Business owners searching for funding sources are likely to converge on two options: business credit cards and business loans/lines of credit. In the following paragraphs, we’re going to be comparing both of these common sources of business financing and telling you situations that decision for working with them.
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If you’ve reached this post since your business continues to be affected by the COVID-19 pandemic, we’ve got resources on business lending for you. Take a look at our full Coronovirus hub for smaller businesses, but start by reading What SBA Disaster Loans Are & How you can Be eligible for a One and Small Business Loan Resources & Guides for Businesses Impacted by The Coronavirus.
Credit Cards VS Business Loans: A Quick Comparison
There are a few fairly obvious differences between business charge cards and loans, as well as some less obvious ones. Let’s go through these differences.
With a company loan, with respect to the lender, you can get up to $2 million in funding — perhaps even up to $5 million with an SBA loan. Loans can be used for many different business purposes — asset purchasing, business growth projects, debt consolidation/refinancing, and, yes, disaster assistance. Even though borrowing amounts can be quite high with loans, interest rates tend to be significantly lower than what you’ll find with business credit cards.
Generally, loans are available in the form of installment loans, though short-term loans for business are also available. You’ll obtain the profit one lump sum payment after which repay the loan in installments on the set length of time. Unfortunately, the application process could be lengthy, and you'll need to pledge a personal guarantee, lien, or any other assets in return for getting your needed funding. Even though a company credit line more closely resembles using a business credit card than does a business loan, wrinkles of credit tend to be more akin to a company loan in terms of the application process, credit/income/asset requirements, and interest fees involved.
Business credit cards are different. Borrowing amounts are lower — generally as much as $50K. Rates of interest are higher — basic business cards often start at around 12% APR while loans start around 6-7% APR. And while a loan gives you access to a lump sum of cash which must then get paid in installments, a business charge card essentially gives you access to a revolving line of credit, and also you make payments on (and pay interest on) just the portion of the credit line that you simply utilize, not the total amount of the line of credit.
Business credit cards are generally simpler to make an application for, and while the effectiveness of your company credit will be taken into consideration, your money probably won’t be as closely examined, and also you won’t need to put up collateral (unless you’re applying for a secured business charge card). Also, unlike business loans and lines of credit, a business credit card usually offers a rewards program that gives you points or cash-back for your spending.
Now, let’s examine the situations that decision for using a company charge card vs. trying to get a business loan or line of credit.
When To utilize a Business Card
Let’s list the circumstances that favor the use of a business charge card over a business loan.
1) You Need Financing For Common Ongoing Expenses
Given the truth that a) you are able to usually get funding more quickly with an instant approval business charge card and b) the funding you have access to using a business charge card is really a lot less than what you can access having a loan, a business credit card is the perfect method of getting capital for everyday business expenses.
Because credit cards gives you a revolving credit line, you won’t be borrowing more than you'll need — and also you won’t be paying interest on money you don’t need.
2) You Want To Pay 0% Interest (for a while)
Many business credit card issuers present an introductory 0% APR period using their charge cards. The 0% APR period typically lasts 9-12 months, however, you can find offers that extend this period to 18-21 months in certain instances.
This is particularly helpful for business people who desire to make some significant purchases in the short term. Credit cards offering a substantial 0% APR period can end up saving you lots of cash on interest payments.
3) You Want To Develop Your company Credit
One helpful feature of virtually watch charge card is the fact that they report your card activity towards the three major business credit agencies (Dun & Bradstreet, Equifax Small company, and Experian Business). If you make your payments in a timely manner and keep guidelines with your credit utilization ratio — that's, the amount of credit you’re currently using divided by the amount of credit you have available — utilizing a business credit card might help develop your business credit.
Of course, there’s a other side for this. Should you don’t make a payment as required — or if you use a greater proportion of the credit than the credit agencies like (less than 30% is generally considered good) — utilization of a company charge card can actually hurt your company credit, so be careful and don’t spend more than you can afford to pay for down.
