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Is a Small Business Loan Installment or Revolving Credit: The Essential Guide

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We often hear small business owners ask if a business loan is an installment or revolving credit. The answer depends on what type of funding you receive, as small businesses have access to both installment loans and revolving lines of credit.

Understanding the differences between these two financing options is crucial, as it helps you plan your funding strategy and identify the options that will best help you meet your goals. Installment loans provide a large sum upfront and offer predictability in the repayment process. Revolving credit is far more flexible in how you access and repay the funds.

This guide explores the critical differences between installment and revolving credit to help you make an informed decision. Specifically, we’ll answer these questions and more:

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    What is an Installment Loan?

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    An installment loan is a type of loan in which borrowers receive a lump sum of money and repay it in equal installments over a predetermined period. These loans have fixed terms and repayment schedules outlined in the loan agreement.

    Installment loans are commonly used for various purposes, including capital loans for small businesses. The loan amount, interest rates, and repayment terms are agreed upon at the beginning of the loan. This type of financing provides predictability for borrowers, making budgeting easier.

    Online lenders and traditional financial institutions, such as banks and credit unions, offer installment loans to businesses. These lenders have specific lending requirements that companies must meet to qualify for the loan.

    Installment Loan Benefits

    Installment loans can provide small businesses with predictable monthly payments, making budgeting and managing cash flow easier. Additionally, these loans often have longer repayment terms, allowing businesses more time to repay the borrowed funds without putting too much strain on their finances. Overall, installment loans can be a flexible financing option for small businesses looking to fund growth or cover unexpected expenses.

    Installment Loan Drawbacks

    One drawback of installment loans is their rigid repayment structure, with the same amount due each month. Businesses with inconsistent revenue or cash flow might find it challenging to make the same monthly payment for the loan term.

    Most installment loans are not renewable, meaning you cannot get additional funds after using the initial loan disbursement. Unlike a revolving line of credit, borrowers must pay interest for the full loan amount rather than just the funds they use.

    Additionally, missing payments on an installment loan can negatively impact a borrower’s credit score, making it harder to secure future loans or credit. It’s essential for borrowers to carefully consider their ability to repay the loan before taking out an installment loan to avoid these potential drawbacks.

    Small Business Installment Loan Pros & Cons


    • Provides access to a larger sum of money upfront.
    • Allows for predictable monthly payments.
    • Can help build business credit with timely payments.
    • Suitable for significant business investments or purchases.


    • May require collateral to secure the loan.
    • Rigid repayment structure in most cases.
    • Potential for penalties for late payments.
    • Can lead to increased debt if not managed properly.

    How do Installment Loans work in Small Business Financing?

    Installment loans provide a lump sum upfront, with fixed monthly payments until the loan is fully repaid. This makes installment loans more beneficial for significant investments.

    For instance, if a small business needs to purchase new equipment that will benefit the company over several years, opting for an installment loan with lower interest rates can be more cost-effective than using high-interest credit cards. Types of installment business loans include:

    Each type caters to specific needs and comes with varying terms and repayment structures tailored to suit different business objectives. When businesses aim to expand operations, acquire assets, or undertake significant investments that require substantial upfront capital, installment loans can provide the necessary financial support without compromising cash reserves.

    What is Revolving Credit?

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    Instead of activating your funds as a one-time disbursement like an installment loan, a revolving credit loan activates your funds as an available credit limit. Business owners can draw funds from the credit limit as needed and pay interest on the funds they use.

    Two of the most common forms of revolving credit are business lines of credit and business credit cards. There are also SBA CAPLines of credit.

    A business line of credit is a flexible financing option that allows businesses to borrow funds up to a predetermined limit. It can be used for various purposes, such as managing cash flow, purchasing inventory, or covering unexpected expenses.

    A business credit card is a financial tool that allows businesses to purchase on credit, helping with cash flow management and expense tracking. These cards often come with rewards programs tailored to business spending and offer detailed reporting for accounting purposes.

    SBA CAPLines of Credit are specialized loans backed by the Small Business Administration (SBA) to help small businesses manage their short-term working capital needs. These credit lines can be used to finance inventory, accounts receivable, and seasonal increases in labor costs. Most other SBA loans are installment loans.

    Benefits of Revolving Credit

    Revolving credit can provide small businesses with flexibility in managing their cash flow, allowing them to borrow funds as needed and repay them over time. This can help businesses navigate periods of fluctuating expenses or unexpected costs without taking out a traditional term loan. Revolving credit lines provide a flexible option for small businesses looking to access capital quickly.

    Drawbacks of Revolving Credit

    Revolving credit may carry higher interest rates, leading to increased debt over time. For example, business credit cards typically have a higher APR than a business loan. Carrying a balance on your business credit card can accrue significant interest.

    Additionally, the temptation to continuously use revolving credit can result in a cycle of debt that becomes difficult to break free from, impacting the business’s financial health. It’s crucial for small businesses to manage their revolving credit carefully to avoid these potential pitfalls.

    Revolving Credit Pros & Cons


    • Flexibility to access funds as needed.
    • Ability to borrow up to a set credit limit.
    • Can help with managing cash flow during slow periods.
    • Only pay interest on the amount borrowed.


    • Higher interest rates compared to traditional loans.
    • Temptation to overspend and accumulate debt.
    • Risk of maxing out credit limit and harming credit score.
    • Potential for variable interest rates to increase over time.

