Installment Loan vs Revolving Credit: Know the Difference

If you’re wondering whether small business loans are installment or revolving, the answer is that it depends. When you’re looking to grow your small business, you typically have two main financing options to choose from: installment loans and revolving credit. Installment loans give you a lump sum of cash upfront that you pay back (with interest) in monthly payments. Revolving credit, on the other hand, provides a source of funds you can draw on and repay (with interest) as needed. Each has its own features, benefits, and drawbacks to consider as you research your business financing options.

Below, you’ll find the basics about small business installment loans vs. revolving credit so you can make an informed choice about which financing option makes sense for your business.

Revolving Credit vs Installment Loans

Both types of business loans can provide companies access to the funds they may need. However, they don’t work in exactly the same way. Here’s a quick rundown of how each kind of funding works.

Features	Installment Loan	Revolving Credit
How You Access Your Money	You receive a fixed lump sum after the loan is approved.	You take out what you need up to a fixed maximum.
When Payments Start	Payments (typically at a fixed interest rate) include principal and interest, generally begin shortly after you receive the funds, and are usually monthly.	Payments are charged after you draw money and their amount depends upon how much you’ve withdrawn. You may be able to pay a monthly minimum.
Interest Rate	6.30% to 11.50% for small business bank loans; often fixed.	10.00% to 99.00% APR for a small business line of credit; often variable.
Possible Fees	Origination fee, application fee, administrative fee, prepayment fee, late fee.	Application fee, monthly and/or annual account fee, prepayment fee, late fee, origination fee with draw.

Key Differences Between Installment Loans and Revolving Credit

While both installment loans and revolving credit may offer companies access to funds when they have need of them, there are significant differences between the two that it’s worth looking at more closely.

Repayment Structure

One way these lending products differ is in how you repay the loans.

For an installment loan, you’ll typically get a fixed interest rate. In this case, you would repay the loan in regular installments over a defined period of time. Typically, your payments would be the same each month.

With a business line of credit, you generally pay back (with interest) only the position of the credit line you actually use. The interest rate is likely to be variable, meaning that it is less predictable than a fixed rate. Thus, it may be harder to predict your monthly costs than it is with an installment loan.

Interest Calculation

For an installment loan, you typically pay interest on the entire amount that you have borrowed. That interest is generally calculated and worked into your repayment schedule before you sign the loan.

With revolving credit, your interest is typically calculated only on the amount of your credit line that you have utilized – not on the total amount available to you. With revolving credit, the exact amount you will pay in interest each month cannot be predetermined.

Impact on Your Credit Score

As with any kind of loan, both these forms of funding may have an impact on your credit score. Credit utilization is a factor in your score, and if, for example, you take out a business line of credit and keep the balance on it low, you will have unutilized credit that may help strengthen your credit rating. Making your repayments regularly and on time is also likely to strengthen your credit profile.

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What Is an Installment Loan?

A business installment loan is a type of small business financing that provides a fixed amount of capital you can use to cover business expenses. You then pay back the loan, generally in fixed monthly installments that include both principal and interest for the duration of the loan term. For example, if your company takes out a $20,000 loan with a 8.00% annual percentage rate (APR) and a five-year term, your monthly payment would be $405.53.

Qualification requirements for installment loans will vary depending on the lender. Bank and Small Business Administration (SBA) loans tend to have higher requirements in terms of time in business and credit scores, while online lenders may rely more on your sales and revenues to determine your eligibility. If you own a startup but have bad credit, there may be loan options for your business as well.

Recommended: Guide to Business Loans for Bad Credit

Common Types of Installment Loans

Within the category of business installment loans, there are both long-term business loans and short-term business loans. Both are offered by banks, credit unions, and online lenders.

Other popular installment loans for businesses include:

•   SBA loans

•   Microloans

•   Equipment financing

•   Commercial real estate loans

Secured vs. Unsecured Installment Loans

As you investigate how business loans work, another factor to consider is whether the loan is secured. An installment loan can be either secured or unsecured. In the case of a secured loan, you provide the lender with some form of collateral – like real estate or financial assets – to back up your loan. An unsecured loan would not involve collateral.

