Business Loans Vs Business Credit Cards

How to choose between the two…

Updated: April 2, 2024
Matt Crabtree

Written By

Matt Crabtree

 
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If you've been trying to get financing for your company, you may have been frustrated by the sheer number of possibilities. There’s a big difference between the two. 

Company loans and credit cards are two of the most common financing choices entrepreneurs use, with or without collateral to back it up.

But is it better to apply for a business loan or a business credit card? Keep reading to figure out which option suits you best.

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Business credit cards vs business loans: Overview

When and how to take out a loan is a crucial choice for every company owner. 

A small company may grow and improve via self-investment if it has access to sufficient funding. However, if you don't handle your money well, you may find yourself working for your creditors instead of yourself. 

Term loans and credit cards for small businesses are common ways to get capital. Personal loans and credit cards function similarly, so you may be acquainted with these kinds of financial tools. 

However, it's important to reconsider how a business loan and a company credit card operate and the circumstances in which one may be preferable to the other. But why exactly would one want to use a company credit card or loan? We've included some of the most typical uses for business loans and company credit cards below.

Loans for businesses uses 

  • Investing in brand-new tools
  • Staff expansion
  • Changing locations
  • Increasing capacity
  • Trading stocks
  • Reorganising current debt
  • Card for commercial use
  • Enhancing financial stability
  • Investing in travel costs
  • Covering the cost of overhead
  • Client entertainment
  • Invoice payment
  • Managing staff expenditures

Credit cards for businesses uses

  • Enhancing financial stability
  • Investing in travel costs
  • Covering the cost of overhead
  • Client entertainment
  • Invoice payment
  • Managing staff expenditures
Credit cards for businessLoans for business
FundingAccess to cash up to a predetermined limit; this amount might be as high as £250,000.One-time, lump-sum funding for businesses of up to £10 million
EligibilityA personal loan has fewer restrictions than a commercial loan, but both need a solid credit history.Lender-specific criteria might be somewhat vague, but in general, you need to have an established firm and solid credit.
RepaymentsNo-interest, month-to-month payments are available.A predetermined schedule of monthly instalments and a due date for full repayment.
Interest rateIf you have excellent credit, you might get a rate as low as 9.9%Dependent on credit history, as low as 4%
Interest-free periodSome cards provide 0% interest for the first six months, and billing cycles may be as long as fifty-six days.None
Other featuresBenefits, pay, and protection are all on the table.Very few benefits are accessible.
FeesThere might be annual fees, costs for paying late, and others.Fees for things like prepayment, overdue payments, and arrangement are possible.

Loans for businesses: Pros and Cons

You can borrow more money over a longer period of time at a lower interest rate with a business loan. However, it is not particularly adaptable and may be more difficult to get.

Pros

✔️ You can get more money for your project and get it right now.

✔️ You know the exact interest rate and monthly payment amount at the outset.

✔️ Perfect for a one-time, massive endeavour like opening a new location, recruiting more workers, or upgrading outdated machinery.

✔️ A variety of criteria, including your credit score, will determine the interest rate that is ultimately provided to you.

✔️ Excellent for borrowing over a lengthy period of time; many creditors may extend your repayment period to ten years or more.

Cons

❌ Lacking in adaptability; you'll need to know exactly how much money you'll need to borrow before applying.

❌ It's possible that the required loan minimum won't cover your financial needs.

❌ If your credit isn't stellar or your company is still in its infancy, you may not be eligible.

❌ Collateral and a personal guarantee may be needed to get a loan.

❌ Probably not the greatest way to fix your money problems.

❌ Borrowing won't get you any points towards prizes.

Business credit cards: Pros and Cons

Using a credit card, you can boost your cash flow incentives that can be earned on company expenditures with the. But borrowing money on a credit card over the medium to long term is quite costly and should be avoided at all costs.

Pros

✔️ No interest will be added to your balance if you pay in full each month.

✔️ Your company's credit score will rise if you use the card often.

✔️ Helpful in boosting one's financial stability.

✔️ Useful for short-term borrowing needs (although you should pay off your bill in full whenever feasible).

✔️ You can get extra cards to hand out to coworkers to assist with costs.

✔️ There are additional bonuses, such as cash back, airline miles, and free insurance, that may be used on top of your trip.

✔️ Extremely adaptable; use it as little or as much as you want.

Cons

❌ If you don't pay off your amount in full every month, this might be a costly choice.

❌ Borrowing limits are lower than what you would get with a traditional loan.

❌ Personal loans often have higher interest rates than commercial loans.

❌ A high credit score is often required for approval.

Can I use both and why?

It's possible that you'll need to use both term loans and credit cards to finance your company, since they both have their advantages and disadvantages.  

To open a new storefront or introduce a brand-new product line, for instance, may necessitate taking out a term loan. 

The money from the loan can be used to pay for the first, big expenses, as well as to hire and equip any necessary new workers or purchase any necessary supplies. A company credit card might help to bridge the gap until the new division begins to generate revenue. 