    How does Revolving Credit work in Small Business Financing?

    Businesses should consider revolving credit when they need flexibility in their financing. Small businesses with fluctuating cash flow can benefit from revolving credit to manage expenses during lean periods.

    To utilize revolving credit effectively for business purposes, companies can use it for short-term needs such as purchasing inventory, covering unexpected expenses, or managing payroll during slow seasons. This type of financing allows businesses to access funds quickly and repay them as needed.

    How can my Business decide between Revolving Credit or Installment Loans?

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    When deciding between a revolving credit line and an installment loan, businesses must carefully consider their specific needs and financial situation to determine the right choice. Here are some factors to consider.

    Purpose of the Loan

    Businesses should first identify the purpose of the loan. An installment loan may be more suitable if they need a large sum of money for a specific one-time expense, such as purchasing equipment or expanding their operations. It provides a lump sum upfront that is repaid over a fixed period.

    A revolving line of credit makes more sense for ongoing projects, working capital needs, or covering unexpected expenses. Deciding the how and why of your funding needs can help inform which option is better suited for you.

    Repayment Structure

    Installment loans have a fixed repayment schedule with set monthly payments, making it easier for businesses to budget and plan for repayment. This predictability can benefit businesses with stable cash flow looking for a structured repayment plan.

    On the other hand, a revolving line of credit provides flexible funding to cover various cash flow gaps. This also means the repayment structure could fluctuate with your cash flow. Since you’re only paying interest on the funds you use, a revolving line of credit often has more manageable payments.

    Interest Rates

    Businesses should compare the interest rates of installment loans with other financing options to determine the overall cost of borrowing. Installment loans may have lower interest rates than revolving credit, but you must pay interest for the full amount. However, they offer the advantage of fixed rates, protecting businesses from fluctuations in interest rates.

    Revolving credit might carry a higher interest rate, but it’s short-term debt, and you only pay interest on the funds you use. You should carefully compare interest rates and your intended use of the funds to determine the more financially beneficial option.


    Qualifying for a business installment loan typically requires a detailed review of the company’s financial history, credit score, and revenue projections. Lenders will also consider the business owner’s personal credit score and financial history.

    On the other hand, revolving credit, such as a business line of credit, may have less stringent qualifications. With revolving credit, businesses can access funds as needed up to a predetermined credit limit, making it a more flexible option for companies with fluctuating cash flow.

    By carefully evaluating these factors, businesses can determine if an installment loan aligns with their needs and financial objectives. It’s essential to conduct thorough research, compare different loan options, and consult with financial advisors to make an informed decision that supports the growth and success of the business.

    Frequently Asked Questions

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    Here are the most common questions about installment loans vs revolving credit in small business financing.

    Are Installment Loans secured or unsecured?

    When it comes to installment loans for small businesses, they can be either secured or unsecured. Secured installment loans require collateral, such as business assets or personal property, to back the loan. This provides the lender with security in case the borrower defaults on the loan.

    Unsecured installment loans do not require collateral and are based solely on the borrower’s creditworthiness. While secured loans may offer lower interest rates and higher loan amounts, unsecured loans can be a good option for businesses that may not have valuable assets to use as collateral. Ultimately, the decision between a secured or unsecured installment loan for a small business will depend on the specific needs and circumstances of the business owner.

    When is an Installment Loan better for Small Business?

    An installment loan usually makes more sense for small business loans when the business plans to:

    • Expand into a new market.
    • Open a new location.
    • Purchase expensive equipment.
    • Develop or launch a new product.
    • Launch a new marketing campaign.
    • Acquire another business.

    When is Revolving Credit better for Small Business?

    Using revolving credit makes more sense for small business loans when your business needs to:

    • Manage seasonal fluctuations in cash flow.
    • Gain flexible access to funds for unexpected expenses.
    • Meet short-term financing needs.
    • Access ongoing access to credit without reapplying for a new loan each time.
    • Cover immediate working capital needs.

    Is Revolving Credit or an Installment Loan better for Bad Credit?

    When it comes to small business owners with bad credit, the accessibility of revolving credit versus installment loans can vary. Revolving credit, such as a business credit card, can be easier to obtain for those with bad credit as it allows for flexibility in spending and repayment. However, the interest rates on revolving credit can often be higher, which may not be ideal for business owners looking to minimize costs.

    On the other hand, installment loans provide a fixed amount of money upfront that is repaid in regular installments over a set period. While installment loans may be more challenging to qualify for with bad credit, they can offer lower interest rates and predictable monthly payments, making it easier for business owners to budget and plan for repayment.

    Ultimately, deciding between revolving credit and installment loans for small business owners with bad credit will depend on individual circumstances and financial goals. Exploring both options and comparing terms may be beneficial to determine which option best suits the business’s needs.

    Is a Small Business Loan Installment or Revolving Credit – Final Thoughts

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    Whether a small business loan is installment or revolving credit depends on the specific terms and structure of the loan. Understanding the differences between the two types of credit can help small business owners make informed decisions about their financing needs.

    By carefully evaluating their options and considering factors like repayment terms and interest rates, businesses can choose the best type of loan to support their growth and success. Assess how you intend to use the funds and your cash flow to determine the best option for your business.

    Contact us if you have more questions about installment loans vs. revolving credit or to apply for a small business loan. Our alternative funding experts can help you access installment and revolving credit for your business financing needs.


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