Business Credit Card vs. Small Business Loan: Which is Better?


Most small businesses require a bit of financial help to run or expand at one point. Whether you need money to hire more employees or purchase new equipment, you need a funding source. How are you going to fund these ongoing capital requirements if you do not have enough savings?

Should you opt for a small business loan or a credit card?

Business Credit Card vs. Small Business Loan

A business credit card is just a revolving line of credit that you can use and repay as many times as you want. You can do this as long as you keep making minimum monthly payments and do not exceed the credit limit. Whether you want to pay travel expenses or buy new equipment, you can use a business card as you please.

On the other hand, small business loans provide you with a lump sum of money that you need to repay monthly at a fixed rate of interest. You should take out this loan if you want to make a large one-time investment. Loans given by online lenders are smaller in amount and are can be given to persons with poor credit and no collateral.

Advantages and Disadvantages of Business Credit Cards

Best for businesses that need rewards – You should get a card that offers you rewards every time buy something. You might get cash back for spending on cable, internet, or gas. Some business cards also offer 0-percent APR, meaning that you will not be charged any interest for a specific period.

Businesses without collateral can get funding – when applying for a credit card, you do not need to provide any collateral. Therefore, if you were to default on your payments, none of your assets will be seized.

They can help you to track spending – you can track your business expenses and keep your personal and business expenses separate.

They carry higher APR – because business credit cards are unsecured, they have higher APRs. Moreover, most business cards have variable APR, meaning that the interest rises and falls depending on prime rates.

High balances affect your credit score – having a high balance will affect your credit score negatively. This means that you should use the card prudently and make payments on time.

High annual fees – being over the limit and making late payments could invite high annual fees. You need to read the agreement carefully to be aware of all potential costs.

Advantages and Disadvantages of Loans through Banks

Good for businesses with collateral – for a small business loan, you will probably need collateral. Although defaulting means that you have to forfeit the asset, giving collateral might mean lower rates of interest.

Approval is tough – big banks only approve a small percentage of business loans.

The loan takes a long time to get to you – you need to be patient.

Stringent lending requirements – business loans through banks have stricter requirements than credit cards and online loans.

You need to appear in person –you have to present yourself to the bank to complete the application unlike with online loans.

Advantages and Disadvantages of Online Business Loans

You get the money quickly – if you need funds urgently, you should apply for an online business loan.

People without collateral can get them – most online lenders give smaller amounts and do not ask for collateral.

Higher interest rates – short-term loans carry higher interests than bank loans.

Extra fees – an online lender charges extra fees, including origination fees and prepayment penalties.

When it comes to business loans vs. credit cards, you should compare the pros and cons of each before you choose.

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