Business Loan vs. Business Credit Card: How to Choose

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.

Which is easier to get -- a business loan or a business credit card?

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.

Comparing small business loans and business credit cards

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).

Data source: ValuePenguin.com.

What's best for you: a business loan or a business credit card?

Once you've compared the features of business loans and business credit cards, it's time to decide which is best for you.

Business loans are best for business owners who…

• Need to borrow large sums of money
• Want to invest in profit-generating expansion projects, whether that entails hiring additional staff, purchasing new equipment and technology, or opening new locations
• Have established businesses that have been around for at least a year and generate at least $100,000 in annual revenue, although there are options -- such as SBA loans and online lenders -- for business owners who aren't quite there yet

Business credit cards are best for business owners who…

• Are sole proprietors or people with side hustles and are looking for a way to separate their finances
• Want to start using a form of payment that earns big rewards
• Need a way to access quick cash in case of emergency
• Aren't necessarily looking to borrow money, as credit cards come with high interest rates and should be paid off in full each month
• Want to finance a project with a credit card that has a good 0% introductory APR offer and plan to pay it off in full before the promotional period ends

What to look for in the best business loans and business credit cards

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.

Interest rates

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.

Other fees

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.

Eligibility

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.

Loan amount

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.

Perks and benefits

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.