Are Small Business Loans Installment or Revolving?

If you own a business or startup, you’ve likely wondered if a small business loan meets your needs. There are many funding options out there for small business owners and each is different. Two terms you might have seen are “installment” and “revolving.”

These terms can tell you a lot about the type of business funding you’re looking at — including how you’ll access capital, how repayment may work and how much flexibility you’ll have if you need more funds later. This is important when you’re looking to take care of specific business needs, whether it’s managing cash flow gaps, planning for a big expense or looking to invest into growth.

Understanding the difference between the types of credit available to your business can help you compare options and focus on how the funding fits your business. It’s important to do your research so you can make the right choice.

Are small business loans installment or revolving?

Small business loans can be either installment or revolving. It depends on the type of financing you choose. Business term loans, equipment loans and SBA 7(a) loans are all types of installment loans. But business lines of credit, credit cards and SBA CAPLines are examples of revolving credit.

The main difference between the two is how you access and repay the funds. For many business owners, the choice comes down to fit and what the funds will be used for. An Installment loan offers a one-time lump sum of cash upfront, revolving credit gives you access to funds that you can borrow from, repay and borrow again without reapplying. Before making a decision, it can be helpful to determine how much money you need, what it will be used for and if you’ll need ongoing access to funds.

What is an installment loan?

An installment loan provides your business with an upfront lump sum payment, then lets you repay it over a set term length through scheduled payments. The payments typically include principal and interest, and continue until the loan is paid off.

For business owners, these types of loans can be helpful when you have a large, one-time expense that’s clearly defined. Such as purchasing equipment, investing in a new opportunity, consolidating debt or paying for an expansion project.

These loans have predictable payments and can be easier to work into a business budget. Instead of drawing funds as expenses come up, you get the capital at once and follow the repayment schedule outlined in your loan agreement. This makes it easy to understand what you owe, when it’s due and when the loan will be paid off.

Types of small business installment loans

Term loans

A business term loan is a common type of installment loan. Your business receives a lump sum upfront, then repays it over a set term length according to the repayment schedule in your loan agreement.

You can typically get a term loan through a bank, credit union or online lenders. Traditional lenders can offer lower interest rates and better terms. However, they often have strict eligibility requirements and the process may be slower. Online lenders often offer loans with higher interest rates, but they often have more flexible requirements and move faster.

SBA 7(a) loans

SBA 7(a) loans are a type of installment loan and are offered through approved lenders. They are partially backed by the U.S. Small Business Administration, which helps the lenders offer better terms. They can be used for a wide variety of business needs.

These types of loans often offer lower interest rates and longer term lengths, which can make them easy to fit into your budget. However, they often require a lot of paper work and documentation, and they may be difficult to qualify for.

Equipment loans

Equipment loans can be used to purchase machinery, vehicles, technology or other types of business equipment. They can be a good fit if your business has a specific equipment need to keep business running.

In many cases, the equipment itself acts as collateral for the loan. This can mean a lower annual percentage rate (APR). However, if you fail to repay the loan the lender can seize and sell the equipment to recoup their losses.

Microloans

Microloans are smaller installment loans — typically for amounts under $50,000. They can be useful for business owners looking to cover the costs of supplies and inventory, or other short-term needs.

Because they offer a smaller amount, they can be a good fit for a business who just needs a small boost to working capital, or that are looking to build business credit history.

What is revolving credit?

Revolving credit gives your business access to a set credit limit you can borrow from as the need arises. Instead of getting a lump sum, you borrow what you need, repay it over time and can borrow again.

This makes it a flexible way to borrow. Revolving credit can be useful when expenses are harder to predict or you want to have a safety net or reserve for emergencies. Revolving credit can help cover a variety of business needs like cash flow gaps or long term projects.

Repayment can vary depending on the type of credit and the lender. In general, you’ll only pay interest on the amount you borrow, and the payments may change based on how much and when you borrow. In some cases, the interest rate may be variable — be sure to read all of the terms and conditions before applying.

