Is a Small-Business Loan Installment or Revolving?

A small-business loan can be either installment or revolving, depending on the type of loan offered by the lender. A business term loan is a type of installment credit that is generally a long-term funding option for large purchases. A business line of credit is a type of revolving credit often used for short-term financing needs like working capital.

Determining whether installment or revolving credit is the right fit for your business will depend on the loan amount, payment preferences and other factors. Both forms of credit are offered by traditional banks, credit unions and online lenders.

What is an installment loan?

An installment loan provides a borrower with a lump sum of capital which is then repaid at regular intervals over a set period of time. Depending on the loan agreement, payments could be made monthly, weekly or daily. Typically, the payment amount is fixed and includes a portion for interest and another amount to pay down the principal balance.

A business term loan is a type of installment loan. After a term loan is paid off, the borrower typically must apply for a new loan if additional funds are needed.

Installment loans can be either secured or unsecured. Secured business loans require some form of collateral, usually property, equipment or another type of business asset, that can be seized by the lender if you default on the loan. Unsecured business loans, on the other hand, don’t require collateral, but you may be asked to sign a personal guarantee.

Pros and cons of installment loans

When to use an installment loan

You need a set loan amount

If you're confident in the loan amount you need, then an installment loan may be the right fit, especially if you need the money in a lump sum. For example, if you’re using the funds to make a one-time purchase, you’ll likely want an installment loan.

You have long-term financing needs

Some term loans can offer you more time for repayment when compared with revolving credit. When you stretch your payments out over a longer period of time with a long-term business loan, it can mean a lower monthly payment. However, that trade-off typically means you’ll pay more in interest costs over the life of the loan.

You have larger funding needs

Installment loans are typically used to finance large expenses. If you're looking to purchase a new property or buy equipment, inventory or other large-ticket items, an installment loan is often a good option. Some types of installment loans that often have large loan amounts include commercial real estate loans, equipment loans and secured business loans.

» MORE: Compare the best large business loans

You prefer predictable payments

Installment loans with fixed interest rates will typically require the same payment amount each month over the term of the loan. With a set monthly payment amount, it can be easier to budget for an installment loan compared with a revolving loan, where the payment varies depending on how much of the credit line you use.

What is a revolving loan?

A revolving loan allows the borrower to withdraw money as needed up to a preset limit. Typically, the borrower repays a portion of the balance at regular intervals based on their agreement with the lender. For example, a monthly minimum payment may include accrued interest plus a small percent of the outstanding balance. With a revolving loan, you typically only pay interest on the funds that you use — not the maximum limit.

A business line of credit is a common type of revolving credit. Revolving credit gives the borrower flexibility in determining when to withdraw money and how much. As long as the credit balance remains within the preset limit and you make timely payments, you can continue to draw from the line again and again.

Revolving credit can be in the form of a secured business line of credit or an unsecured business line of credit.

» MORE: What is a business loan?

Pros and cons of revolving loans

When to use a revolving loan

Short-term financing needs

Revolving credit can be a good option for short-term cash shortages or to cover unexpected expenses. Some businesses use lines of credit as a type of emergency fund since interest is only paid on the funds used. Some revolving loans used for short-term needs include payroll loans and working capital loans.

» MORE: Best short-term business loans

Fluctuations in cash flow

Businesses that experience major fluctuations in their cash flow may benefit from revolving credit in the form of a cash flow loan. For example, seasonal businesses that don’t have consistent revenue throughout the year can use lines of credit to cover operational expenses during their slow season.

Preference for flexible loan amount and payments

If you don’t know exactly how much money you need, then revolving credit will give you the flexibility to withdraw funds if and when needed. While you’ll typically need to make a minimum payment, you’ll have the option to make larger payments when you want.

Installment loans vs. revolving credit

The terms of a loan can vary depending on the type of business loan, lender and your business’s credentials. However, the following are some common differences between installment and revolving loan programs.