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

Small business funding can help your business stay afloat, pay for expansion, finance equipment purchases, hire new staff, and more. But what’s the best kind of funding for you? Should you sign up for a business credit card, take out a small business loan, or open a line of credit? This post can help you decide.

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 credit cards and loans are very different types of funding, each with its benefits and drawbacks. Let’s take a look at each option:

Business Loans

• Let you access up to $2 million in funding, or even up to $5 million if you take out a Small Business Association loan from one of the top SBA lenders.
• Can be used for many different business purposes, including buying assets, funding business growth projects, debt consolidation/refinancing, and even disaster assistance.
• Most often come in the form of installment loans, though short-term loans for business are also available. (Read our guide to short-term loans to find out more.) This means you’ll get the money in one lump sum and then repay the loan in installments over a set period of time.
• Involve a lengthy application process.
• May require a personal guarantee, lien, or other assets in exchange for funding.
• Come with interest rates that vary depending on the loan type, starting around 2-13% APR.

Note: Another option for small business funding is a business line of credit. A business line of credit is more similar to a business loan in terms of the application process, interest fees, and credit, income, and asset requirements. There’s one key difference, however. Unlike with a loan, a line of credit lets you access only the money you need, when you need it, up to your total credit limit. So 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. Learn how to get a small business line of credit.

Business Credit Cards

• Generally come with lower borrowing amounts, up to $50K.
• Involve higher interest rates, with the APR on business cards averaging more than 21% APR.
• Give you access to a revolving line of credit, and you make payments on (and pay interest on) only the portion of the credit line you utilize, not the total amount available.
• 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. (If you don’t want your personal finances examined at all, check out our list of the best business credit cards with no personal guarantee). Typically, you won’t have to put up collateral, unless you’re applying for a secured business credit card.
• Usually offers a rewards program that gives you points or cash-back for your spending.

So how can you decide if it makes sense to use a business credit card vs. applying for a business loan or line of credit?

When To Use A Business Card

Certain circumstances favor the use of a business credit card over a business loan.

You should consider applying for a card when:

1) You Need Financing For Common Ongoing Expenses

Although you usually can get funding more quickly with 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 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 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) using a business credit card can help build up your business credit.

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 generally considered good), using a business credit card can actually hurt your business credit rating.

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 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’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. Get started with our list of the best rewards credit cards for small businesses.

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

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, it’s important to 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 it 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 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 online.

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, you definitely should 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 an ongoing 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
• 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: Our Top 10 Picks