Should you apply for a Business Loan or a Business Credit Card for your business?

How to should you borrow money for your business? A small business can invest in itself and flourish. But mismanagement can strain your cash flow and make it feel like you’re working for your creditors rather than yourself. 

You may already be familiar with small business term loans and small business credit cards as there are similar to personal loans and personal credit cards. The differences between a business loan vs. business credit card is really about your business’ needs in mind.

Business term loans

For businesses considering a business loan instead of a credit card, you will get the entire amount upfront and them it pay it off with installments that are often monthly. This can help the business with a large funding need. Term loans usually have a fixed interest rate, so you can budget with cash flow needs in advance.

Business credit cards

A business credit card is a credit card created specifically for small business owners—there are also corporate cards for large companies. Business credit cards work similar to consumer credit cards, but often offer specific benefits that align with business needs.

You may be able to get free employee cards linked to your account and limit where and how much employees can spend. Business credit cards also often offer rewards on common business purchases, such as at business supply stores or online advertising.

Business Loans vs. Business Credit Card FAQS

Business Term loans

1. The loan amount can range from several thousand to 1M or more
2. Payments are fixed monthly payments
3. You may be able to choose from 6 months or several years to repay
4. The APR (annual percentage rate) is usually around 5% to 35%
5. The requirements to get a business term loan might require the business to be in business for several years have good credit and established revenue.
6. There might be application, administrative or prepayment fees plus have late payment fees.
7. This may be a secured or unsecured loan with sign a personal guarantee.

Business Credit Cards

1. The credit cards limit will depend on your creditworthiness
2. There will be a minimum payment each month
3. No fixed terms on a credit card and it depends on how much you pay each month
4. The average APR is 15%
5. You may be able to qualify based on your personal credit and business revenue.
6. Potential annual fees and usage-based fees and transactions fees. Late fees
7. General it is unsecured but a personal guarantee is almost always required

Benefits and drawbacks of a business loan

Pros

• May offer large loan amounts and you receive all the money upfront
• Choose your repayment term, which can influence your monthly payment
• Some lenders don’t charge prepayment penalties
• Low interest rates, depending on your business’ finances and creditworthiness

Cons

• The minimum loan amount may be more than you need
• There may be an origination fee
• You’ll need to apply for a new loan if you want additional funding
• Creditors may ask for collateral and a personal guarantee

Benefits and drawbacks of business credit cards

Pros

• A revolving line of credit that you can use multiple times without reapplying
• Pay no interest if you pay your balance in full every month
• There’s no collateral requirement 
• May offer rewards, purchase protections, and benefits for small business owners

Cons

• Often has a high, variable interest rate
• Some vendors and suppliers charge fees if you pay with a credit card
• Credit card companies can change your credit limit at any time
• Often requires a personal guarantee

Is it better to get a business loan or credit card?

Understanding how and when to use various small business financing options can help you keep your business running smoothly while increasing your revenue over time. When comparing business term loans vs. business credit cards, each have their place in the mix. 

Term loans are best when:

• You need quick access to lots of funding: With a term loan, you receive the entire loan amount as an upfront lump sum. The disbursement method makes them a good choice for business owners who want to finance a large purchase or project, such as renovations, expanding to a new location, covering emergency expenses, buying a competitor, or preparing for a busy season. 
• You’ll need months or years to repay the loan: You may need several months or years to repay a large loan. Even if you can raise enough money with a business credit card or line of credit, it can take years to pay off the debt and term loans often have lower interest rates. 
• You’re consolidating higher-rate debt: In looking at the benefits of a business loan vs. credit card, term loans can also be a money-saving tool if you have high-interest credit card balances or higher-rate loans. If you can qualify for a low-rate term loan, you can use the money to consolidate other business debts  
• You’ve calculated your ROI: Term loans can give you quick access to lots of financing, but you’ll want to calculate your return on investment (ROI) before taking out a loan. Sometimes, it makes more sense to focus on cutting costs or increasing income sales than to take out a loan and keep a business afloat without addressing the underlying issues first. 

Business loan vs. business credit card: Credit cards are best when:

• You need short-term financing: If you’re experiencing cash-flow crunches and need helping smoothing out your finances, a business credit card allows you to make purchases today and pay for them later. Timed right, you may have over 50 days between your purchase and the bill’s due date. 
• You’re separating everyday business and personal spending: Some small business owners use the same accounts for both business and personal expenses. But this can lead to headaches come tax time and expose you to additional personal liability. In reference to the question, “is it better to get a business loan or credit card”, opening and using a business credit card solely for business purchases can help you avoid a mess later. 
• You qualify for a promotional rate: Some business credit cards offer a temporary 0% APR on purchases during a promotional period. It’s one of the few opportunities to borrow money without paying any interest, but make sure you have a plan for paying off the debt. Otherwise, you may be stuck with a balance and high interest rate when the promotional period ends. 
• You’ll use the cardholder benefits: Business cards may offer a variety of benefits, including rewards, additional warranties on purchases, and free employee cards. But it’s only worthwhile if you get a card with perks that align with your business needs, and you remember to use the cardholder benefits. 

Term loans can complement credit cards

As term loans and credit cards can be helpful for different—and sometimes similar—circumstances, you may find yourself using both types of financing while running your business. 

For example, you may decide to take out a term loan to expand your business to a new location or start offering a new line of services or products. The loan gives you the initial capital to cover the major costs and invest in the additional employees and materials you’ll need. However, it can take time for the new part of the business to pick up, and a business credit card can help with short-term financing. 

Both business loans and business credit cards can get reported to the business credit bureaus and help you build business credit, which is separate from your personal credit. In turn, having good business credit can help you qualify for more favorable financing in the future. 

What should you look for in a small business lender?

If after comparing a business loan vs. business credit card you find that a small business term loan aligns with your business’ needs, you’ll still need to figure out where to apply for your loan. Here are a few factors to consider:

• How quickly do you need the money? Banks and Small Business Administration (SBA) lenders may take several weeks or months to go over your application. Online lenders can often give you a decision within a few days.
• Loan amounts and terms: Lenders may have different maximum and minimum loan amounts and repayment terms. 
• Interest rate ranges: Often, you won’t know the rate you’ll be offered until after you apply. However, you can look at lenders’ interest rate ranges to get an idea of the best and worst rates available. 
• Repayment terms: How frequently do you have to make payments. Weekly or biweekly payments may have a bigger impact on your cash flow than monthly payments. 
• Fees: Common fees to look out for include application, prepayment, and origination fees. 

As with any type of financing, comparing lenders can help you find the best fit for your business. If you have time, you may even want to submit several applications and compare the offers to see which lender offers the best rates and terms.