Business Loan or Credit Card: Which is Better for You?

When it comes to financing options for businesses, the decision between business loan or credit card can have significant implications. This article aims to shed light on the question of which option is better for you by examining the characteristics, advantages, and disadvantages of both business loans and credit cards. Understanding their distinctions will help you make an informed choice tailored to your specific needs. Let’s get cracking!

Understanding Business Loans

First, let’s take a look at business loans, from its characteristics to the types of loans typically available for small enterprises.

Business loans are financial instruments specifically designed to provide businesses with a lump sum of capital to meet their operational needs or fund expansion plans. These loans are typically offered by banks or other financial institutions and are subject to interest charges.

Repayment is made over a predetermined period through regular installments, with interest accrued on the outstanding balance. Business loans require a thorough application process that includes evaluation of creditworthiness, business performance, and collateral assessment.

Advantages of Business Loans

1. Lower interest rates. Business loans often come with lower interest rates compared to other forms of financing, such as credit cards or lines of credit.
2. Fixed repayment terms. Business loans provide a structured repayment plan with fixed monthly installments, allowing for better budgeting and financial planning.
3. Larger loan amounts. Business loans typically offer higher borrowing limits, allowing businesses to secure substantial amounts of capital to support their growth or expansion plans.
4. Improved cash flow management. By obtaining a business loan, businesses can access a lump sum of capital to manage cash flow fluctuations, cover operational expenses, or invest in new opportunities.
5. Flexible usage of funds. Once approved, businesses have the flexibility to allocate the loan funds as needed, whether it’s for purchasing equipment, expanding the premises, hiring additional staff, or marketing campaigns.
6. Potential tax benefits. In some cases, the interest paid on business loans may be tax-deductible, providing potential tax advantages for the business.
7. Building credit history. Successfully repaying a business loan can help establish or improve a business’s credit history, which may increase its eligibility for future financing at more favorable terms.
8. Retaining ownership and control. Unlike seeking equity funding or partnerships, obtaining a business loan allows the business owner to retain full ownership and control of their company.
9. Opportunities for growth and expansion. With access to capital through a business loan, businesses can seize growth opportunities, invest in new markets, launch new products or services, and expand their operations.
10. Potential for long-term cost savings. By utilizing a business loan to invest in cost-saving initiatives such as technology upgrades or process improvements, businesses can realize long-term savings and improved profitability.

Disadvantages of Business Loans

1. Strict qualification requirements. Business loans often have strict qualification criteria, including minimum credit scores, financial statements, and business history, making it challenging for some businesses, especially startups or those with weaker credit profiles, to qualify.
2. Longer approval process. Compared to other financing options, business loans typically have a longer approval process, involving extensive documentation and underwriting procedures, which can delay the access to funds.
3. Collateral requirements. Many business loans require collateral, such as business assets or personal guarantees, which can be burdensome and increase the risk of losing assets in the event of loan default.
4. Debt burden. Taking on a business loan means adding debt to the balance sheet, which increases financial obligations and the need to manage monthly loan repayments, impacting cash flow and profitability.
5. Interest costs. Business loans come with interest charges, which can add up over time, increasing the overall cost of borrowing and reducing the profitability of the business.
6. Limited flexibility. Unlike revolving credit options like credit line or credit cards, a small business loan provides a fixed lump sum of capital, limiting the flexibility to access additional funds if needed during the loan term.
7. Prepayment penalties. Some business loans may impose prepayment penalties if the loan is repaid before the agreed-upon term, potentially discouraging early repayment or refinancing options.
8. Risk of default. If a business fails to make timely loan repayments or faces financial difficulties, it may default on the loan, leading to potential consequences such as damage to credit scores, collection actions, or even business closure.
9. Impact on credit utilization. Utilizing a significant portion of available credit through a business loan can impact the business’s credit utilization ratio, potentially affecting its creditworthiness and ability to secure additional financing in the future.
10. Limited forgiveness or flexibility during challenging times. Unlike some government-backed loans or grants, traditional small business loans may not offer forgiveness options or flexible repayment terms during economic downturns or challenging periods, potentially adding financial strain to the business.

