Business Loan vs. Business Credit Card: Which Is Right for You?
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Business loans and business credit cards are two of the most common types of financing for small-business owners. In general, business loans are best suited for larger purchases and investments in your company, whereas business credit cards are ideal for day-to-day and ongoing expenses.
Here’s what you need to know about these financing options and how to choose the right one for your business.
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Business loan vs. business credit card
Business loan | Business credit card | |
|---|---|---|
Typical funding amount | Ranges up to $5 million or more. | Ranges up to $50,000 or more. |
Repayment terms | Installment loan. Get a lump sum and repay it (with interest) in regular payments over a specific period of time. | Revolving line of credit. Borrow from the credit card as needed and make minimum monthly payments. Pay off your entire balance every month to avoid interest. |
APR range | 6% to 99%, but varies based on loan type. | 18% to 36%. |
Qualification requirements | May need good credit, strong business finances and multiple years in operation to qualify. | Likely need a good personal credit history. New businesses with no revenue can still qualify. |
Funding time | May take up to 30 days or longer, depending on the product. | Typically can receive approval within minutes. |
Best for | Large investments, such as equipment purchases, business expansion and debt refinancing. | Daily and ongoing expenses, such as gas and travel costs, inventory purchases and utilities. |
What is a business loan?
With a business loan, you receive a lump sum of money from a lender and pay it back, with interest, over a specific period of time. Different types of business loans include bank loans, SBA loans, equipment loans and microloans, among others.
Pros
High borrowing maximums. Business loans typically have higher borrowing maximums than business credit cards. SBA loans, for example, are usually available in amounts up to $5 million.
Lower interest rates. Although business loan rates vary based on the individual product and your qualifications, many financing options carry lower rates than small-business credit cards. Bank and SBA loans offer the most competitive interest rates, ranging from 6.42% to 12.41% and 11% to 14.5%, respectively.
Long repayment terms. Whereas business credit cards require you to pay off your balance every month to avoid accruing interest, most business loans provide a lump sum that you can pay back (with interest) over a longer period of time. Some SBA and commercial real estate loans offer repayment terms up to 25 years.
» MORE: What is a business loan?
Cons
Physical collateral may be required. Some business loans require physical collateral, such as equipment, inventory or real estate. These assets are used to secure your loan, and in the case of default, your lender can claim them to recover its losses. Although there are certain secured business credit cards, the majority of options do not require specific collateral.
Can be hard to qualify. Some business loans, especially bank and SBA loans, have strict eligibility criteria and may require that you have good credit, strong finances and multiple years in business to qualify. Although online loans can be more flexible, you’ll still typically need established revenue and at least six months in operation to access financing.
Funding process can be slow. Certain business loan options can fund within 24 hours, but many products have slower processing times. Business bank loans, for instance, often require extensive documentation, and funding may take anywhere from several days to several weeks or longer.
What is a business credit card?
A business credit card works like a personal credit card; it’s a revolving line of credit that lets you make purchases (within a specified limit), repay the full amount, or a portion of the balance, and repeat the cycle. Unlike personal credit cards, however, business credit cards are designed specifically for entrepreneurs, offering benefits such as free employee cards and rewards on everyday business spending.
Pros
Flexible functionality. Business credit cards offer greater flexibility compared to many small-business loan options. With a business credit card, you can pull from a revolving set of funds — meaning you don’t need to reapply again and again to get access to working capital. Additionally, if you pay your credit card balance in full each month, you don’t have to worry about accruing or paying interest.
Dedicated rewards. Business credit cards can provide a wide variety of perks, including cash back, airline miles and rewards points. Many cards allow you to earn these types of rewards on categories where small businesses spend the most, such as travel, shipping, utilities and office supplies, among others. Business credit cards can also offer benefits such as sign-up bonuses and 0% introductory APR periods. During a 0% intro APR period, you can carry a balance without accruing interest. As long as you pay the full balance before the intro period ends, this type of card can be useful for startup costs.
Easy to qualify. Although most small-business credit cards will require good-to-excellent personal credit, you don’t necessarily need a certain time in business or established annual revenue to qualify. Business credit cards are available for startups, as well as freelancers and self-employed individuals. Unlike small-business loan lenders, credit card providers tend to focus on your personal credit history and income.
Fast application process. You can usually apply for a business credit card and receive a decision within minutes, if not instantly. Business credit card applications don’t typically require documentation — instead, you’ll just need to provide details about yourself and your business.
Helps establish your business and build credit. For newer companies in particular, business credit cards can help you establish a financial history. Responsible spending on your credit card also allows you to build business credit, which will help you qualify for other financing products, like small-business loans, in the future.
Cons
Potentially high, variable interest rates. Interest rates on business credit cards tend to range from approximately 18% to 36% — and are subject to change based on the market and prime rate. Although online loans can have high interest rates, many other business loan products offer lower APRs. If you don’t pay your credit card balance in full each month, interest will start to accrue and this debt can quickly become expensive.
Can negatively impact your personal credit. Not all business credit card issuers report to the personal credit bureaus, but most of the ones that do will only report negative information. Therefore, if you miss payments or become delinquent on your business credit card account, your personal credit score may be affected.
Limited federal protections. The 2009 Credit Card Act placed limits on interest rate changes and fees and established greater transparency requirements for credit card statements. The law offers protection for consumers who have personal credit cards, but these same protections do not apply to business credit cards.
Business loan vs. business credit card: How to choose
If you’re comparing business credit cards vs. business loans, there are different scenarios where each option may be better suited for your needs.
Business credit cards are a good option if:
You’re looking to pay for everyday or ongoing expenses and earn rewards in the process.
You’re a new business and want to establish a financial history and build credit.
You need a smaller amount of startup funding and can take advantage of a 0% intro APR period.
Business loans are a good option if:
You need to make a large purchase or investment for your established business.
You want to borrow funds and repay them over a long period of time.
You’re looking to consolidate multiple existing debts into one new loan.
It’s also important to keep in mind that business loans and business credit cards often complement one another. You may take out a business credit card to pay for day-to-day expenses and later, when you need to expand or grow your operations, invest in a small-business loan. As long as you have the cash flow to repay any money you borrow, these products can be used together effectively.
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