If you own a small business, financing is often essential – and deciding on the suitable form of funding can either make or break your business. But is a small business loan installment better or you should opt for a revolving credit? You need to understand this first.
They can be both. Small Business Loans can be either Installment Loans or Revolving Credit. Both come with their fair share of tradeoffs and benefits, and thus – require assessment.
Before applying for a loan, small business owners should research which lenders offer the best terms and conditions. Additionally, business owners should assess their qualifications, as lenders will require proof of financial stability and a solid business plan.
What is an Installment Loan?
Most small business loans are installment loans, meaning that borrowers receive a lump sum of money in exchange for a pre-negotiated rate of interest and repayment term.
These loans are repaid in a set number of regularly scheduled payments, and the interest rate is fixed or static across the loan’s lifespan.
What is Revolving Credit?
Revolving credit is a type of loan which allows the borrower to access a set amount of available credit and use those funds as needed. This type of loan does not provide a lump sum of money upfront but instead provides a line of credit that you can access at any time.
The interest rate for a revolving credit loan is typically variable, meaning the rate is subject to change. Also, lenders may require a borrower to pay a one-time or annual fee to use the line of credit.
Installment Loan vs. Revolving Credit
Small Business owners should assess their financial situation and determine which repayment option is most feasible.
Installment loans are typically best for those who need a large sum. They can repay it over a fixed repayment period. On the other hand, revolving credit loans are well-suited for those who need access to a credit line and the flexibility to make payments as required.
Difference Between Installment Loan & Revolving Credit
The differences between both can be illustrated as follows:
|Installment Loan||Revolving Credit|
|A lump sum of money is received||Access to a line of credit|
|The interest rate is fixed||Interest rate is variable|
|The repayment schedule is fixed||Payments as needed|
|A one-time fee or annual fee may be required||A one-time fee or yearly fee may be required|
When To Use An Installment Loan
Installment loans are best for those who need a large sum of money and understand the importance of meeting their repayment obligations. This can include equipment purchases, real estate investments, or any other high-cost purchase that requires immediate cash.
When to use Revolving Credit
Revolving credit is ideal for those who need access to a line of credit and can manage their payments accordingly. This type of loan is helpful for business owners with variable cash flow. It allows them to draw from the line of credit when needed and make payments when funds are available. It is also helpful for those who need to finance a large purchase but prefer to make payments over time.
Benefits of Small Business Installment Loans
Lump Sum to Spend
Small business installment loans are outstanding for those who need a lump sum of money to make large purchases or investments. For example, if you need to buy a new piece of equipment to help your business grow, an installment loan can give you the required amount to make that purchase.
Fixed Interest Rate
With an installment loan, the interest rate is fixed, so you have a fixed estimate of what you owe your debtor. This predictability allows you to budget accordingly and be more comfortable with the amount you are repaying.
Small business installment loans can also provide tax benefits to those who qualify. Generally, Business owners can deduct expenses related to purchasing a business asset from their taxes. Installment loans can help make the cost of doing business more affordable.
Downsides of Small Business Installment Loans
Higher Interest Rates
Installment loans typically come with higher interest rates than other types of loans. This is because installment loans are generally unsecured, meaning the lender doesn’t have any collateral to back up the loan.
Rigid Payment Schedules
Installment loans come with a pre-set repayment schedule, meaning that borrowers must make their payments on time to avoid penalties and interest accumulation.
Installment loans are not as flexible as other types of loans because you are required to make payments routinely. This can be a problem if your finances or business needs change and you cannot make the payments on time.
Benefits of a Small Business Revolving Credit
Some lenders may offer rewards or incentives to those who use their revolving credit loan. This can include discounts on various products, cash back, or other perks for using the loans.
Small business owners may find that a revolving credit loan is more flexible than an installment loan. This is because they can borrow as much or as little as they need and make payments as required. This could benefit those who need a more flexible amount of money to work.
Revolving credit loans are also renewable, meaning that upon repayment, you can borrow more money again. This is great if you need funds for additional investments or are in a cash crunch.
For those with a frequent urgency to avail of quick cash, a revolving credit loan can provide a quick solution. These loans offer quick access to funds and can sometimes be processed in as little as one business day.
Downsides of Small Business Revolving Credit
Variable Interest Rate
Revolving credit loans tend to include a variable interest rate, which means that the rate can go up or down over the life of the loan. This can make it difficult to budget and plan accordingly.
Sometimes, lenders may charge additional fees for revolving credit loans, such as processing or annual fees. This can make it more expensive to use a revolving credit loan than an installment loan.
Some lenders may also charge inactivity fees for revolving credit loans if the borrower does not use the loan for an extended period. This means that borrowers should be aware of their lender’s inactivity.
For small business owners who are looking for a source of financing, understanding and comparing different kinds of loans can be highly beneficial. Installment loans and revolving credit loans are two standard options, each with its own benefits and drawbacks.
Before applying for any loan, it’s essential to understand your financial situation and assess which loan will best meet your needs.
Now you should understand why is a small business loan installment or revolving. Choose your option wisely.