An installment loan is a purchase in which the borrower takes possession of an asset (a vehicle, for example), the funds are given for the purchase of the asset, and the borrower pays back the loan in installments or payments over the term of the loan.
In an installment loan, the number of payments is fixed, as opposed to revolving credit, in which the payments change with the balance (as with a credit card). An installment agreement defines the terms of the loans.
Installment loans are often the best option for financing the purchase of a business asset because the loan term can coincide with the life of the asset. For example, a car loan is often for 3 to 5 years, which the time an average vehicle is owned before being traded in for a newer model.
Types and Examples of Business Installment Loans
Some examples of installment plans include:
- The IRS provides taxpayers with the ability to pay their tax bill over time with an installment payment plan.
- Some employers allow employees to purchase specialized equipment or computer hardware/software over time, through the company, using an installment agreement to record the terms of repayment.
- Installment loans may also be available for debt consolidation or debt refinancing
The Typical Terms on an Installment Loan
Installment loans are almost always secured loans (meaning that the lender requires security in case the borrower can't pay. Security usually is collateral (as in a vehicle loan), but most installment loans are linked to the purchase of an asset, which is the security. Before an installment loan is granted, the asset or assets linked to the purchase must be valued, and its fair market value determined. Interest rates on installment loans vary, depending on whether the loan secured and on the credit rating of the borrower.
Secured loans are loans backed by an asset (like a car, a building, equipment). Secured loans usually have lower interest rates than unsecured loans.
Getting an Installment Loan for Business Startup
Getting a loan of any type for a business startup is tricky because the business may not have any assets that can be used as collateral on the loan.
What you will need for an installment loan for business startup:
Good credit. Having good business credit already in place is best, but for a startup, you will need at minimum good personal credit. Run your credit report and
Collateral. Lenders require collateral (like a car for a car loan) for installment loans. Having security doesn' mean you have to sell assets to get cash, but it means the lender can sell the asset for a specific amount if you don't make the payments.
A Business Plan. Prepare a comprehensive business plan to justify how much you want, what assets you will pledge and their value. The plan also must show the ability of the business to generate enough cash flow to pay back the loan.
Additional Guarantees. You may need Work with the lender to provide additional guarantees on the loan. The lender may want a personal guarantee from you, which means the lender can take some of your personal assets (your home, for example) if you default on the loan. You might also need to find a co-signer who has assets to pledge to get the loan.
Sources of Business Installment Loans
The best places to get a business installment loan:
Banks and credit unions are usually the first places to look for an installment loan.
Consider Small Business Administration guaranteed loans. The SBA doesn't do the lending, but it acts as a co-signer, helping your business to qualify with a lender.
You might also consider getting a loan from a friend or family member, but do this with the help of an attorney or a reputable friend and family lender.