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When applying for a small business loan in the U.S., it’s important to understand whether the loan is installment-based (fixed-term) or revolving (credit-based). Each type serves different financial needs and business goals.
1. Installment Loans (Fixed-Term Loans)
An installment loan provides a lump sum of money upfront, which the borrower repays in fixed installments (monthly, weekly, or biweekly) over a set period. Interest is applied to the total loan amount, and payments remain predictable.
Key Features:
✅ Fixed loan amount issued upfront
✅ Regular repayment schedule (installments)
✅ Interest accrues on the full borrowed amount
✅ Often used for long-term investments
Common Types of Installment Business Loans:
- Traditional Bank Loans – Offered by banks and credit unions with competitive interest rates but require strong credit and financials.
- SBA Loans (Small Business Administration) – Government-backed loans with long repayment terms and lower interest rates. Popular options:
- SBA 7(a) Loan – Flexible use for working capital, equipment, or real estate.
- SBA 504 Loan – Used mainly for commercial real estate and large fixed assets.
- Online Business Term Loans – Provided by alternative lenders with faster approval but typically higher interest rates.
- Equipment Financing – Loans specifically used to purchase business equipment, with the equipment itself serving as collateral.
- Commercial Real Estate Loans – Loans designed for purchasing office space, retail locations, a gym, a dental clinic, a medical clinic, a construction company, or other commercial properties.
Best For:
✔ Businesses needing a large, one-time investment (e.g., buying equipment, expanding operations)
✔ Companies that prefer predictable payments
✔ Businesses that qualify for low-interest, long-term financing (especially SBA loans)
2. Revolving Credit (Flexible Borrowing & Repayment)
A revolving credit facility allows a business to borrow, repay, and borrow again up to a set credit limit. Interest is only charged on the amount used, making it ideal for managing cash flow fluctuations.
Key Features:
✅ Flexible borrowing—access funds as needed
✅ Interest applies only to the borrowed portion
✅ No fixed repayment schedule (minimum payments required)
✅ Can be reused after repayment (revolving)
Common Types of Revolving Credit for Small Businesses:
- Business Lines of Credit (LOC) – A pre-approved credit limit that businesses can draw from as needed.
- Business Credit Cards – Work similarly to personal credit cards but with business-specific benefits and higher credit limits.
- Merchant Cash Advances (MCA) with Revolving Features – Not a traditional loan but provides upfront cash in exchange for a percentage of future sales. Some MCAs allow re-borrowing once a portion is repaid.
- Trade Credit / Supplier Credit – Some suppliers offer businesses revolving credit terms, allowing them to delay payments while maintaining inventory flow.
Best For:
✔ Businesses with fluctuating cash flow (e.g., seasonal businesses)
✔ Companies that need quick access to funds for short-term needs
✔ Entrepreneurs who want flexibility without long-term debt commitments
Key Differences Between Installment Loans & Revolving Credit
| Feature | Installment Loans | Revolving Credit |
|---|---|---|
| Loan Structure | Fixed lump sum | Credit limit, borrow as needed |
| Repayment | Fixed, scheduled payments | Flexible payments, based on usage |
| Interest | Charged on full amount | Charged only on borrowed amount |
| Best Use | Large, one-time expenses | Ongoing or unpredictable expenses |
| Example | SBA Loan, Bank Loan | Business Line of Credit, Credit Card |
1. SBA Loans – Partially Insured
The Small Business Administration (SBA) partially guarantees SBA loans (such as the 7(a) loan). This means if a borrower defaults, the government reimburses the lender for a portion of the loss. However, this does not cover the borrower—business owners are still personally responsible for repayment.
2. Traditional Bank Loans – Not Insured
Most bank loans and term loans for small businesses are not insured. The borrower is fully responsible for repayment, and if they default, the bank can seize collateral (e.g., business assets, property) if the loan was secured.
3. Business Lines of Credit – Not Insured
Revolving credit lines are not insured, and repayment responsibility falls entirely on the borrower. If it’s an unsecured credit line, lenders may charge higher interest rates due to the increased risk.
4. Merchant Cash Advances (MCAs) – Not Insured
MCAs are not traditional loans but cash advances against future sales. They are not insured or guaranteed, and they come with high fees and aggressive collection policies.
