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Is the Small Business Loan Installment or Revolving?

Is the Small Business Loan Installment or Revolving?

Is the small business loan installment or revolving? This is one of the most important factors to consider if you’re looking for funding for your small business. To help you make the best decision, let’s dive into what installer and revolving loans are and the differences between them.

What are Revolving Loans?

Revolving loans are small business loans that you can access continually. This means small businesses can enjoy this type of loan again and again, provided their borrowing record is satisfactory.

Essentially, small businesses borrow money from their lender and repay that money when their cash flow situation allows them to do so. The lender will then open up the credit line for more borrowing as required. The revolving nature of these small business loans gives small businesses greater financial flexibility and access to a bit more capital when it’s sorely needed.

Examples of revolving loans include:

  • Credit cards
  • Business lines of credit
  • SBA lines of credit

Pros and Cons of Revolving Loans

The Pros

Flexible Repayment Terms

One of the main advantages of a revolving loan is that it offers flexible repayment terms. This means that you can choose to repay the loan over a period of time that suits your needs and budget. Additionally, you can make additional payments on the loan if you have the funds available, which can help to reduce the overall cost of the loan.

Lower Interest Rates

Another perk that comes with revolving loans is that it typically comes with lower interest rates than other types of loans. This is because the lender views the loan as being less risky, as they know that they will receive regular payments from the borrower. Additionally, the interest rates on revolving loans are often lower than those on credit cards, making them a more affordable option for borrowers.

Accessibility

Revolving loans can also provide quick access to funds when needed. This means that you can borrow money when you need it, up to your credit limit, and then repay the loan over time. This can be helpful in unexpected situations where you need access to extra funds, such as medical emergencies or car repairs.

The Cons

Limited Borrowing Power 

One of the main downsides of revolving loans is that they typically have lower borrowing limits than other types of loans. For example, a credit card may have a credit limit of $5,000, while a home equity loan may have a credit limit of $50,000. This can be problematic for borrowers who need to borrow large sums of money.

Difficult to Qualify For 

Another disadvantage of revolving loans is that they can be difficult to qualify for. This is because lenders often require good or excellent credit in order to approve borrowers for these loans. Additionally, some lenders may also require that borrowers have a certain amount of income in order to qualify for a loan.

Limited Funds

While accessible, revolving loans typically come with limited funds. This means that you may not be able to borrow as much money as you need in order to cover your expenses. Additionally, the funds that are available through a revolving loan may need to be repaid quickly, which can be difficult if you are facing financial difficulties.

What are Installment Loans?

Installment loans are a type of small business loan that are given to borrowers and divided into small, fixed payments with pre-arranged payback occasions. These debts generally occur over long-term intervals separated by the small payments over an extended period of time.

Installment loans can also be secured or unsecured, depending on the agreed-upon terms between lender and borrower. With installment loans, you have access to small amounts of cash with flexible repayment plans that fit their needs without jeopardizing your business’ cash flow in the long run.

Examples of installment loans include:

  • Business term loans
  • Commercial real estate loans
  • Equipment financing
  • SBA loans
  • Microloans

Pros and Cons of Installment Loans

The Pros

Opportunity to Increase Credit Score

One of the primary benefits of installment loans is that they can help to build credit. When you make timely payments on an installment loan, it will reflect positively on your credit report, which can help to improve your credit score. A good credit score can help you qualify for better terms on future loans, such as a lower interest rate.

Access to More Money

Another advantage of installment loans is that they give you access to more money than other types of loans. For example, if you take out a payday loan, you may only be able to borrow a few hundred dollars. However, with an installment loan, you could borrow several thousand dollars. This can be helpful if you need a large sum of money for an emergency expense.

Allows Smaller Payments

To top it off, installment loans will let you make smaller payments over a longer period of time than other types of loans. This can be helpful if you are struggling to make ends meet and need a little extra time to pay off your debt. Additionally, making smaller payments can help to reduce the amount of interest you pay over the life of the loan.

The Cons

High Interest Rates

One of the biggest disadvantages of installment loans is that they typically come with high interest rates. This means that you will end up paying more for your loan than you would if you had taken out a traditional loan with a lower interest rate. Additionally, the high interest rates can make it difficult to keep up with your monthly payments, which can lead to late fees and other penalties.

Shorter Repayment Periods

While allowing smaller payments, installment loans can sometimes come with shorter repayment periods than traditional loans. This means that you will need to make your payments more frequently, which can be a challenge if you have a tight budget. Additionally, if you miss a payment, you may be charged a late fee, which can further increase the cost of your loan.

Negative Effect on Your Credit Score

While it can help you build up your credit score, installment loans can also potentially decrease it. This is because installment loans are typically reported to the credit bureaus, and having too many loans can negatively impact your credit score. Additionally, if you miss any payments on your installment loan, this will also be reported to the credit bureaus and can further damage your credit score.

Differences Between Installment and Revolving Loans

Weighing the advantages and disadvantages of revolving and installment loans is one thing. Knowing the differences between the two is another. So in this table, we’ll take a look at the latter.

Installment LoanRevolving Loan
Loan AmountFixedMaximum credit limit
PayoutOne timeWithdraw as needed
Payment AmountFixedDepends on balance and interest, with the option to pay more
Interest RateDepends on loan amountDepends on current balance
RenewabilityNoYes

Tips to Increase Your Chances of Getting a Revolving or Installment Loan

With the right approach, you can increase your chances of securing a revolving loan and put yourself in a great position to keep up with cash flow trends. Simultaneously, getting an installment loan doesn’t have to be an uphill battle. Read on for our top tips on how to maximize your odds of receiving approval.

Improve Your Credit Score

One of the best ways to increase your chances of getting an installment or revolving loan is to improve your credit score. Your credit score is a number that represents your creditworthiness, or how likely you are to repay a loan. The higher your credit score, the more likely you are to qualify for the loan with favorable terms. There are a number of ways to improve your credit score, including paying your bills on time, maintaining a good credit history, and using a credit monitoring service.

Shop Around for the Best Rate

Another way to increase your chances of getting a revolving or installment loan is to shop around for the best interest rate. Interest rates on loans can vary significantly from lender to lender, so it’s important to compare rates before you apply for a loan. You can use an online loan calculator to compare rates from different lenders.

Apply with a Co-Signer

If you have trouble qualifying for the loan on your own, you may want to consider applying for a loan with a co-signer. A co-signer is someone who agrees to repay the loan if you default on the payments. Having a co-signer with good credit can increase your chances of getting approved.

Get Pre-Approved

Another way to increase your chances of getting approved for the loan is to get pre-approved before applying. Getting pre-approved means that you have already been approved for the loan and just need to finalize the paperwork. This can give you an edge over other applicants who have not been pre-approved.

Use Collateral as Security

As a last resort to increase your chances of getting approved for a revolving or installment loan,  present a collateral as security. Collateral is an asset that can be used to secure the loan in case you default on the payments. Common types of collateral include homes, cars, and jewelry.

Revolving VS Installment Loans: Which is Better for You?

If you’re considering taking out a loan for your small business, it can be difficult to choose between revolving or installment loans. As touched on earlier, each have their own unique benefits and risks that may suit different needs depending on the circumstances.

So is the small business loan installment or revolving? How do you decide which one is right for your situation? Read the guide above to find out!

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