The Merchant’s Guide To Installment Loans

If you need business financing, an installment loan is probably the first type of loan you think of. Also commonly referred to as term loans, installment loans can be useful for many business financing needs — from working capital to business expansion and refinancing.

If you’re new to business funding, this guide will help you understand what installment loans are, how they can be used, and whether it’s the right financing option for your business.

What Are Installment Loans?

Installment loans are repaid in fixed, periodic increments over a certain amount of time. The length of time can vary, but installment loans for business purposes are normally repaid over the course of one to 25 years.

Each payment goes toward repaying a portion of the principal (the amount of money you originally borrowed) and interest (a fee charged by periodically calculating a percentage of the remaining, unpaid, principal).

For example,an installment loan agreement might look like this:

The origination fee, a common fee charged to cover the costs of administration and application, is normally deducted from the principal before issuing the loan. In the example above, the borrower would actually receive $9,700.

To repay the principal and interest, the borrower would make monthly payments of $263 over the next 48 months. The total amount the borrower would pay is $12,640.

Long, Medium, & Short Term Loans

Installment loans are commonly defined by the length of their repayment term.

• Long-term loans have term lengths of six years or more.
• Medium-term loans carry term lengths between two and five years.
• Short-term loans carry term lengths up to two years. Typically, the term “short-term loan” refers to a product that carries a one-time fixed fee instead of interest.

Because longer term lengths take more time to repay, they’re considered higher risk. After all, there are more opportunities for something to go wrong in 10 years than there are in two. For this reason, normally only strong, profitable businesses with collateral and a positive business track record have access to the longest term lengths.

When To Get An Installment Loan For Business

There are many reasons to get an installment loan. If your business is in one of these common situations, you might want to get this type of financing.

Working Capital

Working capital loans are used to cover everyday operating expenses, such as payroll, inventory, overhead costs, and rent.

Whether your business is seasonal and you need funds to cover your slow season (or gear up for the busy season), a new client wants a big (but expensive) job done, or you need extra capital to make ends meet for some other reason, a working capital loan might be for you.

Inventory Or Equipment Purchases

Installment loans can be used to purchase the things you need to keep your business running smoothly. You could use a loan to purchase inventory in bulk (to save on cost), to purchase a vehicle for your mobile business, or whatever else you may need.

Business Expansion Or Acquisition

If your business is doing well, you may want to seek out new opportunities to keep it growing by expanding to additional locations.

On the other hand, you may want to purchase a pre-existing business, whether that’s to integrate it into your own or to become a business owner without going through the effort of starting the business yourself.

Debt Refinancing

Some businesses find that, due to poor money management or some other reason, they have a lot of debt. Other businesses already have loans, but may now qualify for better rates due to business growth. If you’re in either of these situations, refinancing debt may be a way to save a lot of money.

Installment Loan Calculator

Loan calculators, like the one below, can be used to gain a full picture of an installment loan. This calculator can help you understand your incremental payments, your APR, and the total amount of money you’ll owe.

The Bottom Line On Business Term Loans

Installment loans are a versatile form of financing that can be useful for businesses in many different situations.

However, don’t assume that installment loans are your only option. Your business may benefit from more specialized types of financing, such as a flexible line of credit or a low-interest, government-backed SBA loan.

If you’re unsure of which option is right for you, check out our picks for best small business loans. These lenders offer everything from long-term SBA loans to short-term loans and everything in between.