Types of Business Loans Available for Entrepreneurs

So now that you familiarized yourself with the nature of business loans, as well as their pros and cons, let’s check out some of the most common types of loans available for businesses:

1. Term Loans. Term loans are a common type of business loan where a fixed amount of money is borrowed and repaid over a specified period, typically with regular monthly installments. These loans can be used for various purposes, such as working capital, equipment purchase, or business expansion.
2. Small Business Administration (SBA) Loans. SBA loans are government-backed loans designed to support small businesses. The SBA guarantees a portion of the loan, reducing the risk for traditional or online lenders and enabling businesses to access financing with favorable terms and lower down payments.
3. Equipment Loans. Equipment loans are specifically used to finance the purchase or lease of equipment needed for business operations. The equipment being financed often serves as collateral for the loan, making it a secured form of borrowing.
4. Business Lines of Credit. A business line of credit provides a revolving credit facility that allows businesses to access funds up to a predetermined credit limit. It provides flexibility to borrow as needed and make repayments, and interest is charged only on the amount utilized.
5. Invoice Financing. Invoice financing, also known as accounts receivable financing, involves using unpaid customer invoices as collateral to secure a loan. It provides businesses with immediate cash flow by borrowing against outstanding invoices, with the loan amount typically based on a percentage of the invoice value.
6. Merchant Cash Advances. Merchant cash advances are a type of financing where businesses receive a lump sum payment in exchange for a portion of future sales or credit card receivables. Repayment is made through a fixed percentage of daily or weekly sales until the advance, along with fees, is repaid.
7. Commercial Real Estate Loans. Commercial real estate loans are used to finance the purchase, construction, or renovation of commercial properties, such as office buildings, retail spaces, or warehouses. These loans are secured by the property itself.
8. Startup Loans. Startup loans specifically cater to new businesses or entrepreneurs seeking funding to launch their ventures. They may have different qualification criteria and terms, often considering factors like personal credit history and business plan viability.
9. Business Acquisition Loans. Business acquisition loans help entrepreneurs acquire existing businesses. These loans provide financing for the purchase price, allowing entrepreneurs to take over established businesses and leverage their existing customer base and assets.

Exploring Credit Cards for Business

Next, let’s talk about business credit cards, its advantages, disadvantages, and other notable features.

Business credit cards are financial tools designed specifically for businesses to manage expenses and access a revolving line of credit. They function similarly to personal credit cards, except they’re tailored more specially to meet the needs of businesses.

Business owners can make purchases, track expenses, and have the flexibility to repay the balance in full or carry it forward, paying interest on the outstanding amount. They often come with features such as expense tracking, employee card management, and rewards programs tailored to business spending categories.

Advantages of Business Credit Cards

1. Convenient expense management. Business credit cards offer an easy and convenient way to track and manage business expenses. They provide detailed statements, categorized spending reports, and digital tools that simplify expense tracking and bookkeeping.
2. Access to a revolving line of credit. Business credit cards provide a revolving line of credit, allowing businesses to make purchases and pay them off over time. This flexibility can help manage cash flow fluctuations and provide additional working capital when needed.
3. Separation of personal and business expenses. By using a business credit card, business owners can keep personal and business expenses separate. This simplifies accounting and helps maintain clean financial records, making tax preparation and financial analysis easier.
4. Enhanced purchasing power. Business credit cards often come with higher credit limits compared to personal credit cards. This increased purchasing power enables businesses to make larger purchases or cover unexpected expenses that may arise.
5. Rewards and perks. Many business credit cards offer rewards programs tailored to business spending categories, such as travel, office supplies, or advertising. These rewards can include cashback, airline miles, hotel discounts, or other perks, providing potential savings or additional benefits for the business.
6. Improved cash flow management. Utilizing a business credit card can help smooth out cash flow by providing a grace period between the purchase date and the payment due date. This can be particularly helpful when managing irregular revenue or timing discrepancies between income and expenses.
7. Building business credit history. Consistently using and responsibly managing a business credit card can help establish or improve the business’s credit history. This can strengthen the business’s creditworthiness, making it easier to secure other forms of financing in the future.
8. Additional cardholder benefits. Many credit cards for businesses offer the option to issue additional cards to employees, enabling easier expense tracking, setting spending limits, and consolidating payments. This streamlines employee spending and reduces the need for reimbursement processes.
9. Purchase protection and insurance. A business credit card often comes with built-in purchase protection, such as extended warranties, purchase guarantees, and insurance coverage for travel accidents or rental car damage. These features can provide added security and peace of mind for business-related purchases.
10. Acceptance and global usability. Business credit cards are widely accepted by merchants globally, making them a convenient payment method for business transactions, whether in-person, online, or during international travel.

