With small business loan defaults hitting the U.S. hard (made worse by the pandemic, of course) it’s important to know your options when looking to secure funding. So, a common question for loan officers: is a small business loan installment or revolving line of credit?
The goal of any loan is to give you the cash flow you need to capitalize on an opportunity or avoid business disruption. That being said, there are two basic categories of business finance:
Revolving lines of credit
Do you need to take advantage of a deal on a large purchase right now? Do you find yourself needing a little help to meet payroll month after month?
Let’s start with the basics—we want to help you answer these questions by explaining the differences, advantages, and disadvantages of installment loans and revolving lines of credit.
What Are Installment Loans?
Let’s begin with a good installment debt definition:
An installment debt comprises a lump-sum payment that must be repaid by the borrower in regular installments. These loans are generally repaid over a set period of time in equal monthly installments that include part of the principal and interest.
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There are many types of installment loans that can be used for different purposes. Some popular ones include:
Working Capital Loans
These help small business owners meet daily operational expenses, like payroll and purchasing additional goods or materials. They are short-term installment loans that can help stabilize cash flowand meet immediate business needs.
These are a type of secured loan where you can get funds by providing an asset as collateral to the lender. A mortgage is usually a loan borrowed against an asset like a commercial property. The lender keeps the asset as collateral until the borrower repays the loan in full.
You can get loans for more specific purposes, such as an equipment loan to repair or purchase equipment.SBA loans require more paperwork and a certified lender but can be used for almost any small business need. You could also get a business expansion loan if you need to open a new location or expand product lines.
What Is Revolving Credit?
A revolving line of credit, or a business line of credit, is more like a business credit card than a loan. You just don’t have to carry a physical credit card with you. This is a great option to stabilize cash flow. You will be approved up to your limit, though that does depend on your credit score.
Gettingrevolving credit from a bank or lender is like opening a credit account with them. You can withdraw only as much as needed, and you’ll pay interest only on that amount.
This type of business credit does come with an interest rate, but like a credit card, you only pay the interest rate when you carry a balance from one month to the next.
The great thing about revolving credit is it makes funds available when you need them (up to your limit).
Are Small Business Loans Installments or Revolving Credit Right for You?
It’s actually a good decision for your small business to carry some kind of debt for the purpose of building your credit (and potentially reducing tax liability).
You should never borrow above what you are able to repay, but responsible credit utilization is essential for a good credit score.
When you’re trying to decide which option is right for you, consider your business needs.
You might want an installment loan if you need a lump sum right away to pay for an essential piece of equipment. It’s also a good option if you have a steady income and can handle regular payments without stress.
A revolving line of credit will be the better option if you want to get ready for future financial needs but don’t need a large sum right now. You might also need to access smaller amounts on a regular basis to meet payroll or keep certain products or materials in stock.
Small Business Loans with Installments or Revolving Credit – Find the Best Financing Option