Learn the ins and outs of small business loans and discover the best option for your business with our guide. We compare installment loans and revolving credit and explain where to find them, how to choose the right one, and when to use them. Get the funding you need to grow your business today!

Summary

• A small-business loan is a form of financial assistance that allows entrepreneurs to acquire the necessary funds to grow and expand their businesses.
• Small-business loans can come in two forms: installment loans and revolving credit.
• An installment loan is a one-time lump sum of money that is borrowed and repaid over a set period of time, with fixed interest rates and monthly payments.
• A revolving credit line is a flexible loan option that allows the borrower to borrow up to a certain limit and make payments as they borrow money.
• Both types of loans can be found through the Small Business Administration (SBA) loan program, as well as through banks, credit unions, and online lenders.
• An installment loan is useful for situations where a set loan amount is needed, long-term financing needs, larger funding needs, and preference for predictable payments.
• A revolving loan, also known as a line of credit, is useful for short-term financing needs, fluctuations in cash flow, and preference for flexible loan amounts and payments.
• It is important to review the credit terms of the loan offer and understand the key differences between the two types of loans to determine which one is best for your business.

MORE: How to Refinance a Business Loan: A Guide to Improving Financial Situation

Small Business Loans: An Overview of Installment Loans and Revolving Credit

A small-business loan is a form of financial assistance that allows entrepreneurs to acquire the necessary funds to grow and expand their businesses. This type of funding can be used for a variety of purposes, such as purchasing equipment and supplies, expanding operations, and more. Small-business loans can come in two forms: installment loans and revolving credit.

An installment loan is a one-time lump sum of money that is borrowed and repaid over a set period of time, with fixed interest rates and monthly payments. On the other hand, a revolving credit line is a flexible loan option that allows the borrower to borrow up to a certain limit and make payments as they borrow money. The credit terms of the loan will determine whether it is an installment loan or revolving credit.

Both types of loans can be found through the Small Business Administration (SBA) loan program, as well as through banks, credit unions, and online lenders. It is important to review the credit terms of the loan offer and understand the key differences between the two types of loans to determine which one is best for your business.

MORE: Finding Federal and State Grants for Small Businesses: A Comprehensive Guide

Types of Small Business Loans: Installment Loans vs. Revolving Credit

When it comes to small-business loans, there are two main types to consider: installment loans and revolving credit.

An installment loan is a lump-sum loan that is borrowed and repaid over a set period of time. The borrower receives a specific amount of money up front and then repays the lender a fixed amount at regular intervals, typically with interest. Once the loan is paid off, the borrower must apply for a new loan if additional funds are needed. This type of loan is also referred to as a business term loan.

On the other hand, a revolving loan, also known as a business line of credit, is a flexible loan option that allows the borrower to withdraw money as needed up to a preset limit. The borrower only pays interest on the funds that are used, not the maximum limit. The payments are based on the current balance, interest charges, and any applicable fees. As long as the credit balance remains within the preset limit and the borrower continues to make timely payments, they can continue to draw from the line again and again. This type of loan provides greater flexibility in determining when and how much to borrow.

Choosing the Right Small Business Loan: Factors to Consider and How to Decide

An installment loan is a type of loan where the borrower receives a lump sum of money upfront and then repays the lender in fixed payments over a set period of time. This type of loan can be useful in certain situations, such as:

• When a set loan amount is needed: If you know exactly how much money you need, an installment loan can provide the funds in one lump sum. This can be useful for making a one-time purchase or for covering a specific expense.
• Long-term financing needs: Some installment loans offer longer repayment terms than revolving credit, which can mean lower monthly payments. However, it may also mean paying more in interest costs over the life of the loan.
• Larger funding needs: If you need to purchase large-ticket items such as property or equipment, installment loans can offer higher loan amounts than revolving credit.
• Preference for predictable payments: With an installment loan, you will have a set monthly payment amount, which can make budgeting easier compared to a revolving loan, where payments can vary depending on how much of the credit line is used.

On the other hand, a revolving loan, also known as a line of credit, allows the borrower to withdraw money as needed up to a preset limit. This type of loan can be useful in the following situations:

• Short-term financing needs: Revolving credit can be used to handle short-term cash shortages or unexpected expenses.
• Fluctuations in cash flow: Businesses that have inconsistent revenue throughout the year can benefit from revolving credit to cover operational costs during slow seasons.
• Preference for flexible loan amount and payments: Revolving credit allows the borrower to qualify for a maximum amount but only withdraw funds as needed. This means only paying interest on the current amount owed.

MORE: Secured vs Unsecured Business Loans: Understanding the Differences and Choosing the Right Option

Using Small Business Loans: Situations where Installment Loans and Revolving Credit are Ideal

If you’re looking for a small-business loan and want to compare different options, consider checking out Edfed’s list of the best small-business loans. This list is a great resource to help you find and compare loan options that are suitable for your business. The recommendations on this list are based on a combination of factors, including the lender’s market scope and track record, the specific needs of business owners, rates, and other important factors. This will help you make an informed decision and choose the right financing option for your business.

Questions Answered in this Article

1. What is a small-business loan?

• A small-business loan is a form of financial assistance that allows entrepreneurs to acquire the necessary funds to grow and expand their businesses.

2. What are the two types of small-business loans?

• The two types of small-business loans are installment loans and revolving credit.

3. What is an installment loan?

• An installment loan is a one-time lump sum of money that is borrowed and repaid over a set period of time, with fixed interest rates and monthly payments.

4. What is a revolving credit line?

• A revolving credit line is a flexible loan option that allows the borrower to borrow up to a certain limit and make payments as they borrow money.

5. When is it best to use an installment loan and when is it best to use a revolving loan?

• An installment loan is best for situations when a set loan amount is needed, long-term financing needs, larger funding needs, and preference for predictable payments. A revolving loan, also known as a line of credit, is best for short-term financing needs, fluctuations in cash flow, and a preference for flexible loan amounts and payments.