4) You need to Earn Rewards/Cash Back For Your Spending
Most business charge cards are made to perhaps you have earn rewards or cash return if you use the credit card to make purchases. You may even be able to find a card that targets its highest reward-earning in the purchase categories your company uses most.
If you’ve chose to get a business credit card, pay particular attention to the rewards scheme provided by the credit card issuer. This way, you can get the credit card that gives you the most value during the form of reward points or cash back.
We’ve compiled a list of the best rewards charge cards for smaller businesses.
5) You Want Help Tracking Your company Expenses
With most business charge cards, you’ll obtain a monthly billing statement that details your transactions for the month. A number of these cards also allow you to link to accounting software, giving you another way to track your company expenses in real-time.
When To utilize a Small Business Loan
Now, let’s enter into the circumstances that call for that use of a company loan or line of credit.
1) You need to Finance A sizable Expense (Up To $2 Million)
While credit cards are useful for financing smaller purchases, if you want to finance expenses worth as much as $2 million (you can even get up to $5 million with an SBA loan, though those take time and effort to be eligible for a), you’ll wish to apply for a small business loan.
A loan will likely be needed if you’re seeking to expand your business inside a significant way.
2) You need to Minimize Your Interest Payments On The Money You Borrow
When comparing loans to business credit cards, it’s important to note that, everything else being equal, you can get a lower interest rate with a loan or credit line than you are able to having a business credit card.
With a web-based lender, a business with a decent credit score and healthy business metrics can get financing with an APR starting around 6% — or perhaps a credit line by having an APR around 8% — that is a significantly lower APR than what you’ll be offered with even the simplest business charge card.
3) You need to Repay What You Borrow On the Longer Stretch Of Time
Online lenders often offer loans with term lengths as high as 7 years. SBA loans can even carry term lengths of up to Twenty five years. Suffice to state, if you wish to borrow a significant amount of cash and you’re seeking to spread out repayment on the significant period of time, a business loan is the approach to take.
A Word Of Caution Regarding Business Loans
When comparing business loans with business charge cards, it’s worth noting that requirements to be eligible for a a company loan tend to be more stringent compared to requirements to qualify for a business charge card. You’ll likely need to provide collateral, and for large loans, you will need to create a significant down payment.
Another factor to consider: You can get funding more quickly with a business credit card than you can with a business loan/line of credit. You may be waiting a couple weeks or longer for funding from the business lender. If you apply successfully for any business charge card, you ought to be able to get funded within a week.
That said, you will find choices for quick business loans should you apply online.
Which Suits Your online business?
In conclusion, when deciding between trying to get a company credit card or a business loan to pay for the price of your business expenses, it’s vital that you consider your unique business situation and funding needs.
If you'll need more than $50K in funding and you have the opportunity to qualify for financing — and are in a position to provide collateral and a deposit — you should definitely start researching business lenders.
If you need less than $50K, you need to take a loan at 0% curiosity about short term, or you want to earn rewards for your purchases on a continuous basis, you’ll want to obtain a business charge card. However, should you just have a small amount to keep you going and don’t wish to wreck havoc on a credit card, you will find choices for $5,000 loans and $10,000 loans.
Next Steps
If A Credit Card Is The Right Option for Your Business…
If you’ve decided to apply for a business charge card, here are a few resources that will help you during your search:
- How To obtain a Business Charge card: The Step-By-Step Guide
- The Best Business Credit Cards For 2022
- Business Charge cards For People With Bad Credit
If A Small Business Loan Is The Method to Go…
If a small company loan is exactly what you need, browse the following links to assist guide your search:
- How To obtain a Small company Loan: The Step-By-Step Guide
- Types Of Small company Loans: 12 Types You Should Know
- Best Small Business Loans For 2022: Our Top ten Picks
Again, if you’ve reached this post since your business continues to be affected by the COVID-19 pandemic, we’ve got resources on business lending for you. Take a look at our full Coronovirus hub for small businesses, but begin by reading What SBA Disaster Loans Are & How you can Be eligible for a One.
