If you need business financing, taking out an installment loan is one of the best options. This type of loan is quite popular with business owners in terms of financing their respective businesses. Moreover, they tend to use installment loans for working capital, refinancing, or business expansion.
Understanding Installment Loans
Installment loans are a practical funding option for several small businesses. They work like a car loan or mortgage. With a business installment loan, you borrow a lump sum of money and pay it off for a set period.
Lenders tend to offer fixed rate installment loans. This means that the interest rate of your loan will remain the same until you’ve paid the total amount you owe. Also, the interest tends to depend on your credit score. Individuals with high credit scores tend to receive lower funding costs than those with poor or bad credit.
Most of the loans you know about are simply different types of installment loans. Below are some examples:
- Auto, student, and personal loans
- Mortgages
- SBA 7(a) loans
- Business and construction loans
Pros of Getting an Installment Loan
The following are the pros of taking out an installment loan for your business needs:
Predictable Repayment Terms
If you get an installment loan, you’ll know when your loan repayments are due and when the loan will end. This will help eliminate cash flow uncertainties that you might experience if you land a repayment term that isn’t strictly set. Since you know when payments are due, you can avoid late or missed payments that can hurt your credit score.
Large Loan Amounts
Unlike other debt types, such as credit cards or revolving credit lines, installment loans can allow you to access more funds. Credit line limits are usually below $250,000. On the other hand, installment loans can offer you a much higher amount than the latter.
This doesn’t mean that you can’t get a smaller installment loan. Several lenders can offer you installment loans with just a few thousand dollars. It’s recommended not to take out a loan amount you don’t need or cannot afford. Doing so can harm your business’ future cash flow.
Wide Variety of Options
Installment loans come in many varieties. This ensures your chances of finding the best fit for your business needs. Not only that but there’s even a wide range of installment loans that are designed for specific industries. This includes the following:
- Medical practice loans
- Retail financing
- Construction loans for contractors
- Startup business loans
- Restaurant business loans
Several online lenders can also give you different installment loan types. They can provide you with more variety. That way, you’ll know your options and select the one that best fits your current business needs.
Cons of Getting an Installment Loan
Below are some cons of getting an installment loan that you should look out for:
Costly Loan Fees
An installment loan might have the potential to give you costly loan fees. These fees usually include the following:
- Origination fees
- Administrative fees
- Late payment fees
- Underwriting fees
- Annual fees
These fees can add up fast, which will cost you even more. For example, origination fees alone can range from 1% to 6% of your loan amount. Not only that but if you want to pay your loan fully before expiration, you might be charged with a prepayment penalty.
The best way you can mitigate this is by paying your loan on time and in full. This can help you avoid the costly fees. Plus, it’ll help boost your business credit score.
Inflexible Payment Terms
As mentioned earlier, installment loans offer predictability when it comes to repayment. However, this can be too rigid for some business owners. Other options for business financing, like bridge loans, merchant cash advances, or factoring, tend to offer more flexible payment options.
Use of Fund Restrictions
This isn’t always the case. However, several installment loans tend to have restrictions on how you can use the funds. For example, if you take out an SBA 7 (a) loan, the following are the only way you can use the funds:
- Working capital
- Equipment
- Inventory
- New construction
- Real estate acquisition
- Business startup costs
The list of expenses is sufficient for some business owners. But, others prefer a loan with more flexibility in terms of how to use the money. For example, non-installment financing options like invoice factoring and cash advances often have no restrictions when using funds.
To Sum It Up
Installment loans are quite popular when it comes to business financing. They usually come in different types, and some even are designed for specific businesses. If you plan to get this type of loan, weighing the pros and cons is best. That way, you won’t have any regrets about getting the business funds you need.
