Revolving credit and an installment loan are two different methods of financing available to small businesses. Revolving credit allows you to keep the money you’ve borrowed in your account until you pay it back, while an installment loan requires payment on time every month. Which one should you choose? In order to make the best decision, you need to compare both options in terms of interest rates, the amount available, and repayment options. Read on to learn more about the differences between revolving credit and installment loans and when to use each one of them in your business!
The Benefits of a Merchant Cash Advance
Both installment loans and revolving credit can help finance small business operations—but it’s important to know when to use each type of financing. Revolving credit allows you to pay down your balance month-to-month, whereas installment loans require that you pay off a specific loan over time (i.e., 4 installments). Therefore, using revolving credit is ideal if you need cash more often or need smaller amounts of money on a regular basis; otherwise, get an installment loan instead. Both revolving credit and installment loans can be useful in keeping your business solvent—so think about what makes sense for your needs before applying!
Under what circumstances do I need to take out an installment loan over a revolving line of credit?
One of your most important small business financial considerations is determining whether to use revolving credit or installment loans to finance your company’s needs. What factors should you take into account when deciding? Here are some factors that can help you choose between a revolving credit line and an installment loan
#1 – How much do I need?: Before making any decisions, consider how much money you need at what time. If it’s less than $25,000, you might be able to get by with a traditional personal loan (which typically offers better rates). But if it’s more than $25,000 and you’re unable to pay it back within 12 months, then an installment loan might be your best bet.
#2 – Am I trying to build my credit?: Another major factor in choosing between revolving credit lines and installment loans is whether or not you want to build a good (or bad) credit history with lenders. If you’re planning on borrowing over $50,000 from banks and other institutions, it would be wise to start building up your credit score early. Otherwise, you could end up paying higher interest rates later on in life as a result of having a little-to-no credit history.
#3 – Do I have collateral?: While neither type of loan requires collateral, there are certain situations where taking out an installment loan makes sense even without collateral. For example, if you need a short-term loan to keep your business afloat until payday, an installment loan may be your only option. However, if you just need cash quickly and don’t plan on repaying it right away, then using a revolving credit line is probably a better idea.
#4 – Is there flexibility?: When comparing these two types of loans side by side, one thing becomes very clear: Revolving credit lines offer significantly more flexibility than their installment counterparts. For example, many businesses find that they don’t always spend all of their available funds each month — but they still want access to those funds when needed.
What are the key considerations when taking out an installment loan over a line of credit?
An installment loan is very similar to a line of credit in that it gives you access to more money than you’d have on hand, but unlike a credit card, it doesn’t operate on a revolving basis. The biggest difference is how repayment works: with an installment loan, you agree to pay back fixed amounts over a set period of time (e.g., $1,000 per month for 12 months), whereas with a credit card, you don’t know how much or when your debt will be repaid; in fact, your balance can actually grow due to interest charges and additional charges like cash advances and late fees if you do not pay off your balance each month.
How can I make sure my small business can afford an installment loan over a line of credit?
Before taking out an installment loan, or any type of business loan, you should assess your liquidity situation to see if it makes sense to pay off the debt over time (installment) versus financing big-ticket items all at once (line of credit). Doing so can help you avoid costly fees and terms associated with a small business line of credit. The first step is to calculate how much cash flow you’ll have each month after paying expenses and taxes. You’ll also want to consider how long it will take you to pay back a loan—if it takes too long, then your monthly payments could be too high for your business’s cash flow needs. A good rule of thumb is that installment loans shouldn’t exceed half of your projected net income per year. If they do, then you may want to look into refinancing options or another source of funding altogether (such as a friend or family member).
Consult with a United Funding Group Specialist
United Funding Group is here to help you find the loan option that best suits your needs and goals. We know there are a lot of options out there and our experienced lenders have helped thousands of business owners just like you find the right loan to meet their needs. Consult with a United Funding Group Specialist today, who can answer your questions and guide you through the entire process to ensure everything goes smoothly when it comes time to get your money. You may call or email our team at any time to discuss loans without any obligation or cost on your part, so contact United Funding Group today!