5. Government Disaster Loans – Insured by the Government
Loans like the SBA Economic Injury Disaster Loan (EIDL) are backed by the U.S. government, meaning the government provides funding and may offer deferment or forgiveness options in certain cases.
6. Business Credit Cards – Not Insured
Credit cards function as a revolving line of credit and are not insured. However, some business credit cards offer fraud protection, which protects against unauthorized transactions but not default.
Does Loan Insurance Exist for Small Businesses?
Yes! Some private lenders offer loan protection insurance, but it’s optional. This insurance may cover loan payments in case of:
✔ Disability or death of the business owner
✔ Business interruption due to disasters
✔ Other unforeseen financial hardships
Speaking of insurance, check out our business insurance articles. We’ve covered insurers like NEXT Insurance, Hiscox, Tivly, Insurance Bee, Thimble and others. Check out your specific state for top business insurance companies your state. We’ve covered: CA, MS, FL, IL, CO, PA, GA, NC, MI and others.
Which One is Right for Your Business?
- If you need a large sum upfront for a major purchase or expansion → Installment Loan
- If you want flexibility to borrow as needed for cash flow management → Revolving Credit
Both options can be used together—many businesses get an installment loan for long-term growth and a business line of credit for short-term needs.
I recommend that you check with your state to see if there are any special business grants or loans for your specific industry. States like New York, Washington, New Jersey, California and many others are known to have special funding programs for small businesses.
FAQ: Small Business Loans – Installment vs. Revolving Credit
1. Can I have both an installment loan and a revolving credit line at the same time?
Yes! Many businesses use both. An installment loan helps fund major expenses (e.g., buying equipment or property), while a revolving line of credit provides ongoing flexibility for short-term needs like payroll, inventory, or emergency expenses.
2. Which option is easier to qualify for: an installment loan or a revolving credit line?
It depends on the lender and your financial profile.
- Installment Loans (e.g., SBA loans) often require strong credit, financial statements, and a detailed business plan.
- Revolving Credit Lines (e.g., business credit cards) may have lower requirements, but interest rates can be higher.
3. Do installment loans have prepayment penalties?
Some do, depending on the lender. Banks and SBA loans may charge a prepayment penalty if you pay off the loan early. Online lenders may not. Always check the loan terms.
4. Do I pay interest on my entire credit line even if I don’t use it?
No. With a revolving line of credit, you only pay interest on the amount you borrow, not on the total credit limit.
5. How does a business line of credit affect my credit score?
Just like a credit card, it affects your credit utilization ratio. Keeping your balance low relative to your limit helps maintain a good credit score.
6. Can I use a business credit card instead of a loan?
It depends on your needs. Business credit cards are great for small, recurring expenses but have higher interest rates than traditional loans. They can complement, but not fully replace, a loan for large purchases.
7. Are SBA loans always installment loans?
Mostly, yes. SBA loans like the 7(a) and 504 loans follow installment structures. However, the SBA Express Loan offers a line of credit option with revolving features.
8. What happens if I max out my line of credit?
Once you reach your limit, you can’t borrow more until you repay part of the balance. Some lenders may allow limit increases based on good repayment history.
9. Is a merchant cash advance (MCA) a revolving credit product?
No, but it works similarly. With an MCA, you receive a lump sum and repay it using future sales revenue. Some MCAs offer renewal options, allowing businesses to borrow again after repaying part of the advance.
10. Can I use a personal credit card or loan instead of a business one?
You can, but it’s not ideal. Using personal credit for business expenses can:
- Hurt your personal credit score if the business struggles.
- Limit your borrowing capacity since business credit lines are often larger.
- Lack tax benefits compared to business financing.
11. What’s the biggest risk with each loan type?
- Installment Loans → Getting stuck with long-term debt that you can’t afford to repay.
- Revolving Credit → High-interest costs if balances aren’t paid off quickly.
12. What should I consider before applying for a small business loan?
Ask yourself:
✔ What do I need the funds for?
✔ How quickly can I repay the debt?
✔ Do I need a lump sum (installment loan) or ongoing access to credit (revolving)?
✔ Can I afford the interest rates and fees?
Mark Turner is an author and editor at Sophisticated Investor. He has over two decades of experience in the financial industry as a broker in both Chicago and New York and has written for several top tier publications. He currently covers the topics of alternative investments, geopolitical events, US economy, portfolio diversification and others.
