Need Small Business Funding? When You Should Get A Business Credit Card VS A Small Business Loan

Business owners looking for funding sources are likely to converge on two options: business credit cards and business loans/lines of credit. In this article, we’re going to be comparing these two common sources of business financing and letting you know the circumstances that call for utilizing them.

Credit Cards VS Business Loans: A Quick Comparison

There are some fairly obvious differences between business credit cards and business loans, as well as some less obvious ones. Let’s go through these differences.

With a business loan, depending on the lender, you can get up to $2 million in funding — perhaps even up to $5 million with an SBA loan. Business loans can be used for many different business purposes — asset purchasing, business growth projects, debt consolidation/refinancing, and, yes, disaster assistance. And while borrowing amounts can be quite high with business loans, interest rates tend to be significantly lower than what you’ll find with business credit cards.

Generally, business loans come in the form of installment loans, though short-term loans for business are also available. You’ll get the money in one lump sum and then repay the loan in installments over a set length of time. Unfortunately, the application process can be lengthy, and you may need to pledge a personal guarantee, lien, or other assets in exchange for getting your needed funding. And while a business line of credit more closely resembles using a business credit card than does a business loan, these lines of credit are more akin to a business loan in terms of the application process, credit/income/asset requirements, and interest fees involved.

Business credit cards are different. Borrowing amounts are lower — generally up to $50K. Interest rates are higher — basic business cards often start at around 12% APR while business loans start at around 6-7% APR. And while a loan gives you access to a lump sum of money which must then be paid back in installments, a business credit card essentially gives you access to a revolving line of credit, and you make payments on (and pay interest on) only the portion of the credit line that you utilize, not the total amount of the credit line.

Business credit cards are generally easier to apply for, and while the strength of your business credit will be taken into consideration, your finances probably won’t be as closely examined, and you won’t have to put up collateral (unless you’re applying for a secured business credit card). Also, unlike business loans and lines of credit, a business credit card usually offers a rewards program that gives you points or cash-back for your spending.

Now, let’s examine the situations that call for using a business credit card vs. applying for a business loan or line of credit.

When To Use A Business Card

Let’s list the circumstances that favor the use of a business credit card over a business loan.

1) You Need Financing For Common Ongoing Expenses

Given the fact that a) you can usually get funding more quickly with a business credit card and b) the funding you can access via a business credit card is significantly less than what you can access with a loan, a business credit card is 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 don’t need.

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 in certain instances.

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 Up Your Business Credit

One helpful feature of just about every business credit card is the fact that they report your card activity to the three major business credit bureaus (Dun & Bradstreet, Equifax Small Business, and Experian Business). If you make your payments in a timely manner and maintain best practices with your credit utilization ratio — that is, the amount of credit you’re currently using divided by the total amount of credit you have available — using a business credit card can help build up your business credit.

Of course, there’s a flip side to this. 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 generally considered good) — use of a business credit card can actually hurt your business credit, so be careful and 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 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’ve decided to get a business credit card, 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.

We’ve compiled a list of the best rewards credit cards for small businesses.

5) You Want Help Tracking Your Business Expenses

With most business credit cards, you’ll get 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

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)

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 are difficult to qualify for), you’ll want to apply for a small business loan.

A loan will likely be needed if you’re looking to expand your business in a significant way.

2) You Want To Minimize Your Interest Payments On The Money You Borrow

When comparing business loans to business credit cards, it’s important to note that, all else being equal, you can get a lower interest rate with a loan or line of credit than you can with a business credit card.

With an online lender, a business with a good credit score and healthy business metrics can get a loan with an APR starting around 6% — or a line of credit with an APR around 8% — which is 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 25 years. 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 business credit cards, it’s important to note that requirements to qualify 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/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, there are options for quick business loans if you apply online.

Which Is Right For Your Small Business?

In conclusion, when deciding between applying for 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 have the ability to qualify for a loan — and are able to provide collateral and a down payment — you should definitely start researching 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 a continuous basis, you’ll want to apply for a business credit card. However, if you only need a small amount to keep you going and don’t want to mess with a credit card, there are options for $5,000 loans and $10,000 loans.

Next Steps

If A Credit Card Is The Right Choice For Your Business…

If you’ve decided to apply for a business credit card, here are some resources to help you in your search:

• How To Get A Business Credit Card: The Step-By-Step Guide
• The Best Business Credit Cards For 2020
• Business Credit Cards For People With Bad Credit

If A Small Business Loan Is The Way To Go…

If a small business loan is what you need, check out the following links to help guide your search:

• How To Get A Small Business Loan: The Step-By-Step Guide
• Types Of Small Business Loans: 12 Types You Should Know
• Best Small Business Loans For 2020: Our Top 10 Picks

Again, if you’ve arrived at this post because your business has been affected by the COVID-19 pandemic, we’ve got resources on business lending for you. Check out our full Coronovirus hub for small businesses, but start by reading What SBA Disaster Loans Are & How To Qualify For One.