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Small Business Installment Loans: Is a Small Business Loan Installment or Revolving?

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Small Business Installment Loans: Is a Small Business Loan Installment or Revolving?

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What is a business installment loan?

A business installment loan is simply another term to describe a term loan or conventional business loan. Business installment loans and term loans can be used for a variety of business expenses including purchasing equipment, expanding, remodeling, inventory, payroll, and more. 

Business installment loans are provided to business owners by banks, credit unions, online lenders, and sometimes through the Small Business Administration. Typical loan terms can range from 12 months to 25 years with amounts ranging from as little as $5,000 to as much as $5,000,000. Also, the SBA does allow some business installment loans of up to $5,500,000 for purchasing long-term fixed assets like commercial real estate. 

There are three main types of business installment loans that are classified by the length of the repayment period. There are short-term, intermediate-term, and long-term business installment loans. Additionally, there are what lenders also consider small, medium, and large business installment loans that are categorized by the loan amount. 

To qualify for a business installment loan through a bank, credit union, or online lender, you should have a minimum of 6 months of time in business, a good personal and business credit history, and a strong business revenue and personal income. 

How do business installment loans work?

Business installment loans work just like any other type of term loan. Before applying for an installment loan you should review your credit history and score. If there are ways to improve your chance of qualifying you can do so. To access insights that will help you qualify for a loan you can visit mySMBscore online. We will help business owners understand how lenders will view finances when approving a loan. When you’re ready for an installment loan, here’s a breakdown of how it will work.

  1. Fill out the application data 
  2. Link your business data and check your SMBscore
  3. Review Lender offers customized to your information
  4. Choose the offer that best fits your business needs 
  5. Complete the application process with the lender and submit any required documents
  6. Receive funds as a lump sum
  7. Repay the business loan in fixed monthly installments with interest until paid in full

Is a small business loan an installment loan?

Yes, a typical small business loan is most often an installment loan. Business installment loans can also be called term loans, or conventional business loans, or they can be business loans offered through the Small Business Administration which are called SBA loans. However, not all business loans are considered installment loans. There are other types of financing like business lines of credit, business credit cards, invoice financing, and merchant cash advances. These types of business financing behave differently than installment loans, however, they are equally as accessible to small business owners looking for small business loans. 

Are small business loans installment loans or revolving lines of credit?

Small business loans can come in the form of installment loans and revolving lines of credit. The criteria for qualifying are typically the same, however, installment loans come in the form of an upfront payment that is paid back over time with installment payments whereas a revolving line of credit has a credit limit that you can borrow against. 

Installment loans vs. revolving credit  

So, what are the main differences between an installment loan and a revolving line of credit, and what are some examples of each? Let’s take a look.

Installment loans

Installment loans provide a one-time upfront large payment of funds that a business owner can pay back over time through monthly payments. Installment loans can either come with a fixed interest rate or a variable interest rate. If the business installment loan comes with a fixed interest rate, then the borrower should know exactly how much interest they are going to pay and how much their monthly installments will be each month. They will also know that at the end of the loan term, whether that is 12 months or 25 years, the entire loan principal and accrued interest will be paid in full. If the business installment loan comes with a variable interest rate, then the borrower understands that the amount of interest they need to pay and the amount of their monthly payments can change throughout the life of the loan. However, the loan and all interest will still be paid in full at the end of the designated loan repayment period. 

Common types of installment loans include conventional business loans, term loans, SBA loans, and equipment financing. All of these types of installment loans can be acquired through a bank, credit union, online lender, or the Small Business Administration and its network of SBA-approved lenders. 

Revolving lines of credit

There are two main types of revolving lines of credit that businesses can apply for. There are business lines of credit and business credit cards. Both of these types of revolving credit pretty much operate in the same way, however, a business line of credit is typically obtained through a bank or credit union and they often come with lower interest rates. A business credit card can also come from a bank or credit union, but often they come from a credit card company that may charge higher interest rates. 

When a business applies for a revolving line of credit, the lender or credit card company will make a full assessment of the business and its owners to determine how big of a credit limit they can have access to. 

For example, a lender may determine that a business is financially responsible enough to obtain a credit limit of $100,000. The business can then borrow as little or as much of that $100,000 and only pay interest on the amount they borrow. When they make payments on the amount they have borrowed, the amount paid replenishes the credit line and can be borrowed again at a future date. Interest does accumulate on any balance that is carried over from month to month. However, if a business borrows $10,000 of its $100,000 credit line but pays it all before the end of the next billing cycle, the business will not be required to pay any interest. 

A business credit card works very much the same way, however, a business credit card is used more frequently to cover travel expenses and make in-office purchases and a business line of credit is used more for larger purchases like inventory, office supplies, and new equipment. The main reason for this is that a business line of credit acts more like a checking account that you can write checks or make cash withdrawals from. 

What are the types of business installment loans?

There are three main types of business installment loans. There are short-term, intermediate-term, and long-term business installment loans. Here is a quick breakdown of each installment loan type.

  • Short-term business installment loan: Typically used for a quick cash infusion to purchase inventory, cover operating expenses like utilities and rent, or to provide some needed cash flow during slow seasons. Loan terms can range from up to 12 months or as long as 2 years, depending on the lender.
  • Intermediate-term business installment loan: Typically used for business equipment and to fund expansion. These loans can come with terms of anywhere from 2 to 5 years.
  • Long-term business installment loan: Long-term installment loans typically are used to purchase commercial property, company vehicles, and other large machinery or equipment. Loan terms can span up to 25 years. 

When to use an installment loan

An installment loan can be used to expand your business, provide some working capital for seasonal businesses, or to make large purchases. If a business installment loan benefits your business and its goals, you should use one. Always be sure that financially the loan will help your business. For certain things like cash flow improvement or purchasing expensive equipment other types of financing may be better. Do your research and get personalized help if you have a challenging business position. 

What do you need to apply for a business installment loan?

The most common things that lenders require when a business is applying for a business installment loan are the following type of documents and information.

  1. Personal and business credit scores
  2. Business license
  3. Personal and business assets that can be used as collateral
  4. A solid business plan or loan proposal
  5. Financial and personal documentation like tax returns, bank statements, proof of business ownership, proof of identity, and more

To better understand your chance of qualifying for an installment loan, and how to improve it, visit mySMBscore. The SMBscore was developed to create an industry specific, tailor-made risk assessment that can be used to determine the financial stability of small and medium-sized businesses (SMBs). It allows business owners to review their finances through a similar lens that a lender will. At mySMBscore you can view insights that lenders look at to approve your financing. Our platform can help you determine areas of improvement so that you can be as prepared as possible before applying for a loan. We can even help connect you to lenders that you have the best chance of qualifying for. Our goal is simple - to help businesses prosper. 

Position your business to access some of the best installment loans. . . check your SMBscore today!

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