Credit Card Vs. Business Loan: Choosing The Right Funding For Your Small Business
When it comes to funding, understand the differences between business credit cards, small business loans, and lines of credit.
No small business can grow and thrive without a source of funding. When seeking funds for daily operating expenses, equipment purchases, hiring staff, and the like, two funding vehicles immediately come to mind: the business credit card and business loan. Both funding types have their benefits and drawbacks, so if you’re looking to pursue one option or the other, we published this post to help you determine which way to go in the business loan vs credit card debate.
Table of Contents
- Credit Cards VS Business Loans: A Quick Comparison
- When To Use A Business Credit Card Instead Of A Business Loan
- When To Use A Small Business Loan, Not A Credit Card
- A Word Of Caution Regarding Business Loans
- Business Loan VS Credit Card: Which Is Right For Your Small Business?
- FAQs: Business Credit Card Or Business Loan?
Credit Cards VS Business Loans: A Quick Comparison
Business credit cards and business loans both give you access to the funds your business needs. But a small business loan and a credit card are very different types of funding, each with its benefits and drawbacks. Let’s take a closer look at each option.
|Small business loan||Business credit card|
|Loan Amount||Up to $5 million||Up to $50,000|
|Loan Type||Term loan with a fixed interest rate||Revolving line of credit|
|APR Range||2%-13%||Average of 21%|
|Qualifications||Good/excellent credit, strong business financials, and collateral typically required||Good/excellent credit usually required|
Business Loan Details
- With a business loan, you can access up to $2 million in business funding, or even up to $5 million if you take out a Small Business Association loan from an SBA preferred lender.
- Business loans can be used for many different business purposes, including buying assets, funding business growth projects, debt consolidation/refinancing, and even disaster assistance.
- Most often, business loans come in the form of installment loans, though short-term loans for business are also available. This means you’ll get the money in one lump sum and then repay the loan in installments over a set period of time.
- Business loans involve a lengthy application process. Getting a small business loan requires considerable documentation.
- A business loan may require a personal guarantee, lien, or other assets in exchange for funding.
- Business loans come with interest rates that vary depending on the loan type, starting around 2-13% APR.
Business Lines Of Credit
Another option for small business funding is a business line of credit.
- Getting a business line of credit is similar to an installment loan in terms of the application process, interest fees, along with credit, income, and asset requirements.
- The key difference is that unlike an installment loan, a line of credit lets you access only the money you need, when you need it, up to your total credit limit. While you might have a high amount available, you’ll pay interest only on the amount of funding you use, with the option of accessing more funds when needed.
Installment loans and lines of credit aren’t your only business loan options. There are numerous types of business loans, including equipment loans, merchant cash advances, and invoice financing.
Business Credit Card Details
- Business credit cards generally come with lower borrowing amounts than a business loan, up to $50K.
- Business credit cards charge higher interest rates than loans, with the APR on business cards averaging more than 21% APR.
- A business credit card gives you access to a revolving line of credit — you make payments on (and pay interest on) only the portion of the credit line you utilize, not the total amount available.
- Regarding how to get a business credit card, they are easier to apply for than business loans. While the strength of your business credit will be taken into consideration, your finances probably won’t be as closely examined. (If you don’t want your personal finances examined at all, look for a business credit card with no personal guarantee).
- Typically, you won’t have to put up collateral with a business loan, unless you’re applying for a secured business credit card.
- Most business credit cards offer a rewards program that gives you points or cash back for your spending.
So, how should you determine when to pursue a business credit card vs. a business loan or line of credit?
When To Use A Business Credit Card Instead Of A Business Loan
Certain purposes favor the use of a business credit card over a business loan. Consider applying for a card under the following circumstances.
1) You Need Financing For Common Ongoing Expenses
Although you usually can get funded more quickly with a credit card — especially if you get an instant approval business credit card — the funding you can access will be significantly less than what you can access with a loan. That makes a business credit card a better way to get working capital for everyday business expenses.
