All About Installment Credit

All About Installment Credit

In a perfect world, you’d be able to start or grow a business with minimal to no cash. Unfortunately, this is not the reality. If you’d like your business to succeed, money is a necessity, rather than a “nice-to-have.”  The good news is that installment credit can give you the funds you need to meet your business goals. So what is installment credit and how can you find and secure it? Keep reading to find out.  

What is Installment Credit?   

At its core, installment credit is a loan for a lump sum of money, opposed to a line of credit you can access, pay off, and then access again. If you pursue this financing option, you agree to make a set number of monthly payments, at a specific dollar amount, for a predetermined period of time. You’ll repay the loan during a repayment period, which can last anywhere from a few months to a few years. Mortgages and car loans are two common types of personal installment loans. 

Installment credit differs from revolving credit because, unlike a revolving credit line, you decide exactly how much money you’d like to borrow upfront and it doesn’t restore as you use it and make repayment. If you’d like additional funding, you’ll have to apply for a new loan. While an installment loan is a good option for many small business owners, it’s not as flexible as a revolving credit line. 

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Installment loans are typically used to pay for high-value business expenses. For example, if you need to purchase a costly machine for your small business, installment credit may make sense. This type of financing may also be a good fit if you’d like to expand your facility. 

How Installment Loans Work  

In many cases, installment loans are secured loans—particularly if you are borrowing from a traditional lender like a bank or credit union. This means, the lender will use one of your business assets as collateral. The asset may be your company vehicle, commercial building, or equipment. If your loan isn’t secured with specified collateral, it could also be secured with a UCC lien (a general lien on business assets) and a personal guarantee.

If collateral is involved in your loan, you’ll likely be able to secure a lower annual percentage rate (APR) because your collateral mitigates some of the risk associated with your loan. In other words, they’ll take your asset in the event you default on your loan.  

Once you agree to take out an installment loan, you’ll pay back the lump sum you borrow over its repayment term. Long-term installment loans typically have term lengths of six years or more while medium-term loans are between two and five years. Short-term loans usually last up to two years. 

Common Types of Business Installment Loans

As a small business owner, you may consider a business installment loan for the following.

Equipment or Inventory

You can opt for an installment loan to pay for equipment or inventory that allows your business to run smoothly. If you’re a startup without any of these things, an installment loan can be a real lifesaver. 

Business Expansion

If you’ve been in business for some time and are ready to expand, an installment loan can give you the funding you need to take things to the next level. It may be just what you need to open additional locations. 

Working Capital

If you need cash to cover payroll, inventory, and other everyday operating expenses, an installment loan can help you out. It can be particularly beneficial if you run a seasonal business and require funds to take care of slow seasons.

Debt Refinancing

Although it’s not ideal, you may find that your business has a lot of debt and needs to refinance. An installment loan can allow you to refinance your debt and potentially reduce your monthly payment obligation. 

Common Terms on an Installment Loan 

If you opt for an installment loan, you borrow a specific amount of money upfront and agree to pay it back within a certain time period. For instance, you may borrow $100,000 and pay it back within five years. 

Your installment loan will likely come with a fixed interest rate that will remain the same throughout its life. This is a great perk as it can allow you to plan ahead and budget accordingly so you can avoid late payments and repay your loan on time. 

While you’ll be able to negotiate monthly payments, interest rates, and terms with your lender, factors such as your credit score and whether or not you have collateral to offer will be considered. 

Where to Get Business Installment Loans

If you’d like to use a business installment loan to help you start or grow your business, there are a number of places you can look including.

The SBA

The Small Business Administration (SBA) partners with a number of banks and credit unions to offer guaranteed loans to small businesses. A guarantee means that if you aren’t able to make your payments to your lender, the SBA will cover the guaranteed amount. 

Since the SBA guarantees 85% of loans that are $150,000 or less and 75% of larger loans, these installment loans can be difficult to get. 

Banks and Credit Unions

Most banks and credit unions offer business installment loans to small business owners. If your credit is good, they’ll likely approve you for a favorable interest rate. On the contrary, if you have bad credit, you may have a tough time getting approved for desirable terms. It’s a good idea to do your research and compare various offers before moving forward with a loan from a bank or credit union. 

Private Investors (Family and Friends)  

This isn’t an option for everyone but if you have a family member or friend that believes in your business, and has the money to invest, you can ask them to make an installment loan to your business. Although many small businesses find capital this way, keep in mind that if you go this route, you may have to pay them shares and give them ownership stake in your business if they don’t require you to make regular periodic payments. 

Getting an Installment Loan for Small Business  

There are a number of requirements you must meet before a lender grants you an installment loan. If you’re a startup, you may find the process of applying for and getting approved for one of these loans a bit more complicated. 

Good Credit

If you’d like to take out an installment loan, good credit is a must. Ideally, you’d have a high business credit score. In the event you’re a startup, however, as a business owner good personal credit will likely not be enough. Check your free business credit scores to see where you stand before you apply.

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Collateral

Traditional lenders will require you to put up collateral like your vehicle before offering you installment credit. This reduces their risk because it allows them to sell your assets if you don’t make your payments. An online business lender will not require specifically identified collateral to secure most business loans.

A Business Plan

A traditional lender will likely require a business plan that should include a general description of your business, details on your products and services, and a marketing strategy. Financial statements like a balance sheet, break-even analysis, and projected income statement are important as well. The goal of the business plan is to show the lender that you’ll be able to generate enough cash flow to repay the loan and that you have the experience to effectively leverage business debt to build a successful business.

Additional Guarantees 

Depending on the lender, you may need to provide an additional guarantee on the loan. They will likely ask you to agree to a personal guarantee, which means they may take your home or other personal assets if you default. And, depending upon your creditworthiness, the lender may require a cosigner who has assets to secure your loan.  

Pros and Cons of Business Installment Loans

As with any financial product, business installment loans come with several pros and cons. Perhaps the greatest benefit of an installment loan is that it typically comes with a fixed-interest rate that you can budget for every month. 

Its versatility is also a major advantage as you can use this financing option to make any business purchase you desire. In addition, an installment loan can give you the peace of mind of knowing your debt will be paid off by a certain date.

When it comes to drawbacks, the most noteworthy drawback is that you can’t add to the amount you need to borrow, as you can with credit cards or revolving lines of credit. So you have to know exactly how much cash you’ll need before you take out the loan. 

Also, your credit will have a significant impact on your interest rate and terms so if you don’t have the best business credit report, you may be stuck with a higher interest rate than you’d like. Unfortunately, a higher interest rate can cost you hundreds or even thousands of dollars over the life of your loan. 

Nav’s Final Word: Installment Loans for Business  

If you’re in search of a versatile form of business financing, installment loans can be a great option. You can use them to fund just about anything. However, be sure to consider invoice financing, merchant cash advances, business credit cards, cash flow loans, and other business financing options before you take the plunge. 

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