Are you thinking about getting an installment loan for your small business? Installment loans break up large costs into smaller, manageable payments that can allow you to invest in the growth of your business without worrying about cash flow. However, that convenience often comes with a price in the form of interest and fees. So you’ll need to determine if the benefits of an installment loan outweigh the costs for your situation.
Not sure where to start? Let’s examine how installment loans work.
Installment loans defined
In installment loans, a lender provides a borrower with a lump-sum upfront payment. The borrower then repays the loan amount plus interest and fees through regular payments over a specific period.1
For example, you requested a $10,000 installment loan with a 60-month term and a 5% annual percentage rate (APR). You would get the $10,000 upfront and then make 60 payments of approximately $188.71 per month. In total, you’d repay about $11,322.74 over the five years.2
Examples of installment loans
Installment loans are widespread. You’ll find them in many popular loan products. Here are a few examples:
- Auto loans: When you want to buy a vehicle for your business without paying out-of-pocket, you can opt for an auto loan. You’ll make a down payment on the vehicle’s purchase price, and then the loan will pay for the remaining balance. Your loan payments to the lender will include applicable interest and fees built into monthly payments over a set term (usually several years) until you have paid off the vehicle.3 If you don’t make your payments on time, the lender can repossess the vehicle and sell it to cover the outstanding balance. Once you complete the installment payments, you will own the vehicle outright.
- Mortgages: A mortgage is an installment loan used to buy a home or commercial property. After making the down payment out of pocket, you can pay for the remaining amount with a mortgage. The lender will add interest and fees to the balance and then break down the total amount into monthly installment payments over a term, often 15 to 30 years.4 Like auto loans, mortgages are secured loans, so if you don’t make all your installment payments, you could go into foreclosure and lose the home or commercial property. However, if all payments come in on time, you’ll own the property free and clear at the end of the loan.
- Personal loans: Personal loans are installment loans that enable you to borrow a lump sum of money for whatever legal purpose you want. For example, you could take out a personal loan to pay for a wedding, vacation or startup costs for your small business. Person loans are often unsecured, meaning rather than relying on collateral, lenders will look to your assets as security. With this in mind, you’ll need to have decent credit to get approved for a personal loan. You’ll receive the amount if you are approved, and then need to pay it back over a set term through monthly payments. If you default, the amount will go to collections, and someone could sue you for it. If you pay as agreed, the amount will show as paid in full on your credit report.
You’ll also come across installment loans when seeking business financing. The U.S. Small Business Administration (SBA), for example, runs the SBA 7(a) loan program offering installment loans up to $5 million.5 Further, many online business lenders offer term loans that feature the installment payment structure.
Pros/cons of installment loans
Are installment loans right for you? Here are some pros and cons to consider.
- No large upfront costs: Break up lump sums into manageable payments
- Predictable payments: Know precisely how much payments will be and when they’ll be due
- Various options: Choose from various secured and unsecured options from many lenders
- Range of terms: Spread out the costs over a term that fits your needs
- Build credit: If you make your payments on time, it will help your credit
- Interest: Lenders will charge interest that can be expensive if you aren’t well-qualified
- Fees: You may also have to pay origination and administration fees that can be expensive
- Approval: You’ll have to meet the lender’s eligibility requirements to get approved
- Use restrictions: Lenders may restrict how you can use the loan proceeds
When do business owners need an installment loan?
If your small business has reached a point where a lack of capital is holding you back, it may be time to consider an installment loan. Business owners commonly seek funding to purchase equipment, hire staff, invest in marketing, purchase inventory and take other steps that offer a return on investment.
You’ll want the capital to be an investment that will help your business grow rather than borrowing the money without plans for its use. Enter the loan process with a growth strategy in mind that’s likely to leave your small business in a better place.
Protect your business as it grows
An installment loan can help your business breakthrough to its next level of success. However, you need to be ready to take that step. You’ll be making a bigger impact — a move that can also bring more risk. But what kind of risk? Here are some examples:
- Liability for third-party property damages or bodily injuries
- Accusations of negligence
- Having to go to court to defend yourself
- Commercial building damage
- Loss or theft of business property
These potentially costly situations are common for businesses large and smile. Put your mind at ease and protect your company’s bottom line with a Business Owners Policy (BOP). A BOP offers a combination of general liability insurance, commercial property insurance and business interruption insurance all wrapped up in one convenient package that covers all your small business bases.
So how do you get started? Getting coverage is quick and easy with Thimble. Download the Thimble app or click, “Get a Quote.” Answer a few questions and you can get your policy and Certificate of Insurance in your app and inbox in minutes.