How to Choose Between a Business Credit Card vs. Business Loan

At some point in the course of your business’s life, or if you’re just starting a business, you might find yourself wondering how to finance your business. This question can come about for a number of reasons—maybe you’ve hit a cash crunch, need capital to pursue a specific business opportunity, are looking to expand, or are just getting started. No matter the reason, it’s never easy to decide if debt is the solution.

In these situations, you should perform a cost-benefit analysis. Do this in order to ensure that your total cost of incurring the capital (APR, origination fee, closing costs) is less than what you stand to gain from the investment. If you’ve decided “Yes,” my business needs financing to achieve its goals, your next step is to find the best product for your situation.

There are a number of products available to business owners, from bank loans to SBA loans to invoice financing, and even business credit cards, but how do you decide between a traditional loan and using a business credit card?

It’s not simple. There are many situations in which a business credit card should be considered an option in place of a business loan. There are even some situations in which a business credit card is hands down the best option. We’re going to cover the pros and cons of each to help you compare the two options and decide which is best for your business in the following sections:

Business Credit Card vs. Small Business Loans

There are some pretty stark differences between a business loan and a business credit card. Like the fact that one is a lump sum, while the other is more like a revolving line of credit. Below we’ll compare the features of the two so that you can hopefully make an informed decision when it comes to choosing which one is right for your business debt.

Business Credit Card vs. Small Business Loan: The Specifics

Features Business Credit Card Small Business Loan
Amount
$30,000 – $50,000
Up to $5 million
Type of Loan
Revolving credit
Lump sum
Qualifications
Good credit
Good credit, strong business history, minimum monthly or annual revenue
APR
17% on average
3%-150%
When You’d Use It
When you need a small amount of money quickly that you intend to pay back in a timely manner
When you need a large sum, and months to years to pay it back
Collateral Required?
No collateral
Frequently require collateral

As you can see from a quick glance, a business loan and a business credit card would be able to serve your small business needs but in very different ways, so you should take a good look at your business needs before deciding on one or the other.

Loans Pros and Cons

There are some clear cases in which a business loan is going to be a much better product for you. If you’re looking to refinance debt, heavily invest in your business by expanding or getting new equipment, or even buying a big bulk of inventory, a small business loan will probably be the better option for you.

But there are definitely some restrictions that come with a loan that you should be aware of, especially if you’ve never taken one on before. Many business owners already understand how business credit cards work because they’ve had personal credit cards before but if you’ve never taken out a loan it could be foreign territory for you.

Small Business Loan Pros

Some of the pros of small business loans is that if you’re a highly qualified business owner, you can get some great deals either in the form of an SBA loan or a bank loan. These loans typically come with low-interest rates and reasonable repayment periods that are manageable. Depending on the type of loan, you could have up to 25 years to pay it back, which is a significant chunk of time.

While some loans, like the SBA loans, take some time to process, those from alternative lenders could process in as little as 24 hours and you could get the funds you need in as little as a few days. But the biggest pro of a small business loan where a credit card just can’t compete is with the amount, you’ll get far more money to borrow if you get a small business loan than you would if you were just using the revolving credit offered by a credit card.

Small Business Loan Cons

While the possibility for low interest rates is definitely a pro when it comes to small business loans, on the flip side they can also come with very high interest rates. Some alternative lenders could charge business loan interest rates as much as 150% for a small business loan.

Another con of small business loans is that they frequently require quite a bit of paperwork and they also have more strict qualifying business loan requirements than you would experience when applying for a business credit card. This means if you don’t have the best credit or if you haven’t been in business for long, you might only have access to high interest business loans.

Credit Card Pros and Cons

You’re probably pretty familiar with how these work because chances are, you have a personal credit card already that you use for personal purchases. A business credit card is something you should already have for your business to help keep your personal and business finances separate and to help boost your business credit score.

We’ll go over the pros and cons of business credit cards and why you might want to use one in place of a business loan.

Credit Card Pros

An obvious pro of a business credit card is that you might already have one with a credit line large enough for whatever purchase you need to make. This level of convenience could be hard to pass up. Another pro is that even if you don’t have a business credit card yet, getting approved for one is frequently far easier than getting approved for a good small business loan. You won’t need collateral and you also likely won’t need to gather as much paperwork like proof of years in business or annual revenue in order to apply.

Some credit cards even come with 0% APR for a certain number of months after you sign up which is a huge get if you qualify for such a card. This can go a long way in helping you pay off whatever large purchase you made for your business without interest. Keep in mind though, you might forfeit your 0% intro APR period if you don’t make your minimum monthly payments on time every time. Additionally, you’ve got to make sure you pay the debt down before the APR kicks in and make your payments on time or else you could be putting your business credit at risk. The good thing though is that if you do pay on time, you could boost your business credit.

Credit Card Cons

One con of a business credit card is that it can’t really be used in place of a loan in every scenario because sometimes a card can’t be used for certain purchases. Additionally, you have to consider whether your credit limit is enough to cover whatever purchase you want to make, if not then that’s a major con and a credit card won’t work in place of a loan.

Additionally, if you pay late or don’t make your minimum payments, you could damage your credit score which would make getting another credit card or a loan more difficult down the road. Even carrying a very high balance on your credit card could potentially hurt your credit score, the more of your revolving credit you use, the more it impacts your score.

Deciding Between a Business Credit Card vs. Loan?

It’s a hard question to answer, whether you should use a business credit card or a loan for your business financing because it greatly depends on your specific business situation. In certain scenarios, it will be better for your business to get financing from a business credit card than from a business loan. Thanks to long lists of perks and capabilities, business cards are becoming more small business-friendly than ever.

Before choosing which one to go with, you’ll need to consider a few things. Your qualifications will do a lot to dictate which products you’re eligible for, which can make the process a bit more simple for you. This means your credit score, how long you’ve been in business, and your business’s revenue. You’ll also want to think about what exactly you need money for, if it’s something on the smaller side that a credit card can cover, that might be a good way to go. Things like equipment though might be better purchased using a business loan so think carefully.

Financing your business with a credit or charge card is absolutely an option. However, you need to know the best solutions out there for this very function. Be diligent, compare all your options, and make sure your choice is something your business can easily handle financially. You’ve got to be incredibly responsible when you use a credit card for financing, so make sure the choice is well-thought through.

Founding Editor and VP at Fundera at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. 

Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.

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