Whether you own an established business or are just getting your venture off the ground, every business owner must decide what type of financing makes sense for his small business.
Small business loans and small business credit cards are two of the most popular financing options, but each comes with its own pros and cons. Learn more to find out which option is best for your small business.
|Business Credit Cards vs. Small Business Loans|
|Business Credit Cards||Small Business Loans|
|Loan Amount||Less than $10,000 (average)||$130,000-$140,000 (median)|
|Loan Type||Revolving line of credit||Term loan|
|Typical Interest Rate||14.89%-15.5%||3.66%|
|Sources: CreditCards.com, Federal Reserve, IndexCreditCards.com and SBA.gov|
Related: Should I Get a Business Credit Card?
Business Credit Cards
Business credit cards offer lines of credit to people with small businesses. The business cardholder can choose when and how to spend the funding.
Business owners typically use credit cards to pay for everyday purchases and regular expenses. Having a business credit card makes it easy to keep personal and business spending separate, which is helpful for accounting purposes.
A business credit card can make sense if you are making the switch from sole proprietorship to a registered business such as a limited liability company or S corporation, said Eric Rosenberg, author of the Personal Profitability blog. “Having a separate business credit card makes it much easier to track your business expenses, which is important come tax time,” Rosenberg said.
Business credit cards are similar to consumer credit cards, but there are a few differences. Perhaps the most important distinction is that the Credit CARD Act of 2009 does not apply to business cards. That means your interest rate might change suddenly and often without advance notice. In addition, you might have to spend more cash before qualifying for your rewards than you would for a personal card.
On a more positive note, business credit cards tend to have higher spending limits than personal cards, which can help you make the larger purchases often associated with a small business.
Tips for Paying Off Your Business Credit Card
As with personal cards, business cards allow you to decide how much credit you want to use and how much of the balance to pay each month: the minimum amount, the full amount or something in between. If the balance on the business credit card is not paid in full each month, interest accrues. If the balance is paid in full each month, no interest is charged.
Typically, it is easier to get a business credit card than a business loan. John Rampton is a self-described “serial entrepreneur” and founder of Due.com, an online invoicing platform and payment services provider for small businesses. He said applying for a business card is one of the first things he does when he sets up a new company.
“I charge all business-related expenses to the business card and then pay it off any chance I get,” Rampton said. “This helps me from the start of my business to start establishing a line of credit. Even if it’s only [a] $500 limit credit card, it’s something.”
It is important to note that many business credit cards require you to sign a personal guarantee that will make you personally liable for any debts on the business credit card, even if the business fails.
Business Credit Card Pros: Easy Expense Tracking and More
A business credit card can make organization and accountability easier for business owners. Some other advantages of business credit cards include:
- Easy to track expenses
- Earn points and cash rewards
- Additional purchase protections
Business Credit Card Cons: Higher Rates and Personal Liability
Some disadvantages of business credit cards do exist; you can weigh these points against the advantages to see if a credit card is the right solution for your business:
- Higher interest rates
- No protections against fees and rate hikes
- Personal liability for unpaid balances
When Business Credit Cards Make Sense
Business owners with regular expenses and healthy spending habits are good candidates for business credit cards. Business credit cards are also a good option for new business owners with limited credit history who do not qualify for a business loan. It also helps if the business has enough cash flow to pay the balance in full each month to avoid paying high interest rates and to maximize benefits such as points or cash back rewards.
Where to Get a Business Credit Card
Many lenders that offer consumer cards also issue business credit cards. GOBankingRates surveyed business credit cards and published a list to help you find the best business credit cards currently on the market.
Business loans offer another common method for owners to fund a small business. With a small business loan, the borrower applies for a specific amount of money. When the loan is approved, the entire amount goes into the borrower’s account. Then, the borrower pays back the loan — including interest — in monthly payments over a specific period of time.
Several features of business loans differ from those of business credit cards, including that loans:
- Are a lump sum of cash instead of a line of credit
- Often have a fixed interest rate
- Have fixed monthly payments
If you are looking to finance a large purchase or make an investment in your business, it is usually better to choose a business loan over a business credit card.
“For longer-term borrowing, you can usually save money with a small business loan,” Rosenberg said. “Before you decide, always compare the interest rate and shop around for the best deal that makes the most financial sense for your unique situation.”
Tips for Getting a Business Loan
Most business loans are for higher amounts of money and can be harder to get than business credit cards. For example, Lending Club looks for a business to be at least 2 years old and have at least $75,000 in annual sales to qualify for a business loan.
To prove your business is worthy of a loan, you will likely also have to provide more supporting documentation than you would to get a business credit card. Supporting documentation might include handing over cash-flow projections, financial statements, personal and business credit histories, your business plan, and other documents.
Business Loan Pros: Lower Interest Rates and More
A business loan can provide perks that you can’t get with a credit card. Some of the advantages of a business loan include:
- Lower interest rates than business cards
- Access to large sums of money
- Personal assets might be protected
Business Loan Cons: Little to No Rewards
Some features are lacking in business loans. Consider these disadvantages before you commit:
- No points or rewards
- Inflexible payment terms
- Established credit history and business documentation required
When Business Loans Make Sense
Business loans make sense for business owners with an established credit history who want to finance a large purchase, such as real estate or equipment. They are also a good option if the business is a corporation or LLC because the owner can protect personal assets from any unpaid business loans.
Where to Get a Business Loan
Business loans can be financed in several ways. Some options include:
- A traditional bank
- An online lender, such as Kabbage
- A peer-to-peer lender, such as Lending Club or Prosper
John Rampton prefers to use online lenders as they can be faster to approve and fund applications. “Years ago, when I owned Organize.com, we needed money quick,” Rampton said. “I went and got a $300,000 loan from an online vender in two days. This would have taken weeks and potentially months with my local bank.”
You can also choose to go through the Small Business Association for your business loan needs. If you need a big chunk of cash, the SBA offers 7(a) business loans for up to $5 million in financing. The funds can be used for building renovations, purchasing real estate, refinancing existing business debts or general business expenses.
If you need a much smaller amount of cash, the SBA offers microloans for business owners who want to finance $50,000 or less. You cannot use this type of business loan to pay off existing debts or purchase real estate. But because the SBA microloans are smaller, you will pay less interest on the loan over time.
Credit Cards and Loans: Valuable Tools for Small Businesses
Business credit cards and small business loans serve different purposes in helping small businesses grow. For new businesses with little credit history, it makes sense to use a business credit card to fund startup costs and everyday purchases. The payment options are more flexible than business loans, and you can rack up points or cash back rewards.
For a business that is established and looking for money to grow or to fund a large purchase, a business loan makes sense. The owner can pay back the loan over time without paying the high interest rates associated with business credit cards.
And if you still are not sure which option is best for your small business, take advantage of your network of family, friends and other business owners. “I personally like to bounce what I’m doing off several other people — trusted friends and other business owners that have been through similar situations,” Rampton said.