Disadvantages of Business Credit Cards

1. Higher interest rates. Business credit cards often come with higher interest rates compared to other financing options, such as business loans. If the balance is not paid in full each month, the interest charges can accumulate, leading to increased costs.
2. Potential for overspending. The accessibility and convenience of a business credit card can lead to the temptation to overspend. This can result in accumulating debt and financial strain on the business if the spending is not properly managed.
3. Limited credit limits. a business credit card may have lower credit limits compared to other forms of financing. This can restrict the purchasing power of the business, especially for larger expenses or during periods of increased financial needs.
4. Annual fees. Many business-specific credit cards come with annual fees, which can add to the overall cost of using the card. It’s important to consider whether the benefits and rewards outweigh the annual fee for the business’s specific needs.
5. Impact on personal credit. In some cases, a business credit card may require a personal guarantee, which means the business owner is personally liable for the debt. Late payments or high credit card balances can negatively impact the owner’s personal credit score.
6. Risk of employee misuse. Providing additional cards to employees increases the risk of potential misuse or unauthorized expenses. Without proper monitoring and controls in place, it can be challenging to ensure responsible use of business credit cards by employees.
7. Potential for debt accumulation. If the business consistently carries a high balance on the credit card or relies heavily on credit card financing, it can lead to a cycle of debt accumulation, making it challenging to pay off the balance and manage financial obligations.
8. Impact on credit utilization ratio. Utilizing a significant portion of the available credit on a business credit card can negatively affect the business’s credit utilization ratio, potentially impacting its creditworthiness and ability to secure additional financing in the future.
9. Incompatibility with certain vendors. Some vendors or suppliers may not accept credit card payments or may charge additional fees for credit card transactions. This can limit the usefulness of a business credit card in certain business relationships.
10. Limited forgiveness or flexibility during challenging times. Unlike some government-backed loans or grants, a business credit card may not offer forgiveness options or flexible repayment terms during economic downturns or challenging periods. This can add financial strain to the business if it experiences cash flow difficulties.

Other Notable Features of Business Credit Cards

Now that you know the pros and cons of using a business credit card, let’s delve into its other notable features:

1. Rewards programs. A business credit card offers rewards programs tailored to business spending categories, allowing cardholders to earn cashback, points, airline miles, or other benefits for eligible purchases.
2. Expense tracking tools. A business credit card often comes with expense tracking features, including detailed statements, categorized spending reports, and integration with accounting software. These tools simplify expense management and streamline financial record-keeping.
3. Employee card management. A business credit card often allows business owners to issue additional cards to employees. This feature enables easy expense tracking, setting spending limits for each employee, and centralizing payments for better control and management.
4. Purchase protection. A business credit card may offer purchase protection benefits, such as extended warranties, price protection, and fraud liability protection. These features provide additional security and peace of mind for business-related purchases.
5. Travel benefits. Some credit cards provide travel-related perks, such as airport lounge access, travel insurance coverage, concierge services, or discounts on flights, hotels, or car rentals. These benefits can be valuable for businesses that frequently travel for business purposes.
6. Introductory offers. Most business credit cards come with introductory offers, such as low or 0% APR (Annual Percentage Rate) for a certain period, waived annual fees for the first year, or bonus rewards for meeting specific spending requirements. These promotions can provide cost savings or enhanced rewards for new cardholders.
7. Business-specific tools and resources. Some small business credit cards offer additional resources tailored to business owners, such as access to business expense management platforms, educational resources, or online forums to connect with other business professionals.
8. Cash flow management features. A business credit card often provides flexible payment options, allowing cardholders to pay the balance in full or carry it forward with interest. This flexibility can help businesses manage cash flow and meet short-term financing needs.
9. Integration with financial software. Many business credit cards can be seamlessly integrated with accounting or financial software systems, making it easier to reconcile transactions, track expenses, and streamline financial management processes.
10. Business-specific discounts and partnerships. Some business credit cards offer partnerships with various vendors or suppliers, providing cardholders with exclusive discounts, offers, or benefits when making purchases from those partners.

It’s important to note that the specific features and benefits of business credit cards can vary depending on the issuer, card type, and individual cardholder eligibility or terms. It’s recommended to carefully review the terms and conditions, fees, and benefits of each card to determine the best fit for the business’s specific needs.