Business credit, which is distinct from personal credit, may be established by the use of both business loans and business credit cards, both of which may be reported to business credit agencies. In consequence, better corporate credit means access to more beneficial funding options.

A company credit card or loan — Which is simpler to get?

To get a business loan or a business credit card, you need to have strong credit. Both types of loan applications will inquire as to your business's annual income and length of operation, with the latter requiring less paperwork than the former. 

There might be other restrictions for business loans, such as how long the company has been operating and how profitable it is.

Generally speaking, business loans are harder to get than business credit cards. However, the Small Business Administration (SBA) provides government-backed SBA loans for small firms, even if the borrower has poor credit or has not been in business for very long. 

These loans are provided by a conventional bank, but the federal government guarantees up to 85 percent of the principal, increasing your chances of being approved as a company owner.

Which is preferable, a company credit card or loan?

You can keep your small company operating smoothly and even grow your profits by learning how and when to employ different types of small business finance. There is a role for both business credit cards and business term loans in the business financing landscape. 

When personal and business term loans are ideal:

  • You need a large chunk of money quickly, and a term loan gives you the money all at once. Because of how they are dispersed, they are a great option for company owners in need of financing for a big purchase or project like remodelling, moving to a new site, paying off unexpected costs, acquiring a rival, or stocking up for peak season. 
  • Repaying a large debt might take a long time, perhaps months or even years. Credit cards and lines of credit for businesses are one option for raising capital, but repaying the debt might take years, while the interest rates for term loans are often cheaper. 
  • Consolidating high-interest debt with a lower-interest term loan is another way to save costs when weighing a credit card for business expenses against a loan for the same purpose. Consolidate your business's obligations using the proceeds of a low-interest term loan.  
  • You've done the maths on your return on investment (ROI): Term loans might provide fast access to large amounts of funding, but you should still figure out your ROI before you borrow. If a company is struggling, it may be better to look at ways to reduce expenses or boost revenue rather than taking out a loan to stay alive. 

Credit cards provide advantages over loans for businesses in the following situations:

  • You need temporary funding: If you are having trouble keeping up with your bills and other expenses, a business credit card may let you make immediate purchases and spread out your payments over time. If you time your purchase and payment correctly, you may have more than 50 days before your first bill is due. 
  • You're splitting your day-to-day budget between work and pleasure, unlike other small company owners who use the same accounts for both. However, this may increase your tax burden and cause you unnecessary stress. The answer to the question “is it better to get a business loan or credit card” lies in creating a business credit card and utilising it only for company transactions. 
  • You are eligible for a special rate: For a limited time, several business credit cards offer no interest on purchases. One of the rare times you may borrow money at zero percent interest; just be prepared to pay it back. Don't let the promotional time finish with a balance and a high interest rate. 
  • You will take advantage of your business credit card's perks, such as the cash back incentives, extended warranties, and complimentary cards for employees that may be included. However, the advantages will only pay off if you choose a card whose features are useful for your company and make use of them regularly.

Business credit cards versus loans: Bullet-point Summary

In summary, with business loans: 

  • You can borrow a large quantity of money, maybe several million pounds.
  • Monthly payments are often set, making budgeting simpler.
  • Funds may be borrowed over a number of years.
  • Prepayment of a debt may result in financial penalties.
  • There are risks associated with some loans, such as having to pledge collateral or personally guarantee repayment in the event your company is unable to make its loan payments.

Meanwhile, business credit cards:

  • May be more accessible than traditional lending options.
  • Give you a maximum amount you may borrow (like £250,000).
  • As long as you pay at least the required minimum each month, you are free to pay off your debt whenever you choose.
  • High interest rates mean that carrying a debt from month to month may be quite costly.
  • Additional benefits might be available to you.

Verdict: Should you get a business credit card or a business loan?

Credit cards are great for assisting with cash flow, but company loans are better suited for things like expanding or buying new equipment. Let's examine the nuances of their design. 

The verdict: The best choice will depend on your individual circumstances, such as the amount you need to borrow and whether or not the money will be used for recurring or one-time costs.

A company loan is the best option if you need a large quantity of money quickly, such as when investing in new machinery. You may spread out your payments over a certain number of years and pay back what you borrowed without any surprises.

A company credit card, on the other hand, provides additional borrowing flexibility, especially if you just need to borrow occasionally or to enhance cash flow. You might get bonuses like refunds or free trips. 

Keep in mind that interest rates might be higher compared to loans, making this a pricey option if you don't pay off your debt in full every month. A better business credit score may be attained with the use of both business loans and business credit cards.

Finally, remember that there are several options for company financing, including but not limited to loans and equity investments. 

Related Guides:

Business loans vs. business credit cards — FAQs

How might a credit card help me better manage my company's cash flow?

Can I get a business loan for my company?

Exactly what is a term loan for small businesses?

What exactly is a corporate credit card?

Which credit card is best for a small business?

Which is better for a business: a loan or a credit card?

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