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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 asmall business loan installment or revolvingline of credit?

The goal of any loan is to give you thecash flowyou need to capitalize on an opportunity or avoid business disruption. That being said, there are two basic categories ofbusiness finance:

  • Installment loans
  • 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 the disadvantages ofinstallment loansandrevolving lines of credit.

What AreInstallment Loans?

Let’s begin with a goodinstallment 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 aset period of timein equalmonthly installments that include part of theprincipal and interest.

 

Who Said You Can’t Get a Loan Because of a Low Personal Credit Score? 

Learn about funding options you can get even if you have a bad credit history.

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There are manytypes of installmentloansthat 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-terminstallment loansthat can help stabilizecash flowand meet immediate business needs.

Mortgage Loans

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.

 

Learn more about getting an installment loan:

  1. Small Business Loan Terminology—Speak the Language, Save Money
  2. Applying for a Business Loan? Avoid These 5 Mistakes
  3. Is a Short-Term Loan The Best Fit for Your Business?

 

Other Types of Installment Loans

You can get loans for more specific purposes, such as anequipment 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 abusiness 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 abusiness credit cardthan 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 yourcredit score.

Gettingrevolving creditfrom a bank or lender is like opening acredit accountwith them. You can withdraw only as much as needed, and you’ll pay interest only on that amount.

This type ofbusiness creditdoes 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 with 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).

 

Call-out/Tip
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 aninstallment 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.

Arevolving 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 for Your Business

 

Are You Paying Interest You Don’t Need to Be?

The wrong type of financing option can saddle you with heavy interest payments and make it impossible to grow.

Find the right-sized funding that lets your business grow, not owe.

Speak To a Loan Expert

 

The post Is a Small Business Loan an Installment Loan or Revolving Line of Credit? appeared first on Credibly.

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