Factors to Consider When Using Business Loan or Credit Card

When deciding between business loan or credit card for your business’s financing needs, several crucial factors should be taken into account. Understanding these factors will help you make an informed decision that aligns with your business’s specific requirements and financial goals. These include:

1. Interest rates and fees. Compare the interest rates and fees associated with business loans and credit cards. Consider the annual percentage rate (APR), origination fees, annual fees, late payment fees, and any other charges that may apply.
2. Credit limit and borrowing capacity. Evaluate the credit limit offered by credit cards and the borrowing capacity provided by business loans. Assess whether it aligns with your business’s funding needs and growth plans.
3. Repayment terms and flexibility. Review the repayment terms for both options. Consider the length of the repayment period, installment amounts, and flexibility in making early or additional payments. Determine which option provides repayment terms that best suit your business’s cash flow and financial goals.
4. Qualification criteria. Understand the qualification criteria for business loans and credit cards. Factors such as credit history, business financials, time in business, and collateral requirements can impact eligibility. Assess which option aligns better with your business’s current qualifications.
5. Purpose and usage. Evaluate the purpose for which you need financing. Consider whether a lump sum loan or a revolving line of credit is more suitable for your business’s ongoing needs and spending patterns.
6. Risk management. Assess the potential risks associated with each option. Consider the risk of taking on debt, the impact on your business’s creditworthiness, and the consequences of defaulting on payments. Determine which option aligns better with your risk tolerance and ability to manage debt.
7. Rewards and benefits. If considering a business credit card, evaluate the rewards and benefits offered. Consider whether the rewards program aligns with your business’s spending habits and whether the benefits provided outweigh the associated costs, such as annual fees.
8. Financial impact on cash flow. Assess the financial impact of loan repayments or credit card payments on your business’s cash flow. Consider whether the monthly payments or interest charges will strain your cash flow or limit your ability to reinvest in the business.
9. Long-term financial goals. Consider your business’s long-term financial goals. Assess whether a business loan or credit card aligns better with those goals, taking into account factors such as interest costs, credit building opportunities, and potential impact on future financing.
10. Professional advice and consultation. Seek advice from financial professionals or business advisors who can provide insights tailored to your specific business situation. Their expertise can help you make an informed decision based on your business’s unique needs and financial circumstances.

Frequently Asked Questions

Why credit cards are better than loans?

Credit cards can be advantageous compared to loans for certain businesses due to their convenience, flexibility, and rewards programs. They provide businesses with access to a revolving line of credit, the ability to separate personal and business expenses, and the opportunity to earn rewards on eligible purchases.

Is it good to use credit card for business?

Using a credit card for business can have its benefits, such as convenient expense management, access to a revolving line of credit, and the potential to earn rewards. However, it’s essential to use credit cards responsibly, pay off balances on time, and be mindful of high interest rates and fees to avoid accumulating debt and negatively impacting your business’s financial health.

Is it better to have business or personal credit?

It is generally advisable to have both business and personal credit profiles. Maintaining separate credit profiles allows for better organization, helps to establish business creditworthiness, and avoids commingling personal and business finances. However, each has its advantages, and the optimal approach depends on the specific needs and circumstances of the business.

Which one is the best credit card or loan?

Determining whether a credit card or a loan is the best option depends on the specific needs of your business. Credit cards provide flexibility, rewards, and convenient expense management, while loans offer larger funding amounts and potentially lower interest rates. Evaluating factors such as interest rates, repayment terms, borrowing capacity, and the purpose of financing will help you decide which option aligns better with your business’s financial goals and circumstances.

Why is credit better than money?

Credit offers certain advantages over cash, such as convenience, security, and the ability to make purchases before having the necessary funds. It allows for deferred payment and the opportunity to earn rewards, while cash may be more limiting in terms of transactional convenience and tracking expenses. However, the suitability of credit versus cash depends on individual financial circumstances and preferences.

Conclusion

So which is better: business loan or credit card? Well, it depends on your needs.

At any rate, both business loans and credit cards offer valuable financing options for businesses. Each has its advantages, from the flexibility and convenience of credit cards to the larger funding amounts and potentially lower interest rates of loans. The choice ultimately depends on the specific needs, financial goals, and circumstances of your business.

By carefully considering the factors discussed, you can make an informed decision that aligns with your business’s unique requirements. Whether you opt for a business loan or credit card, both can be valuable tools to support your business’s growth and financial success.

Let's talk small business.

There’s the 1West way to get smart financing fast — and there’s everything else. We believe in your small business and we believe in our approach. No nonsense. No surprises. Just expert guidance from start to finish.

Find out what's next