Business Loan Vs Credit Card – Key Considerations

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Starting and running a successful business costs money, and deciding when and how to borrow money is one of the most important financial decisions you’ll make as a business owner. While demand for business loans has increased by 8% in 12 months, borrowing money is a business expense that can take away from your profits and lead to instability. However, a business can invest in itself and thrive with the correct financing. Business loans and credit cards are two popular ways to give your business a much-needed cash infusion. But what are the differences between a business loan and a credit card?

Business loans

Business loans provide businesses with a lump sum that they must pay back by a certain time with interest. There are different types of business loans designed for different purposes. Small, short-term business loans can help businesses with immediate funding needs, such as purchasing stock and typically have a six to 24-month term. Long-term business loans are usually for larger amounts and provide finance for longer-term investments such as purchasing or renovating a building.

Business credit cards

A business credit card allows you to borrow up to a preset limit. You pay interest on the borrowed amount and can pay off the minimum payment each month or the full amount. The balance will accrue interest, but as you repay the money borrowed, you can draw on the funds again up to your credit limit. Some providers will also let you have employee cards linked to the business account. This type of financing is designed for short-term business financial needs, similar to a short-term loan. It can also provide you with an emergency fund which you can access quickly if required.

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David Luck, co-founder and CEO of Capital on Tap says “We continue to see small businesses overlooked and underserved by the large incumbent banks. Our customers want a simple, seamless finance platform to help run their small business. Today, we see a greater need for business credit cards, spend management tools, and flexible funding in order to help them grow.”

Business loans vs credit cards

Credit cards and business loans can provide the capital you need for your business, but each has unique pros and cons to consider.

Business loans pros and cons

With a business loan, you can borrow more and over a longer period at a lower price. These loans aren’t particularly flexible and can be harder to qualify for. They also don’t tend to offer rewards.

Pros

  • Borrow larger amounts and receive the funds up front;
  • Ideal for long-term borrowing, with many lenders allowing businesses to borrow for up to five years;
  • Lower interest rates are available depending on several factors, including your credit history;
  • Useful for funding big, one-off projects such as buying new equipment or expanding the business; and
  • From the start, you’ll know how much interest you’ll be paying and how much your monthly repayments will be.

Cons

  • Limited flexibility – you’ll need to know exactly how much you need to borrow from the outset;
  • Some providers have a minimum loan amount which could be considerably more than what you need to borrow;
  • If you are a startup or have a poor credit history, you may struggle to get approved;
  • Some lenders require a personal guarantee and collateral before lending;
  • You won’t earn any rewards or perks for taking out the loan; and
  • It may not be the best option if you have cash flow issues.
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Photo by Andrea Piacquadio from Pexels

Business credit cards pros and cons

Business credit cards tend to have fewer eligibility requirements, which help you improve your business’s short-term cash flow and enable you to earn rewards on your business spending. Over the medium and long term, borrowing on a credit card is much more expensive.

Pros

  • A business credit card is good for improving cash flow and occasional short-term borrowing;
  • Incredibly flexible — use it as much or as little as you need;
  • You won’t be charged interest if you pay your credit card balance in full each month;
  • Using a credit card regularly will improve your business credit score;
  • Additional business credit cards can be made available for employees;
  • Some allow you to monitor spending in real-time and set spending limits; and
  • You can earn perks and rewards on your business spending.

Cons

  • A business credit card isn’t suitable for long-term borrowing or financing a large project as it can become very expensive;
  • Annual interest rates are usually higher than business loans;
  • If you carry a balance over each month, it will cost you more; and
  • The card provider can change your credit limit at any time.

Find out more information about business credit cards and how they can help your business achieve its goals.

Business loan or credit card?

Which is better will entirely depend on your circumstances and what you want to do with the money. A business loan could be the best option if you’re looking to fund a major project or have considerable expenses. It will be cheaper, and you’ll know how much you’ll be paying in interest from the outset. You can also take a reasonably long time to repay. However, a business credit card offers much more flexibility than a business loan, can help with your business cash flow, boost your business’s credit score, and let you earn rewards if you use it regularly and clear the balance in full each month.

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