan. As Peterson-Sheptak explains, “The specific rate for either option also depends on factors like lender’s terms, borrower’s credit score, and economic conditions. In general, revolving lines of credit may have higher interest rates compared to installment business loans, often due to the convenience and flexibility.”
  • You need a higher loan amount: You can usually get a larger loan amount with a business installment loan than you would get from revolving credit limits. This can be useful if you want to move to a larger facility or purchase expensive equipment needed to expand your small business.
  • You want to make fixed payments: Revolving loans usually have unpredictable monthly payments, which can be difficult to budget for. If you want to know exactly what your monthly payment is going to be, you’ll probably be better off with an installment loan.
  • You prefer long-term financing: If your loan agreement is for a longer term, that usually equates to lower monthly payments, along with more time to pay back the installment loan. However, this usually means you will pay more interest over the life of the loan.

Pro Tip

In some cases, the interest you pay on a business loan is tax deductible. Talk to a tax professional to see if this applies to your small business loan.

When to seek a revolving loan or a business credit card

One of the good things about a revolving line of credit or a business credit card is that you’re only paying interest on the amount you’ve borrowed, as opposed to the entire credit limit. Here are a few more solid reasons to seek a credit line over an installment loan:

  • You prefer short-term financing: If you only need extra money for short-term needs, such as seasonal cash-flow shortages or funds to replenish inventory, a revolving loan could be a good fit.
  • You want to be able to borrow over and over: Because a business line of credit can be accessed as often as you like (as long as the credit balance remains within your credit limit), it can be an ideal option if you need regular access to funding. For example, some small businesses will use a business line of credit or a business credit card as a sort of emergency fund. As Peterson-Sheptak explains, “If a business anticipates varying cash flow needs or wants a safety cushion for unexpected expenses, a revolving line of credit might be an appealing option due to its flexibility and long-term, reusable nature.”
  • You don’t know how much money you need: If you’re not sure exactly how much money you’re going to need, taking out a business line of credit makes more sense than potentially biting off more than you can chew with a business installment loan. It also eliminates the effort to apply for new term loans should you require more funding.
  • You want rewards along with your line of credit: While a revolving line of credit from a bank, credit union, or online lender doesn’t come with any perks, a business credit card can offer you a line of credit plus benefits such as miles, loyalty points, or cash back. However, Peterson-Sheptak warns, “A business card will often come with perks or rewards, but it may carry higher interest rates.” Of course, like with other credit cards, you can avoid paying interest altogether if you pay your credit account in full each month.

Key Takeaways

  • Two popular types of small business loans are installment loans and revolving line of credit loans.
  • Most installment loans have fixed interest rates and fixed monthly payments, whereas revolving credit usually comes with variable interest rates and no set monthly payment.
  • An installment loan is always disbursed in a lump sum payment. A revolving line of credit allows you to withdraw funds as often as you like (up to the revolving credit limit).
  • An installment loan can be useful if you need longer-term financing or you want to make a large one-time purchase.
  • A revolving credit line is good for small business owners who need to cover business expenses during low cash-flow periods or who prefer flexible loan amounts and only want to pay interest on the funds they’re actively using.
View Article Sources
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