Is a Small Business Loan Installment or Revolving?
Uncover the core structures of bank small business loans. Learn whether your funding is a fixed repayment plan or a flexible, reusable credit line.
Small business loans from banks come in various forms, each designed to meet different financial needs. The primary distinction among these financing options lies in whether they are structured as installment loans or revolving credit. Both types offer unique benefits and are suited for different business situations, influencing how funds are accessed and repaid. This article explores these two common loan structures, clarifying their characteristics and applications in small business banking.
Understanding Installment Loans
An installment loan provides a business with a single, lump sum of capital upfront. This amount is repaid through fixed, regular payments over a predetermined period, known as the loan term. Each payment includes both principal and interest, and the interest rate is often fixed, providing predictable monthly expenses. Once the loan amount, including all interest and fees, is repaid, the loan account closes. No further funds can be drawn unless a new application is made.
These loans are utilized for specific, larger expenditures requiring a one-time infusion of cash, such as financing equipment, real estate, or vehicles. The repayment schedule ensures the loan is fully amortized by the end of its term, which can range from a few months to several years. This predictability assists businesses in managing cash flow and budgeting effectively.
Understanding Revolving Credit
Revolving credit provides businesses with access to a flexible line of funds up to an approved credit limit. Unlike installment loans, borrowers can draw, repay, and re-borrow funds repeatedly as needed, within the set limit. Interest is charged only on the amount actually borrowed, not on the entire approved credit limit, making it a cost-effective option for managing variable expenses. Payments are flexible, based on the outstanding balance, and can vary month to month.
This financing offers ongoing access to capital, suitable for managing short-term operational needs, bridging cash flow gaps, or covering unexpected expenses. Common forms of revolving credit include business lines of credit and business credit cards. The credit line replenishes as payments are made, allowing continuous access to funds without reapplication for each new draw.
Distinguishing Between Installment and Revolving Loans
The fundamental differences between installment loans and revolving credit lie in how funds are accessed, repayment structure, and interest calculation. Installment loans provide a fixed amount of capital as a single disbursement, suitable for one-time, large-scale investments. Repayment involves consistent, fixed payments over a set term, with interest calculated on the entire initial principal. This structure offers predictability in budgeting and financial planning.
Revolving credit offers a reusable pool of funds up to a credit limit, allowing businesses to borrow, repay, and re-borrow as needs evolve. Payments are variable, depending on the outstanding balance, and interest applies only to the utilized portion of the credit line. This provides greater flexibility for ongoing or fluctuating financial requirements, such as managing daily operations or seasonal cash flow variations. Once an installment loan is paid off, the credit is no longer available, necessitating a new application for additional funds. Revolving credit remains open and accessible as long as the account is in good standing, similar to a credit card.
Common Bank Small Business Loan Types
Banks offer various small business loan products, generally falling into either the installment or revolving category. Traditional term loans are common installment examples, providing a lump sum for equipment purchases or business expansion. Commercial mortgages, used for real estate acquisition, are also structured as installment loans with fixed repayment schedules over long terms. Equipment financing, which helps businesses acquire machinery, also operates as an installment loan where the equipment often serves as collateral.
U.S. Small Business Administration (SBA) loans, such as SBA 7(a) and SBA 504 loans, are primarily structured as installment loans. SBA 7(a) loans provide capital for various business purposes, including working capital and equipment, often with variable interest rates and terms up to 25 years for real estate. SBA 504 loans are designed for fixed asset purchases like commercial real estate or heavy equipment, featuring fixed interest rates and terms up to 25 years. In contrast, business lines of credit and business credit cards are prime examples of revolving credit, offering flexible access to funds for ongoing operational needs or unexpected expenses.