Are Small Business Loans Instalment or Revolving?

An instalment loan involves a business borrowing a specific amount and agreeing to repay it in fixed payments over a set period of time.

This type of loan can be either secured, requiring some form of collateral that can be seized by the lender if you default on the loan, or can be unsecured, going off your company’s credit history, financial wealth, and circumstances. 

A revolving business loan, also referred to as a business line of credit, allows flexible financing which allows you to borrow up to a predetermined credit limit, repay the balance, and borrow again as needed.

You will only pay interest on the amount borrowed, not the total limit, and repayment terms are often flexible and adjustable. 

Knowing when to use an instalment business loan is crucial, as it allows you to leverage predictable payments and long-term financing for major investments or large expenses you have in the pipeline.

Choosing to opt for this type of loan, allows you to spread out your costs and avoid unnecessary debt in the short term.

An instalment loan is best used for long-term financing of major purchases. This can include equipment or machinery needed to increase or expand a company’s production offering, the purchasing of new property to open a new branch of a business, or to refinance debt if it currently has existing high-interest debt. 

Revolving loans are best used to cover short-term or fluctuating expenses, this can include cash flow gaps, unexpected expenses, and inventory purchases.

For example, if you have a retail company, you might use a revolving loan to restock inventory during peak seasons, or alternatively use the loan to manage payroll during a slow month.

Revolving loans are a valuable tool if your business has varying financial needs, as you can tap into the funds as and when you need it. 

Instalment loans offer many benefits for businesses, including predictable payments, long-term financing options, access to larger loan amounts, a variety of loan types, and a set repayment end date. 

• Predictable Payments: Instalment loans offer businesses peace of mind with fixed monthly repayments, offering predictability over the loan term, and allowing for better budgeting.
• Long-Term Financing: Instalment business loans often have much longer repayment terms, meaning that the repayment can span many years, spreading out the cost of large loans. 
• Large Loan Amounts: Instalment loans are typically available in large amounts due to being used to finance significant expenses.
• A Variety Of Loan Types: Instalment business loans can come in various types, from secured loans (where assets are used as collateral) to unsecured loans (which do not require collateral), giving you more options to choose from. 
• A Set Repayment End Date: Differently to revolving credit, instalment loans have a set end date by which the loan must be fully repaid, and has a specific repayment schedule in place.

Revolving loans can be beneficial to businesses in several ways, from offering flexible access to funds, paying interest only on the amount borrowed, providing the ability to borrow and repay repeatedly, and offering quick access to capital. 

• Flexibility: Revolving loans offer businesses the ability to borrow funds as needed, repay them, and borrow again, making them perfect for handling fluctuating cash flow or unexpected expenses.
• Only Pay Interest on What You Borrow: Unlike traditional loans, interest on a revolving loan is only applied to the amount borrowed, not the entire credit limit. 
• Quick Access to Funds: Revolving loans allow you to have access to funds quickly without having to go through a lengthy approval process each time you require money.
• Improved Cash Flow Management: Opting for a revolving loan can help steady cash flow, providing a safety net during periods of low revenue. 
• Reusability: Revolving loans allow you to continue using your loan after repaying the borrowed amount, as your available credit replenishes, giving you continuous access to capital without needing to apply for a new loan each time.

Our small business loans at BEF can range between £500-£250k, with the average request for a loan being around £75k.

We understand every business is different, so we are dedicated to working alongside you to get to know your business and its needs, before finding a suitable loan.

Our flexible small business loans mean there is no one-size-fits-all. You will be able to find a loan that can allow your business to grow and thrive, and that you’ll be able to pay back affordably each month.

When considering the loan amount a lender will offer to a borrower, several factors are considered. This ensures that the right loan amount is offered to a business that aligns with its operational goals and financial capabilities.

The sum that a company can borrow depends on set criteria that lenders use to assess a business’s financial wellness, which include:

Revenue
A lender will typically assess a business’s annual revenue to determine whether the company has the financial capacity to repay a loan. Having a higher, consistent revenue stream suggests a company is more likely to repay its loan in full and on time.

The majority of lenders often use the same income multiples to determine how much they are willing to lend a business. This involves calculating the business’s net profit, before multiplying that amount by 4 or 5. 

Creditworthiness
The business’s credit history will be evaluated, with a strong credit rating indicating that the business is responsible when managing debt and finances.

This can result in a higher loan amount being granted or a loan being offered on better terms with less interest.

This is typically why most businesses struggle to receive a loan from a bank, however, at BEF, even if your credit score isn’t perfect, please still get in touch as we may be able to help you. 

Business History
The history of the business and its operations will also be analysed in the loan application process. This means that start-ups or businesses that have operated for under 2 years often find it difficult to be accepted for a loan.

This is a result of insufficient financial statements such as profit and loss (P&L) reports, balance sheets, and cash flow statements, which are all crucial documentation for lenders to evaluate a business's ability to repay the loan. 

Debt-to-Income Ratio

The amount of debt a business has will also be compared to its income by potential lenders. A business with a lower debt ratio shows that it can take on more debt responsibly, and will still be financially capable of repaying the new debt. 

To work out a company’s debt-to-equity ratio, the formula includes dividing the business’s total liabilities and debt by its shareholders’ equity. A ratio that is lower than 1.0 is considered good, while a ratio above 2.0 is regarded as a risk. 

Risk

The type of company and the industry it operates in will also be considered when a lender is looking at a loan application. Some industries and types of businesses are considered to be at higher risk than others, affecting their eligibility for a loan, the amount, and the terms offered.

Some industries classified as high risk include tech companies like cryptocurrency, as they are uncertain, have limited history, and have rapid market changes. Hospitality and tourism are also considered risky due to economic downturns, natural disasters, pandemics, construction and real estate development, due to long timelines, market fluctuations, and overrunning costs.