Should You Finance Your Business with a Credit Card or a Loan?
Credit Cards vs Business Loans
A business credit card is similar to a loan, but it’s usually an expensive one. With a credit card, you borrow money from the bank with a promise to pay it back at the end of the monthly billing cycle. If you pay your monthly bill in full, you won’t be charged any interest and essentially can borrow money for free. But if you don’t fully pay off your balance, the interest charges can be obscene.
A loan has a more concrete set of stipulations. You’ll pay interest on the money you borrow, but at a lesser rate than a credit card APR. Greater sums of money are usually available with loans and you have a longer period to repay them. Still, the cost of doing business with a loan can be expensive (and time consuming) if your credit history isn’t superb.
What’s the best way to fund your business? Let’s review the pros and cons of business loans and credit cards.
Pros of Credit Cards
1. No Restrictions on What You Can Purchase
Credit cards don’t have restrictions on how you can use them. Some loans, such as the SBA Microloan, can’t be used to pay off debts or purchase real estate. With a credit card, the decision of what to buy is entirely in your hands.
2. Easy Approval Process
It’s fairly easy to get approved for a business loan. If you have a good credit score, you shouldn’t have any trouble getting a business credit card with a decent APR.
3. No Interest Charges
If you apply for a credit card, you won’t have to pay for interest charges if you pay off the balance in full each month. For example, if you spend $2000 in September but pay the full $2000 back at the end of the month, you will have just gotten a free $2000 loan for the month. Some credit cards also have introductory periods with no APR on purchases – sometimes for as long as 21 months!
Cons of Credit Cards
1. Costly Financing
Credit cards can be very expensive if you don’t pay them off. In fact, the average interest rate for a business credit card is 14.59 percent! If your card doesn’t have a no-APR introductory period, you could be paying exorbitant sums for the privilege of using it. And that’s before counting any annual fees!
2. Lower Financing Amounts
You’ll have access to less cash since credit card limits are usually smaller than the amounts given by loan companies. If you need $8000 but only have a $5000 credit card limit, you’ll have to find the remaining $3000 elsewhere.
Pros of Business Loans
1. Payoff Term
You’ll have a longer time frame to pay off a loan in comparison to a credit card. With credit cards, you must pay the bank back in full each month to avoid interest charges. With a loan, you’ll get a certain number of months to pay it back and can pay in installments.
2. Larger Funding Amounts
More cash is available for companies seeking business loans rather than business credit cards. For example, SBA 504 loans start at $125,000 and can reach as high as $20 million.
3. Lower Interest Rates
Loans almost always have lower interest rates than credit cards, especially SBA loans where rates can be as low as 4 percent fixed. Credit cards with 4 percent interest rates are about as common as unicorns!
Cons of Business Loans
1. Financing Restrictions
The SBA places restrictions on what their business loans can be used for. For example, the SBA 504 loan must be used on purchases like real estate but can’t be used to pay off debts. Still, this isn’t the case for all business loans. For example, we provide loans to business owners, but don’t discriminate on how they can utilize their financing once they receive it.
2. Collateral Required
Some lenders will require a form of collateral, unlike an unsecured credit card. If you don’t want to put up collateral, we suggest researching unsecured business loans.
3. Considerable Paperwork
A loan provider will want not only a good credit score, but a business plan, balance sheet, and proof that you make enough profit to repay the loan.
Is a Credit Card or Loan Right for Your Business?
Credit cards and loans can both provide capital to your business, but they should only be used in certain circumstances. If you have a short-term need that doesn’t require significant capital, using a credit card and paying it back quickly might be a cheaper option. Still, if you’re starting an expansion project or need to purchase expensive equipment, a business loan with a low interest rate will be your best bet.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.