If you’re a small business weighing the pros and cons of financing expenses with a credit card or a loan, you’re not alone.
Paying operating expenses and accessing credit are the top financial challenges non-employer firms face, according to the 2018 Small Business Credit Survey from the Federal Reserve.
Non-employer firms are businesses that have no paid employees, have business receipts of $1,000 or more and are subject to federal income taxes, according to the U.S. Census Bureau.
Credit cards are the most popular type of financing product, with 45% of all non-employer firms using credit to finance costs. Loans or lines of credit account for 27% of financing among non-employers.
Whether you should choose a business loan or a small business credit card comes down to a range of factors, including:
- What you need the capital for
- The amount
- The payment arrangement you’re most comfortable with
- Your credit
- The desired APR range
Here’s an overview of what to think about when considering these two options:
|Type Of Loan||Best For||Loan Amount Limits||Loan Type||APR|
|Small-business loan||Major purchases||Up to $5.5 million through the SBA||Term loans, invoice-based||Fixed-rate|
|Small business credit cards||Ongoing expenses||Varies by issuer, but typically less than loans||Line of credit||Variable|
Small Business Loans
Getting a loan through a traditional bank could be a good option for small businesses. According to Fundera, such banks often offer lower interest rates than alternative lenders. But the fees they charge can add up quickly, qualifying for the loan can be difficult and the process can be fairly lengthy.
Traditional banks are not the only option for small businesses seeking a loan. The U.S. Small Business Administration offers a range of options with loan amounts from $500 up to $5.5 million. And online lenders have made their way into the small business loan game as well. You can now get term loans, lines of credit and even invoice-based financing, all through online lenders.
Small business loans generally have higher borrowing amounts than credit cards, especially those guaranteed by the U.S. Small Business Administration. Those loans are guaranteed up to $5.5 million. In addition, interest rates on loans are often lower than those of business credit cards, making them a good option if you’re financing a major purchase. SBA loan rates, for example, are tied to the current prime , the LIBOR rate and sometimes an optional peg rate, a weighted average of rates the federal government pays for loans with maturities similar to the average SBA loan. In 2019, rates from the SBA for a loan start at the base rate plus 2.2 percent. Finally, loans offer a range of repayment terms, lasting as long as 25 years.
Breakdown of the pros:
- Higher borrowing amounts
- Lower interest rates
- More repayment options
The process to qualify for a small business loan is often more involved than picking up a small business credit card. For example, the SBA bases eligibility for a loan on what a business does to receive its income, character of ownership, where the business operates, the ability to repay and the business purpose. And while some loans don’t require collateral, many of them do, which is a requirement you won’t find with credit cards. Offering collateral for a loan could help you qualify for higher amounts, better repayment terms and lower interest rates.
Breakdown of the cons:
- Tougher qualification process
- Collateral is often needed
When To Consider It
Because these loans offer higher borrowing amounts, lower interest rates and a range of repayment options, they’re often best for those looking to finance a major purchase, like equipment or inventory. They can also be helpful to refinance debt or build business credit.
Small Business Credit Cards
There are a number of options when it comes to credit cards specifically tailored to small businesses. For entrepreneurs who don’t qualify for a small business loan, or don’t want to put up collateral for a loan, a small business credit card can be a great option. When used well, these tools can finance costs, help track business expenses and build business credit. With these lines of credit, you pay interest only on the credit that you and only if you carry a balance.
Unlike small business loans, small business credit cards require no collateral. Better yet, they often offer rewards or cash back for spending on business-related expenses. The Capital One Spark Cash card, example, offers unlimited 2 percent cash back on spending. And some of these cards, like the Blue Business Plus Credit Card from American Express, offer a 0 percent APR introductory period, which can be great for financing a major expense without paying interest.
Breakdown of the pros:
- No collateral required
- Rewards for spending
- 0% APR intro periods
Business credit cards are essentially unsecured loans, which tend to come with higher APRs than you’d find with a secured loan. The Spark Cash from Capital One, for example, carries a variable APR around 19% If you don’t pay your balance in full each month, the interest payments can eat up all of your rewards and cost you some principal as well. These cards may also come with high fees, including annual fees, late payment fees and fees for going over the card limit.
Breakdown of the cons:
- High variable APRs
- High fees
When to Consider
Small business credit cards can be useful in several situations. If you need a tool that can help you finance costs, track expenses, and earn rewards, a credit card might be a good fit for you. These are also great tools to utilize as working capital, using what you need when you need it and paying it off as you go.
Whether you choose a small business loan or credit card comes down to what you need the money for. If you’re financing a major expense, small business loans provide higher loan amounts and better repayment terms than credit cards. Small business credit cards are often better used for ongoing expenses that you can earn rewards on.
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