The potential upside to a secured loan is that having the security may lead a lender to offer you better terms than for a secured loan. However, it does mean that if you default on the loan, the lender may be able to take your collateral to recoup its losses.

Features of Installment Loans

Also known as installment debt, installment loans can give you access to the working capital you need, whether it’s to expand your business or to get through a slow period. The downside to these loans is that they involve an ongoing commitment to regular payments that you’ll have to make for the duration of your loan term.

Here are some features of installment loans to consider.

You’ll Make Monthly Payments

When you sign your loan agreement, you’re agreeing to make a payment (which includes both principal and interest) each month. If you choose a fixed interest rate, the amount you pay will be the same each month. This can make it easier for you to budget that loan payment among your other monthly business costs. Most installment loans come with fixed rates.

If you opt for a variable interest rate, your interest rate can change depending on market conditions. The small business loan interest rates for variable loans typically start lower than the interest rate on a fixed-rate business loan, but they can go up or down over time. This may make it a little more difficult to budget. However, the loan terms typically limit how much the interest can fluctuate from one period to the next.

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You’ll Get a Lump Sum

Many times, you know you need a certain amount of money to cover a business expense, such as renovating a building or purchasing costly equipment. An installment loan, unlike revolving credit, gives you access to the amount you are eligible to borrow in one lump sum. Having that working capital may allow you to take advantage of business opportunities you wouldn’t otherwise have been able to afford.

You May Get a Tax Deduction

If you’re concerned that taking out a loan would mean you have to pay more in taxes, don’t be. The money you receive as a loan doesn’t count as part of your revenue. And a potential plus is that the interest you pay on the loan may be tax deductible. As always, it’s a good idea to consult with a tax professional about your individual situation and options.

When to Use an Installment Loan

An installment loan might be good for your business if:

•   You need a lump sum upfront.

•   Your small business has a relatively steady income so you can budget for regular repayments.

•   Your small business is well-established and/or you have good credit, meaning you may be more likely to get good loan terms.

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What Is Revolving Credit?

Revolving credit can provide working capital or credit to cover small business expenses. Typically, if you are approved for a form of revolving credit, you’re approved to use up to a set amount of credit, but you aren’t required to take out the full amount. You only pay interest on the amount you actually borrow. Once you repay the funds, they generally are available to borrow again, up to your limit.

For example, let’s say you get a line of credit of $20,000 for your small business. In the first month, you take out $10,000 but pay back $5,000 that same month. That means that you’ll make payments (including interest) on the $5,000 you still owe, and you’ll still be able to draw on the remaining $15,000.

Examples of Revolving Credit Accounts

There are several forms of revolving credit that you might be able to access for your business. These can include business lines of credit and business credit cards.

Features of Revolving Credit

Like installment loans, revolving credit has both advantages and disadvantages. It’s important to be aware of both when you’re choosing a way to purchase what you need for your business.

You Can Access Funds When and If You Need Them

Sometimes you can’t anticipate exactly how much cash you’ll need to cover business expenses down the road. If that’s the case for your business, it can be helpful to have access to a line of credit that you can draw on if and when you need it instead of receiving a lump sum that you immediately have to start paying back.

Funds Are Always Available (Up to Your Maximum)

With an installment loan, the account is closed once you’ve paid off your balance in full. But with revolving credit, you can generally take out additional funds once you’ve paid down your balance. There’s no need to reapply for more funds after you’re initially approved.

You May Have an Option to Earn Rewards

Credit cards, which are one type of revolving credit, often offer rewards and perks that may help offset what you pay in interest. If you earn points for your transactions, you may be able to redeem those points for cash back or travel rewards. And while high interest rates are a potential negative for credit cards, if you pay your balance in full each month, you shouldn’t be hit by high interest charges.

When to Use Revolving Credit

Revolving credit might be good for your business if:

•   You want to be prepared for future financial needs but don’t require a lump sum right away.

•   You may need access to relatively small amounts quickly to take advantage of business opportunities or pay for shortfalls.

