Introduction
Business owners seek financial assistance at some point in time to cater to their business expansion needs. Applying for an installment business loan can prove to be a wise move during such times.
Business owners can use these funds to procure resources, purchase machinery, or develop their infrastructure. So what is an installment business loan? And how can instalment loans make a difference to your business? Let us find out in the following sections.
What is an installment loan?
In simple terms, loans repaid in portions over a fixed period are installment loans. In other words, these are business loans that borrowers need to repay through scheduled payments.
With every installment payment, you also need to repay a part of the principal amount along with its interest. These loans can be both secured and unsecured. Auto, student, personal, and mortgage loans are typical examples of this type of loan.
Further, we try to understand more about installment loans through their features, pros, and cons.
Installment loans features
- Experience – Business owners can seek an installment loan for their business operations. However, the business should have been functioning for at least three years. In some banks, this limit is up to five years.
- Loan Tenure – Installment business loans are ideally short-term loans. Therefore, the tenure of these loans ranges from 1 year to 5 years maximum. However, the lender can extend the duration considering the borrower’s loyalty at the bank’s discretion. Regarding pre-payments, they are allowed post one year of regular repayment. However, the borrower needs to pay minimum pre-payment charges.
- Rate of interest – The interest rate on installment loans is higher than other business loan options. Do you know why? It is due to a high-risk factor associated with installment loans. The current rate of interest on business installment loans ranges from 15% to 25%.
- Loan amount – The final business installment loan amount will depend upon factors like:
- Business turnover records.
- Business credit.
- Feasibility of the business model.
- Business competence.
Pros
- Independent of your credit – One of the most significant advantages of installment loans is that they are independent of your credit status. Whether you have a poor credit record or have just recovered from bankruptcy, you can any day apply for an installment loan.
- Easy loan option – Getting an installment loan is not a rigamarole process. You can easily search for a business loan online and get plenty of options. All you need to do is compare loan terms, interest rates, and lender ratings. Select the lender that offers you the lowest interest rates or offers flexible repayment terms.
- Wide range of options – Are you seeking a loan for your business? If yes, you cannot get a better deal than installment loans. Why? Because there is a range of installment loans specially tailored for specific industries. Retail financing, medical practice loan, construction loan, and restaurant business loan are some common examples in this category.
- Flexible loans – Do you know that installment loans are among the most flexible loans available in the market? You get to choose the loan amount, the lender, the number of installments, and the day you get the money. What more can any borrower ask while applying for a loan?
- Quick dispersal – A business loan can get approved within a few hours. The loan amount will be credited to your bank account by the next day. However, a business loan or a mortgage home equity line of credit might take some days to get approved by the lending authority.
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Cons
- Costly Loan Option – One significant disadvantage of opting for an installment loan is that it has a relatively higher interest rate. Apart from this, there is an extensive list of fees attached to every installment loan. The borrower needs to pay origination, administrative, underwriting, late payment, and annual fees while taking this loan.
- Affects credit score – A lender won’t consider your credit score while approving an installment loan. However, they can report missed or late payments to the credit bureau. This practice can ultimately impact your credit score in the long run.
- Fund usage restrictions – Do you know that many installment loans come with fund usage restrictions? It can be a big turn-off for the borrowers who are seeking funds for specific purposes. For instance, you can use SBA 7 (a) loan only for:
- Inventory
- Equipment
- Working capital
- Real estate acquisition
- Business start-ups
- Construction
There might be instances where the borrowers require more flexibility in terms of loan usage.
- Risk of facing a cash crunch – installment loans are given per an applicant’s stated income. If you fail to get a full salary or overtime payments as expected, you might experience a cash crunch. But, can you plan to restructure the loan by reducing the monthly installment and extending the loan tenure? You can, but in this case, you might end up paying more money in the long run.
Our advice
An installment loan can help owners to meet their business’ day-to-day cash requirements. There are several options like SBA loans, long or short-term loans, home equity loans, and bridge loans.
However, experts recommend an in-depth analysis of each option before making a final decision. Apart from this, they should also consider the rate of interest, loan repayment terms, and penalty clauses before signing on the dotted lines.
Last but not least, if you have made up your mind to go for an installment business loan online, make sure you compare at least four to five options. Familiarising yourself with all the available financing options will help you to get the best deal.
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