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. As some of the most common and straightforward type of loans available, installment loans are a popular type of business financing.
Also commonly referred to as term loans, installment loans can be useful for many business financing needs—from working capital to business expansion to refinancing.
What, exactly, is an installment loan, though? And is it right for your business? Keep reading to find out!
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Table of Contents
What Are Installment Loans?
These loans are, quite simply, loans that 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:
|4 years (48 months)
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; so the borrower would actually receive $9,700. Check out our article about Understanding Small Business Loan Fees for other common fees charged during the lending process.
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. For information on this type of financing, check out our Guide to Short-Term Loans.
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.
Why Get An Installment Loan?
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 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.
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.
Head over to our Term Loan Calculator page for more information on this calculator.
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 the following:
On the other hand, an installment loan might be perfect for your business. Ready to find a lender that fits your needs? Start with our guide to finding the right business loan, or take a look through our full list of business lender reviews.