Business credit card vs. small business loan: Which is better for you?

1
Yagi Studio/Getty Images
Bankrate Logo

Why you can trust Bankrate

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for . The content on this page is accurate as of the posting date; however, some of the offers mentioned may have expired. Terms apply to the offers listed on this page.

Need capital for your enterprise? Whether it’s to help launch the business or simply cover operation costs, a business credit card or small business loan can come to your rescue. Both offer plenty of compelling qualities. What’s more, you don’t need to choose one over the other.

Here’s what to know about the beauty and power of both products—and how to get the right credit card or loan for you and your business.

The beauty of business credit cards

Ramon Ray, a small business expert and the founder of SmartHustle.com, believes every entrepreneur should have at least one business credit card. “They’re great tools to have in your toolbox,” says Ray. “Compared to business loans, credit cards are easy to get.”

To qualify for most business credit cards you’ll need credit scores in the good to excellent range and have enough income to show the issuer that you can afford the payments.

All business credit cards will give you a credit line, which is typically higher than it is for personal cards. Business cards, such as the American Express® Business Gold Card, come with no pre-set limit. A big advantage of business cards is their flexibility. You can charge whatever you want, when you want. You have the option to send at least the minimum payment, which will fluctuate based on your balance, the entire bill in full or somewhere in between.

The interest rate on small business credit cards can be low, often starting at 13 percent, though can go into the upper 20s. If you never carry a balance, you’ll get an interest-free grace period of at least 21 days, so no interest will be applied when you pay the entire bill by the due date. If you don’t use the card at all, no financing fees will be added.

Depending on the account, a business credit card may also come with:

Rewards

As you charge, you will earn rewards, which may be cash, miles or points. If you pay off the balance before interest is added, you will profit by using the card for your business expenses.

Sign-up bonus

This is a one-time offer that provides a fixed amount of rewards after meeting a minimum spend, which is typically a few thousand dollars within three to six months of opening the account. In general, the larger the bonus, the greater the minimum spend.

0 percent APR

This is a promotional limited-time feature that enables you to charge and revolve balances with no interest added to the debt for a set period, often around 18 months.

Perks

Each business card has its own set of perks, which can include purchase protection, extended warranties, insurance products, credits for certain business expenses, deals on car rentals and a wide span of travel benefits, such as complimentary TSA Precheck and entry into airport lounges.

Business credit cards are best used for short-term financing requirements, especially when the interest rate is high. “Credit cards are the tool you’ll want to use for the things your business needs when you can pay the debt off quickly, and not for long-term financing,” says Ray. Therefore, use your card for things that you know you can pay off within a few months. If you do get the 0 percent introductory rate, structure your payments so you’ll be debt-free before the regular rate goes into effect.

How to choose a business credit card

There are many small business credit cards on the market, so it will be important to compare and contrast the offers before you apply.

A cash back card, such as the Ink Business Cash® Credit Card, is more versatile but a points or miles card, like the Capital One Spark Miles for Business, can have a high redemption rate. While a large bonus can be appealing, make sure you can meet the minimum spend without getting into unmanageable debt. Some business credit cards have high annual fees, too, so weigh the cost against what you get out of the benefits.

Before you apply, review your credit scores to see if they’re in positive shape. If they’re bad to fair, take steps to improve them so you’ll be eligible for a greater variety of business credit cards.

The power of small business loans

A small business loan is a fixed amount of money that you will receive all at once. It can be thousands or hundreds of thousands of dollars. You repay the loan in equal monthly installments, with interest built into the entire loan amount. The length of time you have to drive the debt down is called the term, which is typically between one and five years, though can be much longer. Some business loans are secured by assets, while others are unsecured.

According to Ty Crandall, CEO of CreditSuite, which helps business owners improve their business credit and get financing, business loans are ideal for when you need a large sum for a specific purchase, such as a particularly pricey piece of work equipment. “You may want to pay something like that off over a few years,” says Crandall. “That’s when a business loan can be really helpful.”

Be aware that business loan interest rates vary dramatically. For example, a loan that you would receive from the U.S. Small Business Administration—an SBA loan—has rates of prime (currently 3.25 percent) plus between 2.25 percent to 4.45 percent, based on the amount you borrow and term length.

You can also get small business loans from banks, credit unions and online lenders. Their interest rates can be very low (such as Bank of America’s secured business loan that has a current rate starting at 3.5 percent), while those offered by alternative lenders can be far higher—and consequently much more expensive.

Not every small business owner would benefit from a business loan, as opposed to a credit card. In most cases, you would only take one out when you need it to cover a large and important cost.

Additionally, business loans can be more challenging to qualify for than business credit cards. “Some lenders won’t talk to you unless you have three years worth of business tax returns, enough collateral, and an established business credit history,” says Crandall.

How to choose a small business loan

To pursue and identify the right business loan for you, consider the following:

  • How much you want to borrow
  • Whether it will be secured or unsecured
  • Term length
  • Monthly payment
  • Interest rate
  • Any associated fees
  • Total cost by the time the balance is repaid

Since you can’t avoid interest with a loan, you will want to be careful to borrow enough to meet your business needs, without sacrificing your business goals.

Treat all credit products carefully

Your activity with credit products will show up on your credit reports so you want to manage them responsibly.

In addition to paying on time, avoid keeping a high debt-to-credit limit ratio on your credit card. “It’s a good goal,” says Ray. “In a pinch, you may need to buy something very expensive that will max out your credit line. You may need to make only the minimum payments for a while so you can accumulate cash. But remember that everything you do with your card is going to affect your credit rating. To protect your scores, you should make every attempt to keep credit card debt well below the limit.”

As for the loans, paying before the due date is preferable.

“For business credit reports, one day late can damage your credit, not when you’ve missed an entire billing cycle,” says Crandall. “Sign up for automatic payments so you’re always on time. As soon as you get a bill, pay it. Your business credit scores will be higher the earlier you pay.” The more impressive your personal and business credit is, the better. You’re more eligible for preferable rates and terms, as well as higher credit limits and loan amounts.

Finally, don’t hesitate to take advantage of a credit issuer’s funds. “Think about borrowing, either with a loan or a credit card, as an investment in your business,” says Ray. “When you do it the right way, you are creating wealth. Your business is like a plant that you’re watering with a bank’s money. You are giving it what it needs to grow.”

Written by
Erica Sandberg
Credit And Money Management Expert Contributor
Erica Sandberg is a credit and money management expert who began her career at Consumer Credit Counseling Service (CCCS). There, she helped individuals and families overcome their debt issues and developed budgets, then transitioned into the agency’s primary media spokesperson.
Edited by
Editor