by Elizabeth Aldrich | Updated July 21, 2021 - First published on June 7, 2019
Many or all of the products here are from our partners that pay us a commission. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.
Should you get a loan or a credit card? It's an important decision. Read on to find out which is right for you.
If you've been on the hunt for business funding, you're probably feeling overwhelmed by your options. If you're looking to avoid outside investors, business loans and business credit cards are two of the most readily available and widely accessible financing options for business owners who want to fund their business themselves.
Both have their own set of pros and cons, so in this guide, we'll go over everything you need to know to decide between taking out a business loan or opening up a business credit card.
What's the difference between a business loan and a business credit card?
A business loan is a lump sum paid out to you upfront which you then pay back in monthly installments broken up over a pre-specified period of time, called a loan term. A business credit card is a line of credit, so instead of receiving funds in a lump sum, you're given borrowing access to funds up to a certain limit whenever you need them. The line of credit is then paid off in monthly payments of your choosing and can be paid off over any time period you prefer as long as you meet the minimum payment required each month.
Business loans are considered installment debt whereas business credit cards are considered revolving debt. While neither will hurt your credit score in the long run if they're paid off quickly and on-time, it's worth noting that revolving debt has more potential to drag your credit score down as it decreases your debt-to-credit ratio.
Furthermore, the best business loans tend to offer access to larger sums of money and come with lower interest rates but they can be more difficult to qualify for, and the lending process can take weeks or months.
On the other hand, business credit cards offer immediate access to cash, and while the interest rates tend to be higher, you can avoid them entirely by paying off your bill in full each month. The best business credit cards also come with purchase protections, perks, and rewards that are particularly beneficial for business owners.
Tips and tricks from the experts delivered straight to your inbox that could help you save thousands of dollars. Sign up now for free access to our Personal Finance Boot Camp.
By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.
You'll need to have good credit to qualify for both a business loan and a business credit card. Additionally, applications for both will ask you about your revenue and how many years you've been in business, although the documentation required for business loans tends to be much more extensive. Business loans may also have stricter requirements regarding length of time in business and profitability.
Overall, business loans are typically more difficult to get than business credit cards. However, for folks who have bad credit or haven't been in business for very long, the Small Business Administration (SBA) offers government-backed SBA loans for small businesses. These loans are originated by a traditional lender, but the government guarantees 85% of the loan, making it easier for you to qualify as a business owner.
The question of whether you should opt for a business loan or a business credit card has no easy answer. There are advantages and disadvantages to both. The table below compares the main features of each option (business loan interest rates and business credit card rates from ValuePenguin).
|Feature||Business loans||Business credit cards|
|Loan amount||Typically $5,000 to $5 million||Usually up to $50,000|
|Average APR range||4% to 13%||13% to 20%|
|Loan type||Installment loan||Revolving line of credit|
|Repayment||Set monthly payments divided up over a pre-specified term of anywhere from six months to 25 years||Low minimum monthly payments required with the ability to pay off your debt in full each month to avoid interest|
|Eligibility||Good credit, sufficient business revenue and years in business||Good personal credit and steady income|
|Time to approval||Weeks or months||Usually within seven days if not immediate|
|Other benefits||Option to apply for government-backed SBA loans||Rewards programs, sign-up bonuses, rental car and trip insurance, purchase protection|
Data source: ValuePenguin.com.
Once you've compared the features of business loans and business credit cards, it's time to decide which is best for you.
Once you've decided on a business loan or a business credit card, your job isn't necessarily done. You still have to compare your options to find the best business loan or business credit card for you. Here are some important factors to consider.
The most important feature to pay attention to when it comes to loans and credit cards is interest rates. That APR is telling you what your cost to borrow money will be, and you want to keep that as low as possible. Interest fees on credit cards and loans are compounding, which means that they can add up very quickly if you aren't diligent.
Interest fees are the most important fees to keep in mind, but there are others you'll want to take note of. Common credit card fees include annual fees, late payment fees, and foreign transaction fees. Loans come with late payment fees as well, and they might also charge application fees and origination fees.
While one or two credit card and loan applications won't ruin your credit score, it's worth keeping in mind that each application results in a new inquiry on your credit report. If you have too many recent inquiries, your credit score can start to take a more serious hit. Rather than applying for every good offer you see, take the time to sort through them and decide whether or not you're even eligible beforehand.
You never want to borrow more than you need, but you also want to make sure that you have access to enough funds to finish what you've started. Given that credit cards can come with a strict credit limit and business loans tend to come in larger amounts, you should consider how much funding you really need when deciding between the two.
Some small business loans, such as SBA loans, come with access to a wide range of business resources, from business counseling and mentorship to access to professional networks. On the other hand, business credit cards often come with lucrative rewards and money-saving benefits like trip and rental car insurance.
The bottom line is your bottom line. When you're shopping for financing options, the main question to consider is what's going to save and make you the most money.
If you have credit card debt, transferring it to this top balance transfer card secures you a 0% intro APR into 2023! Plus, you’ll pay no annual fee. Those are just a few reasons why our experts rate this card as a top pick to help get control of your debt. Read The Ascent's full review for free and apply in just 2 minutes.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.