Types of small business revolving credit

Business lines of credit

A business line of credit is a flexible type of revolving credit that gives your business access to a set credit limit you can draw from when you need funds. As you repay what you borrow the available credit increases and you can borrow from it again.

Revolving lines of credit can be useful for covering cash flow gaps, payroll, seasonal expenses, or can provide working capital for long-term projects. They can also help you keep funds available for opportunities or unexpected costs without applying for a new loan each time.

Costs and repayment terms vary by lender. Before opening a line of credit, review the credit limit, interest rate, fees, payment schedule and how draws are repaid. You’ll also want to understand whether payments are fixed or variable and how using your available credit could affect your credit utilization.

Business credit cards

Business credit cards are another type of revolving credit. You can use the card to make purchases for your business, pay down the balance and use it again as the available credit replenishes.

They can be useful for smaller, day-to-day expenses your business runs into such as travel, supplies or subscriptions.

SBA CAPLines

SBA CAPLines are lines of credit offered through approved lenders and partially backed by the SBA.

Depending on the type of CAPLine, funds may be used for seasonal working capital, contract costs, construction expenses or other operating needs. Like other SBA loans, CAPLines can require more documentation and may take longer to approve, so review the repayment terms, fees, collateral requirements and timeline before applying.

Installment loans vs. revolving credit: key differences

The main differences between installment loans and revolving credit are how your business accesses the funds and repays. Installment credit provides a lump sum payment, while revolving credit gives you ongoing access to funds as you borrow, repay and borrow again.

How installment loans and revolving credit can affect your business credit score

Installment loans and revolving credit can affect your business credit score because they both contribute to the amount of debt you’re carrying and your repayment history. The impact can vary depending on whether or not the lender reports to the business credit bureaus and how you manage the debt.

Installment loans. Installment loans can affect your business credit score through payment history and account balance. Making payments on time may help strengthen your credit profile over time, while missed or late payments can hurt your score. Additionally, as the amount owed goes down it decreases the amount of debt your business is carrying, which can help support your businesses credit health.

Revolving credit. Revolving credit can affect your score through payment history and credit utilization. Your credit utilization ratio measures how much credit you have available versus the amount you have used. Carrying a high balance on a business credit card or revolving line of credit could affect your score, even if you’re making payments. Keeping balances manageable and paying on time can help show responsible credit use.

How to choose between installment and revolving credit

To choose between installment and revolving credit, look at how your business plans to use the funds, how much flexibility you need and how repayment will fit into your cash flow.

Consider why you need the funds. If you need funds for a large, one-time expense like equipment, debt consolidation or a planned investment, an installment loan may be a good fit. However, if your costs are ongoing or harder to predict, a line of credit may give you more flexibility to cover operational costs like payroll or seasonal expenses.

Look at how repayment fits your budget. Installment loans often have fixed payment schedules. This can be helpful if you want predictable payments you can plan for and a clear timeline for when the loan will be paid off. On the other hand, revolving credit may have variable payments, but you also typically only pay interest on the amount you borrow, giving you more control and flexibility.

Understand the requirements and terms. Both installment and revolving credit can be secured or unsecured. A secured loan will require collateral and may come with lower interest rates. However, if you fail to repay, the collateral can be seized and sold to cover the lender’s losses. Unsecured loans don’t require collateral but may have higher interest rates. Additionally, many type of revolving credit can have variable interest rates — which means the cost of borrowing can change depending on several factors outlined in your loan agreement. Before signing a contract, make sure you understand all the terms and conditions.

The Bottom Line

Small business loans can be installment or revolving. Installment loans provide a lump sum that’s repaid over time, while revolving credit gives you access to funds you can draw from as needs come up.

Installment and revolving credit both have their pros and cons, and can be useful for different business needs. Before you borrow, make sure to do your research, compare your options and read all the terms and conditions to ensure it’s the right fit for your business.