Learn the differences between a business credit card and a business loan so you can make the right choice for your company.
Both business credit cards and business loans are popular financing options for many companies, but there are several key differences between the two. To find the better option for your business's needs it helps to compare the two side by side and examine what these differences are.
Business credit cards are a lot like personal credit cards. They put a revolving line of credit in your pocket, which needs to be managed responsibly.
Business loans are usually tailored for a specific need such as buying essential equipment. They can be paid to you in installments or as a single lump sum, and often you'll have the option to tailor your repayment schedule to suit your business's needs. There are many different types of business loans available.
Compare business loans and business credit cards
The defining features of loans vs credit cards
If you're looking for business finance, then either a credit card or business loan can work well, but there are enough differences between the two that one will usually be significantly more suitable than the other.
| Business credit card | Business loan | |
|---|---|---|
| Funding | A specified amount of money that you can spend as a flexible, ongoing, revolving line of credit | One defined lump sum or multiple set payments |
| Repayment | Minimum monthly repayments | A set repayment schedule |
| Eligibility | Typically has strict requirements | Many options with less strict requirements are available |
| Interest rates | Varies, most offer purchase rates of between 10-20% p.a. | Can be a monthly or annual rate. Typical annual rates for secured loans range between 3-10% p.a. |
| Fees | Annual fees, late repayment fees and more may apply | Signup fees, late repayment fees and more may apply |
| Other features | Rewards points, complimentary insurance and link-ups to accounting software | Typically has no special features other than online account management |
| Advantages | Flexible funding, continuously available money and bonus features | Many different options, can be closely tailored and a choice of many providers |
| Disadvantages | Typically cost more than standard loans | Has few special features, loan quality varies widely |
How business credit cards are different to business loans
Business credit cards offer a number of advantages in comparison to typical business loans, mostly in the form of extra features. How extensively you plan on utilising these features often answers the question of whether or not a business credit card is worth it for you.
Business credit cards often come with the following bonus features:
- Track your business spending more easily by seeing all expenses in one place
- Access various account management and financial analysis tools
- Give business credit cards to employees and manage the cards through one account
- Enjoy rewards like frequent flyer points and complimentary insurance
- Get access to perks such as free delivery or express shipments
- Build your company credit score by using the card wisely
There are also downsides to consider:
- Interest rates skew high, ranging from about 10% to 20% p.a.
- Almost all business credit cards charge an annual fee, which is usually higher than the annual fee charged for an equivalent loan.
- It can be difficult to get a business credit card. Eligibility requirements are usually more strict than with loans.
- The cost of missing multiple repayments can rapidly escalate. An extended period of poor business might saddle you with growing debt.
- If you depend on this credit to pay for business operations, then you might become abruptly stuck when it runs out
Choosing between a business loan and a business credit card
Generally speaking, a business credit card probably isn't the right choice if you're looking for ongoing funding. However, it probably is the right choice if you're looking for an all-round business tool with built-in borrowing functionality. Business credit cards can help fund ongoing purchases and expenses, as long as you're able to repay what you use each month. Taking full advantage of the extra features and benefits, as well as using the card for quick financing on the side, is an effective way to use a business credit card.
If your number one priority is getting financing, then a business loan is more likely to be right for you. You can borrow only the amount you need without locking yourself into a potentially expensive account, you can tailor your repayment plan and there are plenty of options for self-employed borrowers and people with an erratic credit history.
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