•   Your business could benefit from perks offered by business credit cards. If you have to travel frequently for your company, for instance, a card that offers miles could help defray those costs.

Recommended: How Much Does It Cost to Start a Business?

Installment Loan and Revolving Credit Options

Once you’ve researched the numbers and determined how much money you want to borrow, either through a small business installment loan or a revolving credit line, it’s time to start shopping solutions. Here are a few options you may want to consider.

•   Traditional bank loan: This is a small business loan given by a bank or credit union. Qualification requirements are often stricter than with online business loans.

•   SBA loan: Backed by the Small Business Administration, SBA loans typically come with better rates and higher loan amounts than traditional and online business loans.

•   Business line of credit: Similar to a credit card, a business line of credit gives you a maximum amount to draw on. Once you pay it back, you can generally continue to use the funds up to the maximum credit limit.

•   Equipment loan: An equipment loan is a small business loan used to purchase equipment. The equipment acts as collateral, which can sometimes land you a better interest rate.

•   Business credit card: Business credit cards may be useful for companies that want to take advantage of credit card perks and rewards. Interest rates on credit cards are often higher than on loans, so if you go this route, you’ll want to make sure you can afford to pay your credit card in full each month.

Two options that don’t fall into either category but which may be available for certain types of businesses. These include:

•   Merchant cash advance: A merchant cash advance allows you to receive funding in exchange for future credit and debit card sales. Merchant cash advances technically are not loans and can be one of the most expensive forms of borrowing.

•   Invoice factoring: Invoice factoring allows you to sell unpaid invoices to a factoring company. You get a percentage upfront, and then once the factoring company collects the payment, you get the remainder minus any fees. With invoice factoring, funding is typically fast but can be expensive.

Each option and lender will have different criteria, so do your due diligence when researching which options you will qualify for at the best rate.

Recommended: 15 Types of Business Loans to Consider

Choosing Between an Installment Loan and Revolving Credit

When you’re deciding whether to apply for an installment small business loan vs. a line of credit, for instance, there are a few questions you might consider.

Do you need an upfront lump sum of money? Do you prefer to know exactly what your repayment obligation will be every month? And do you have reason to believe you might get a good interest rate? If the answer to most of these questions is yes, an installment loan may be a good choice.

On the other hand, do you want to have the ability to draw on funds as you need them, but have no immediate need for a significant lump sum? Are you comfortable with a variable repayment schedule? Or would your business be able to use credit card perks or rewards? In that case, a revolving line of credit or business credit card may suit you.

The Takeaway

Installment loans involve a lump sum of cash upfront that must be paid back (with interest) in monthly payments. Revolving credit, on the other hand, provides a source of funds (up to a preset maximum) for a business owner to draw on and repay with interest as needed. Each has its own advantages and disadvantages.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

Is a small business loan an installment loan or revolving credit?

A small business loan is typically an installment loan, in which a lump sum is provided upfront and repaid in fixed payments over a set period. However, some small business financing options, like lines of credit, function as revolving credit, allowing flexible borrowing and repayment as needed up to a set limit.

What types of loans are revolving?

Business revolving loans include business lines of credit and business credit cards. These loans allow borrowers to access funds up to a set limit, repay them, and borrow again as needed. Interest is charged only on the amount used, offering flexible borrowing and repayment terms.

Is an SBA loan considered an installment loan?

Yes, an SBA loan is considered an installment loan. Backed by the Small Business Administration, obtaining one of these loans allows borrowers to receive a lump sum upfront and repay it in fixed monthly installments over a set period. The loan terms, including interest rates and repayment periods, vary based on the specific SBA program.

How does installment loan vs revolving credit affect your credit score?

Both installment loans and revolving credit can offer you the opportunity to strengthen your credit record by making your repayments on time. However, if you have revolving credit and your balance is low, either because you don’t use it or you pay off what you do use right away, this might improve your credit utilization ratio, which is usually considered in your credit score.

Can you have both an installment loan and revolving credit at the same time?

It is possible to have both an installment loan and revolving credit at the same time. For example, you might have acquired key machinery for your company with an equipment financing loan and also have a business credit card for day-to-day expenses.

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