Because a credit card provides you with a revolving line of credit, you won’t be borrowing more than you need, and you won’t be paying interest on money you’re not using.
2) You Want To Pay 0% Interest (For A While)
Many business credit card issuers offer an introductory 0% APR period with their credit cards. The 0% APR period typically lasts 9-12 months, but you can find offers that extend this period to 18-21 months.
This is especially useful for business owners who intend to make some significant purchases in the short term. Credit cards offering a significant 0% APR period can end up saving you lots of money on interest payments.
3) You Want To Build Your Business Credit
Just about every business credit card reports your card activity to the major credit bureaus. If you make payments in a timely manner and maintain best practices with your credit utilization ratio (the amount of credit you’re currently using divided by the total amount of credit you have available) you can build your business credit by using a business credit card. What’s more, if you have bad credit, using a bad credit business credit card can help qualify you for a better business credit card in the future.
Of course, if you don’t make a payment as required, or if you utilize a greater proportion of your credit than the credit bureaus like (less than 30% is typically considered good), using a business credit card can actually hurt your business credit rating. Don’t spend more than you can afford to pay down.
4) You Want To Earn Rewards/Cash Back For Your Spending
Most business credit cards are designed to have you earn credit card rewards or cash back when you use the card to make purchases. You may even be able to find a card that targets its highest reward-earning at the purchase categories your business uses most.
If you decide to get a rewards credit card for business, pay particular attention to the rewards scheme offered by the card issuer. This way, you can get the card that gives you the most value back in the form of reward points or cash back.
5) You Want Help Tracking Your Business Expenses
Most business credit cards deliver a monthly billing statement that details your transactions for the month. Many of these cards also allow you to link to accounting software, giving you another way to track your business expenses in real time.
When To Use A Small Business Loan, Not A Credit Card
Now, let’s get into the circumstances that call for the use of a business loan or line of credit.
1) You Want To Finance A Large Expense (Up To $2 Million)
If you’re looking to expand your business in a significant way, you’ll probably want a loan. While credit cards are useful for financing smaller purchases, if you want to finance expenses worth up to $2 million (you can even get up to $5 million with an SBA loan, though those can be more difficult to qualify for), you’ll want to apply for a small business loan.
2) You Want To Minimize Your Interest Payments On The Money You Borrow
When comparing business loans to business credit cards, note that when all else is equal, you can get a lower interest rate with a loan or line of credit than with a business credit card.
With an online lender, a business with a good credit score and healthy business metrics can get a loan or line of credit with an APR starting around 5%. That’s a significantly lower APR than what you’ll be offered with even the most basic business credit card.
3) You Want To Repay What You Borrow Over A Longer Stretch Of Time
Online lenders often offer loans with term lengths of up to 7 years. SBA loans can even carry term lengths of up to 30 years, with no prepayment penalties. Suffice to say, if you want to borrow a significant sum of money and you’re looking to spread out repayment over a significant length of time, a business loan is the way to go.
A Word Of Caution Regarding Business Loans
When comparing business loans with credit cards, note that eligibility requirements for a business loan are more stringent than the requirements to qualify for a business credit card. You’ll likely need to provide collateral, and for large loans, you might need to make a significant down payment.
Another factor to consider: You can get funding more quickly with a business credit card than you can with a business loan or line of credit. You might be waiting a few weeks or longer for funding from a business lender. If you apply successfully for a business credit card, you should be able to get funded within a week.
That said, you can find options for quick business loans if you apply with the right online lender.
Business Loan VS Credit Card: Which Is Right For Your Small Business?
When deciding between a business credit card or a business loan to cover the cost of your business expenses, it’s important to consider your particular business situation and funding needs.
- If you need more than $50K in funding and you’re able to qualify for a loan, start researching top business lenders.
- If you need less than $50K, you want to borrow money at 0% interest in the short term, or you want to earn rewards for your purchases on an ongoing basis, you’ll want to look into the top business credit cards.
- If you only need a small amount of funding and don’t want to open a credit card account, there are options for $5,000 loans and $10,000 loans.