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Business Credit Card vs. Business Loan

Business Credit Card vs. Business Loan

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This article was last updated Dec 18, 2018, but some terms and conditions may have changed or are no longer available. For the most accurate and up to date information please consult the terms and conditions found on the issuer website.

Running a business isn’t cheap. Whether you’re a business owner just starting out or have had a business up and running for several years, you understand the high costs associated with day-to-day operations.

In order to keep your business on solid footing, you’re going to need some sort of credit product such as a credit card or loan. The Fed’s 2017 Small Business Credit Survey found that both options are the two most common ways for businesses to finance expenses, with 87% of business owners seeking loans or line of credits and 27% applying for credit cards.

There are a lot of factors to consider prior to applying for a business loan or a business credit card, such as varying interest rates, approval requirements, potential collateral required, and more. Before you apply for a loan or credit card, you should review each product and decide just how they can facilitate your business’s transactions.

Let’s take a look at the pros and cons of a business credit card and a business loan, so you can decide what the best option is for your business.

Determining the best option

As a business owner, you have a lot of decisions to make — choosing a location, how many employees you need to hire, and perhaps most importantly, how to pay for everything. There are two primary ways to financing business expenses — a business credit card and a business loan. Since every business is different, there’s no financing option that is deemed the best for all. A business credit card may be the best choice for one type of business, while a business loan may work as a better option for another.

A business credit card is generally a better choice if you need access to credit fast and want to benefit from rewards, interest-free financing, and other perks. On the other hand, if you need to finance large purchases, such as real estate and equipment or refinance debt, then a business loan is often a better choice since it has larger loan amounts.

In the next section, we dive into the pros and cons of a business credit card and a business loan. After reviewing the information, you should have a better understanding of what each credit product entails.

Business credit card

Pros

No collateral required. Unlike many loans, a business credit card doesn’t require you to hold anything as collateral. This is a big pro of business credit cards since you don’t have to secure a card with assets such as real estate or equipment. However, that doesn’t mean a credit card is risk-free, you’re still liable for the charges made to the card, which we explain more in the cons section.

Some cards offer introductory interest-free periods. Business expenses can add up fast, and you may not be able to pay for them within your credit card’s grace period, especially if your business hasn’t opened yet. Many business credit cards offer introductory 0% APR periods for a specified period of time that can help with finance startup costs and day-to-day expenses. During the intro period, you won’t be charged interest and can benefit from as long as 15 months of interest-free financing.

Potential rewards program. Most credit cards offer rewards programs, and business credit cards are no different. You can earn cash back or rewards points on all your business’s spending and may even have the ability to earn a signup bonus. Business credit cards often offer higher rewards rates in common business expense categories such as gas, dining, travel, advertising and office supplies.

Easily track spending. Business credit cards typically come with financial management tools that allow you to track spending, itemize purchases, add receipts to transactions and download statements to accounting software like Quickbooks or Excel. This can help you streamline financial planning and make things easier come accounting time.

Pay off new purchases interest-fee during the grace period. A helpful feature provided by credit cards is a grace period. During this period of at least 21 days, you can pay off your balance interest-free. That’s compared to a business loan which charges interest every month.

Build your business credit score. If your business is just starting out, you may not have a business credit score or may have a low score. Using a business credit card responsibly is a great way to build credit for your business. Plus, it’ll help you in the long run when you need to apply for another credit card or loan.

Cons

High, variable interest rates and fees. Most business credit cards have variable interest rates. That means they vary with the prime rate. When the prime rate increases, odds are your credit card’s interest rate will increase as well. It’s rare to find a business credit card with a fixed interest rate. We analyzed the APRs on 50 business cards and found the average APR is 19.65%. In addition to interest rates, business credit cards have numerous fees that you may incur, depending on your actions.

Here are some actions that may cause you to be charged a fee:

Action Typical fee (from our partner cards)
Opening a card with an annual fee $95 a year
Paying late or missing a payment Up to $38
Taking out a cash advance 3%-5% of each advance
Completing a balance transfer 3%-5% of each transfer

Business owners are personally liable for charges. While there’s no collateral required for a business credit card, you will be personally liable for any charges you make. In addition, if you give out employee cards, you’re also liable for their spending. However, many cards allow you to track employee purchases and set spending limits. When you apply for a business credit card, there’s often a disclaimer in the terms and conditions stating your personal liability.

Here’s an example: “… That the business entity and I, personally and in my individual capacity, will each be liable for all charges, fees, and finance charges on all of the cards and accounts issued pursuant to this request or any future requests to add additional cards or accounts.”

Can potentially hurt your personal credit, if misused. Since you’re personally liable for a business credit card, if the account becomes past due, your personal credit can be negatively impacted.

Read our guide on the best small business credit cards.

Business loan

Pros

Larger line of credit. Business loans have higher limits than business credit cards, and are more suited for large capital expenditures, such as purchasing real estate, equipment, vehicles or other pricey items. Small Business Association (SBA) loan amounts typically range from $25,000 to $5 million.

Long financing periods. If you need an extended amount of time to repay borrowed money, a business loan is your best bet. The repayment terms can range from five to 25 years, allowing you more time to pay off debt at a reasonable rate. To alleviate high monthly payments, you can opt for a longer term and lower monthly payments. Just know that you’ll end up paying more interest with a longer term.

Lower interest rate. SBA loans have lower interest rates than credit cards at around 6%-10% and are typically capped at the prime rate plus 2.25%, with lenders having the option to charge an additional 1% on loans under $50,000 and 2% on loans under $25,000. In comparison, business credit cards may have interest rates around 23%.

Cons

Stricter credit requirements. Applying for any type of credit isn’t easy, and business loans typically have tougher approval requirements than business credit cards. You’ll most likely need a good to excellent personal credit score and may need to provide additional financial documents during the application process. In addition, depending on the type of loan you apply for, you may need to make a down payment.

Collateral is often required. When you apply for a business loan, you may be asked to put up assets such as real estate, equipment or vehicles to secure your loan. In the event you default on your account and are unable to repay your loan, the lender may take your assets as collateral.

Longer to receive funds. Unlike a credit card that typically comes in the mail in seven to 10 business days and is ready to use, it can take a few weeks to receive funds from a business loan.

Compare small business loans at LendingTree, the parent company of CompareCards.


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