Small Business Installment Loans: Growing Your Business One Installment at A Time
If you are running a small business, then various kinds of merchant funding are going to be important. You will need to pay for daily operational expenses, supplies inventory and even invest for future growth. In times of financial need, small business installment loans can provide a helpful solution to taking care of these many areas of business.
What is an installment loan?
Small business installment loans are one of the most straightforward financing options available for small businesses. Installment loans are fixed rate loans that can have a term between one to twenty five years and are paid in fixed increments. Each payment returns both interest and principal. Installment loans are used for short and medium term expenses as well as long term investment.
Is a small business loan an installment loan? Not necessarily. There are various forms of small business loans besides installment loans, such as revolving lines of credit and variable rate loans.
Definition of an installment loan
Say you took out a 5-year installment business loan of $20,000, with an interest rate of 5%, and an origination fee (amount charged to process the loan) of 3%. Your monthly payments and overall interest paid may look like this:
Total Repayment: $23,245.48
Financing Cost: $3,845.38
Payment Per Month: $387.42
APR 7.36%
As you can see, the installment loan template above is easy to understand, and in an environment of rising interest rates, can be favorable because of its fixed rate nature. Short term, medium term and long term loans are great tools for small businesses.
Why do I need an installment loan?
Installment loans can serve all sorts of business purposes, be they short, medium and long term needs. Here are some examples:
Short term:
- Working capital
- Operating expenses
- New supplies or equipment
- Payroll
Medium Term:
- Medium- or long-term real estate leasing
- Long term advertising campaigns
- Seasonal business expenses
- Location rental and expansion
Long term:
- Real Estate
- Capital expenses (manufacturing facilities, etc.)
- Corporate acquisitions
- Long term investments
Installment loans can help your business meet its needs and provide a predictable set of expenses that can be matched up against projected cash flow. Effectively used installment loans can be a great tool that can help your business ride out bumpy patches in the business cycle, deal with late payments from customers, and help your business grow in the long term.
Long, medium and short term options
Installment loans work the same in most cases. What varies is the term of the loan, the interest rate, the origination costs, and the total interest paid on the loan.
Shorter term loans have higher interest rates because lenders need to charge a higher rate on the loan to be profitable. Short term loans will probably also have higher origination fees and other charges, because overall short-term loans are usually in smaller amounts that are loaned to small businesses. Small businesses are usually seen as riskier prospects for loans, so lenders will look for ways to make profit and cover for their risk.
A medium term loan will of course fall somewhere in the middle. A medium term loan duration can bridge the gap between paying the least overall interest and having a manageable monthly payment.
These rates will go down for larger loan amounts that have longer terms. More interest is paid on longer term loans, and these are more profitable for lenders. Longer term loans are more likely to be made for larger amounts and can stretch into decades. As such, they are ideal for long term business investment. Therefore, partnership between your business and your lender is important: a long term lending partner will understand your business and be more flexible when circumstances for your business change. Long term lending partners have a vested interest in your business succeeding, and a partner who has done successful loan business with you will have built with you a strong, trust-based relationship.
What you will need to get an installment loan
To apply for an installment loan at most lenders, you will need the following:
Good credit
Good personal credit as well as a good credit record for your business will be essential for getting an installment loan. It’s wise to check your own personal and business credit ratings via the various reporting agencies.
Collateral
This will be essential. This can be securities, cash, or other assets held by the business. This can also involve such things as invoice factoring and other forms of cash flow financing. Invoice factoring (borrowing against accounts receivable) is an attractive alternative for businesses that do not hold large amounts of collateral.
Your current business plan
Lenders want their money paid back. Since they are invested in their customers succeeding, supplying them with your current business plan will enable you to make the case that your business is a good candidate for a loan.
Personal guarantees
Lenders will be happy to discuss with you posting personal assets such as securities, property, or cash as collateral to secure loans
Learn more
Here at L3 Funding, we work with small businesses every day to help them meet their financing needs. We would love to answer your questions and help you with the right option to help grow your business. Contact us and we will discuss with you the best options for installment loans and other financing tools that are right for you.