Business Tips

How to Choose Between a Business Loan and Business Credit Card

By Christy Bella | July 16, 2019

Starting or running a business needs a ton of resilience and patience, including a lot of faith that things will work out, during seasons when you’re cash strapped and at the brink of closing down your business.

Close friends and relatives won’t come to your rescue, and investors don’t seem like a viable option. This leaves you with only two options. Applying for a business credit card or taking out a business loan.

According to a Small Business Credit Survey conducted by Federal Reserve in 2016, credit cards and business loans continue to be the most common forms of business financing. In the survey, at least 86 per cent of the respondents applied for a business loan. On the other hand, 31 per cent sought credit card financing. Some people used both methods.

Both options come with their own advantages and disadvantages. This article will dive deeper into how these two operate and how to choose the best option for your business.

Business Credit Card vs. Business Loan: The Differences

A business credit card acts as a line of credit. This means you’ll borrow a certain amount of money up to a set limit whenever you wish. You’ll then repay the borrowed amount in instalments each month. An interesting part of this type of financing is you can repay the borrowed amount for as long as you wish, but you must pay a certain amount every month.

In contrast, a business loan is issued as one transaction, and you’ll receive the money upfront. Afterwards, you’ll repay the loan in fixed monthly instalments for a certain period of time fixed by the lender.

For this reason, a business loan is often referred to as an instalment debt while business credit cards are referred to as revolving debt.

However, a business credit card will lower your score because it increases your credit utilization ratio. Typically, anything above 30 per cent is detrimental to your overall score.

In addition, business credit cards allow you to access instant cash, but this comes at a cost. They carry high-interest rates, but you can dodge them by clearing your balance in full each month. Furthermore, you can benefit from rewards, purchase protection, and other perks from using your credit card to make purchases.

Business loans, on the other hand, are best if they offer low-interest rates, but qualifying for such rates is difficult. Also, the whole process from application to disbursement of funds can take months.

Comparing Both Financing Methods

Loan amount: You can get as low as $1,500 up to $5 million with business loans while business credit cards will only offer a maximum of $50,000.
Average APR Rate: Business loan rates range from 4% to 13% while business credit card rates range from 13% to 20%.
Loan Term: On average, business loan terms range from 6 months to 25 years while business credit cards offer low monthly payments, but you can clear the balance in full to avoid interest.
Eligibility: Business loans require one to be in operation for at least 2 years, have a steady business income, and show good credit. To qualify for a business credit card, you need a steady income and a satisfactory personal credit.
Collateral: You don’t need any collateral for a business credit card. For a business loan, you may need security.
Approval Time: Often, you may have to wait for weeks or even months to access funds from a business loan. A business credit card will only take a maximum of 7 days.

A Business Credit Card or a Business Loan: Which Should You Choose?

Now that you know the differences between both financing options, the main question at this point is, “Which option should you go for?” Here’s how to identify which option is best for your business.

A business loan is good for your business if:

You require a great deal of money.
You’re looking to expand your business in any of the following ways: employing new staff, buying new equipment, or moving into a bigger space.
The business has been around for over a year and generates over $100,000 in revenue annually.

On the other hand, a business credit card is good for your business if:

You’re a solopreneur or have other side jobs, but you want to separate finances.
Want to earn rewards through this form of payment.
You need instant cash to take care of an emergency.
You want to access funds through a credit card offering 0% introductory fees but plan on repaying the loan in full before the expiration of the offer.

What to Consider When Considering Both Options

After understanding which situations need which type of financing, it’s time to take a look at the various factors you must consider before settling on either financing option.

Eligibility

This is where your credit score comes into play. Neither option will damage your score, but it’s important to understand that each application results in an inquiry on your report.

One or two inquiries won’t cause any damages but multiple inquiries, especially within a short period will raise eyebrows and lower your score. Therefore, before sending applications to every lender in town, take the time to review your eligibility.

Loan Amount

This is a tricky balancing act because, on one hand, you don’t want to borrow more than what you need. On the other hand, you want to have enough money to fund your project to completion. Business loans offer huge amounts while business credit cards offer a certain credit limit.

Consequently, before applying for either financing option, sit down and review the total amount of money you need to help you make a conscious decision.

Interest Rates

After considering your eligibility and knowing how much money you need, the next important factor to consider is the interest rates. This is an indicator of whether or not the business can afford to take out the loan.

In this case, you want to go for the lowest interest rates in the market for both options. Loans use compound interest, which will pile up fast if you don’t make payments on time.

Benefits

Depending on the lender offering you a business loan, you can get various benefits attached to the loan. For instance, SBA loans offer business owners access to networks, mentorship, and counselling, among other business resources.

Business credit cards, on the other hand, offer lucrative rewards for using the card and also other benefits such as car insurance and trips, which can help you save a lot of money.

Fees

Interest rates aside, it’s also vital to know what other fees apply to the option you intend on choosing. For example, credit cards carry fees such as late payment, foreign transaction, and annual fees.

Business loans include application fees, origination fees, early payment fees, and late payment fees. Keep an eye on these because they may be hidden.

Final Words

Business credit cards and small business loans are both excellent financing options, but they are suitable for various scenarios. However, after going through this article, you’ll be in a better position to make an informed decision on which financing option is suitable for your business.

All in all, when you start hunting for a funding option, the bottom line should be whether the loan will help your business reach its financial goals and save money while at it.