Small Business Revolving or Installment Loans – Which is Better for You?

For small businesses (SMBs), figuring out how to finance a range of expenses from startup costs to marketing to staffing can be overwhelming. Business owners that aren’t ready to give up equity, but want to cover cash flow gaps or accelerate growth often look to business loans. Loans can provide peace of mind that both expected and unexpected costs are covered.

Is a small business loan an installment or revolving loan? It can be either. Understanding the differences between these two loan payment structures is key to choosing the type of loan that works best for your business.

In this post, we’ll cover:

• What Are Installment Loans? 
• Advantages of Installment Loans
• Disadvantages of Installment Loans
• What Are Revolving Lines of Credit?
• Advantages of Revolving Lines of Credit
• Disadvantages of Revolving Lines of Credit
• Installment or Revolving — Which Is Right For Your Business?

What Are Installment Loans?

Installment loans allow borrowers to make regular payments (e.g., monthly installments) toward the total owed on the loan until it's paid off. The monthly payment amount stays the same, with interest and fees wrapped into the payment.

SMBs often use installment loans to finance big expenses like equipment or renovation. Loans help cover costs without tying up cash and make it easier to roll large expenses into a predictable monthly budget.

Typical characteristics of installment loans include:

• Loan amount: $50,000-$1 million (average $500K)
• Term: 3 months to 10 years 
• Repayment schedule: Monthly or weekly
• Interest rates: 2.5%-7% (typically skews lower; base rates may change)
• Time to fund: Days to weeks (typically skews longer)
• Eligibility: Depends on lender (higher credit scores and established business history typically required)

Installment loans may be secured — meaning the borrower puts up collateral for the loan — or unsecured, meaning that no collateral is required.  Consider the differences between secured and unsecured loans to determine which is best for your business.

Installment Loan Use Cases

Example use case #1:  You're a new café owner and need to purchase an espresso machine, coffee grinder, and commercial refrigerator. The total cost of these items is $60,000. You decide to finance the purchase with an installment loan so you can make payments over time.

Example use case #2: You're a retail store owner and want to expand and renovate your space. The renovations will cost about $250,000. You opt for an installment loan, so you don’t have to pay the full cost of renovation up front.

Advantages of Installment Loans

Installment loans offer some key advantages including:

• A predictable payment structure. Borrowers get a set repayment schedule, which makes budgeting and cash flow planning easier. 
• Higher loan amount. Installment loans generally allow for larger borrowing amounts vs. revolving lines of credit, which means you can fund big-ticket items like equipment, vehicles, and renovations.
• Access to the entire sum up front. Borrowers can access the entire loan amount when the loan is funded. 

Disadvantages of Installment Loans

Despite their advantages, installment loans also come with some downsides:

• Difficult to get approved. Requires a higher credit score and more documentation, making it harder for SMBs to qualify. 
• Lengthy application process. The application process can take weeks or even months. 
• Penalties on late payment. If payments are delayed, borrowers may pay additional interest and fees.

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What Are Revolving Lines of Credit?

Revolving lines of credit allow SMB borrowers to draw on the loan as needed, up to their approved credit limit. 

In some ways, they work like credit cards — as you make payments, the loan balance decreases, freeing up funds for further use. Despite their similarities, it’s important to note that there are distinct differences between business lines of credit and credit cards. 

Revolving lines of credit give SMBs more flexibility in how the loan is used and how to repay it. Typical characteristics of revolving lines of credit include:

• Loan amount: $1,000-$250,000, generally
• Term: 6 months-5 years
• Repayment schedule: Monthly minimum payments required; amounts vary by lender and credit limit
• Interest rates: 1.75%-9.75% (typically skews higher; base rates may change)
• Time to fund: Days to weeks (skews shorter with online lenders vs. traditional banks)
• Eligibility: Minimum credit score of 680, plus at least 2 years in business (online lenders tend to be more flexible)

revolving lines of credit can be secured or unsecured. They're often used for ongoing financing needs — managing cash flow shortages, funding repairs, purchasing inventory, paying employees, etc.  

Example use case #1: Your business is seasonal and you need to manage cash flow during the slow months. A revolving line of credit can provide access to funds when revenue is down, helping you avoid potential layoffs, gaps in marketing initiatives, and other cash flow issues. Since interest is often only charged on the funds you use, you can likely avoid paying interest during the busier months.

Example use case #2:  You're a start-up and need funds to cover some steep upfront costs.  A revolving line of credit can fund things like paid advertising, product development, or inventory - and as you repay the loan, the funds become available for use again.

Advantages of Revolving Lines of Credit

Businesses that need access to cash for a variety of purposes may benefit from the unique advantages of revolving lines of credit.

Advantages include:

• Flexibility. Revolving lines of credit allow you to access only the money you need, when you need it. Instead of paying for a large sum upfront, you can draw exactly the amount needed to cover a given expense. 

• Continued access to funds. As you repay the loan, the funds become available again, giving you financing as needed.
• Scalability. As the business grows, you can work with your lender to increase the total limit. Since you’re only drawing funds as needed, you won’t be paying interest on the total increased amount.

Disadvantages of Revolving Lines of Credit

While there are some clear advantages to revolving lines of credit, they're not right for every business purpose. 

Disadvantages of revolving lines of credit include:

• They're not tax-deductible. Unlike business credit cards, the interest on revolving lines is not tax-deductible.
• Your credit score matters. Lenders usually look for credit scores of at least 600 when approving revolving lines of credit. So, businesses with poor credit may not qualify. 
• Higher interest rates. In many cases, the interest rates on revolving lines of credit may be higher than those of installment loans. So, if a low-interest lump sum of cash is your priority, an installment loan may be a better fit.

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Installment or Revolving — Which is right for your business?

What's the purpose of the loan? If you need funds for a specific project with a definitive end date, an installment loan may be better. On the other hand, if you need ongoing access to cash for inventory, marketing, or covering cash flow gaps, a revolving line of credit provides more flexibility. 

How quickly do you need access to funds? An installment loan can take weeks or even months to get approved and funded — too long if you have immediate needs. A revolving line of credit can provide access to funds in days or weeks. 

Ultimately, the decision of whether to get a revolving or installment loan comes down to your business needs and qualifications. But knowing the difference between the two types of loans is an important first step in finding the right financing for your small business. Many lenders offer multiple loan products and, through learning about your unique business circumstances, can help you determine which option is best.

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Financing When You Need It

If you're not sure which type of loan is right for your business, Aion can help. Our financing team brings extensive experience in SMB lending. As a team of entrepreneurs, the Aion team is committed to understanding the nuances of each business we speak with. Our range of installment and revolving financing solutions are tailored to meet different business needs. 

To learn more about how Aion can help your business, contact one of our experts today or create an Aion account to apply online.

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