Finding the right financing for your business can feel like you’re the middle man in a fight between different financing types. Commercials and ads telling you “our credit card makes your life easy” or “our loans will save your business” are everywhere you turn. But when you need access to capital, should you reach for a business credit card or apply for a business loan?
Choosing the right financing option depends on your needs. Both tools serve distinct purposes. When you understand the differences between a business credit card and a business loan, you avoid getting a financial black eye and can choose the tool your business needs.
Business Credit Cards Are Fast and Flexible
When you need small amounts of money fast, a business credit card offers unmatched convenience. Once approved, you can immediately begin making purchases within your credit limit. You don’t wait for underwriting reviews or start a multi-year repayment plan.
Credit cards are best for business expenses when dealing with day-to-day operational costs, like stocking inventory, booking travel, or paying for digital ads. Their revolving nature means you can borrow, repay, and borrow again without reapplying for a new loan.
If your cash flow is unpredictable, this flexible access to funds can be invaluable. Let’s say you run a marketing agency and occasionally need to front client expenses before getting reimbursed. A credit card lets you handle those spending spikes without taking out a lump-sum loan or depleting your cash reserve.
Business Loans Have a Lower Cost
Small business loans offer lower interest rates and longer repayment terms than credit cards, which can have interest rates of 20% or more. A business loan will save you money if you plan to repay the amount over months rather than weeks.
Imagine you’re expanding a bakery and need $50,000 to outfit a new kitchen. You are unlikely to repay the full amount within a single month. Using a credit card for that could max out your limit and leave you with sky-high interest payments. A business loan is the better choice in this scenario. You’ll get a defined repayment schedule, a more transparent cost structure, and favorable rates.
Credit Limits vs. Lump Sums
A key difference between business credit cards and loans lies in how funds are issued. Business credit cards offer revolving credit, while business loans usually issue lump sums. One method isn’t better than the other, so pick the funding structure that best suits your needs.
Business Credit Card
Revolving credit means you’re approved for a specific limit and can use that amount as needed. When you repay it, it becomes available again. There’s no restriction on how you use the funds; you can tap into them whenever needed. If you need to cover regular fluctuations in your expenses or revenue, having regular access to funds makes sense.
For example, your landscaping company may face seasonal expenses to maintain equipment and restock supplies during peak season. A business credit card gives you ongoing access to funding during your high-expense period.
Business Loan
Lump sum funding means you get the money once and begin repaying it on a fixed schedule. If you need more capital later, you’ll need to apply for a new loan or refinance the existing one. This structure works well if you need funding for specific projects.
Maybe your e-commerce business is launching a new product line. You need one-time funding to cover the inventory and marketing costs. A small business loan with a lump sum upfront would suit your needs.
Minimum vs. Fixed Repayments
Business credit cards and loans have different repayment structures, which impact your cash flow. With credit cards, you can delay repayment until your billing cycle closes, and you may make minimum payments. Business loans, by contrast, have fixed repayments on structured due dates.
Business Credit Card
Repayment flexibility makes credit cards useful for businesses with varying cash flow. Say your expenses stay constant, but your monthly revenue varies. You could cover expenses with your revolving credit, make a minimum payment that month, and pay off the balance the next month.
That flexibility is valuable—but dangerous. If you spend several months rolling over the balance, you will accrue high interest and could end up with unmanageable debt.
Business Loan
A fixed repayment schedule from a business loan acts as a fixed cost. You’ll always know exactly how much to allocate each month. That predictability helps you plan your budget reliably and bring peace of mind.
A loan’s structured payments won’t be a burden if your cash flow is stable. But a set amount could strain your finances if your revenue varies. Compare the repayment amount to your cash flow to ensure you can afford a business loan.
Fine Print vs. Application Fees
It’s easy to focus on interest rates, but fees also determine the real cost of capital. Business credit cards and loans have different expenses and penalties, and the fees are outlined differently. Thoroughly vet your new financing option by looking in the right places and for the right costs.
Business Credit Card
When you apply for a business credit card, you usually agree to the fee listed in the fine print when you submit your application. It is solely your responsibility to understand the terms. Read the fine print and compare the costs with other credit cards. Many reputable online sources can help you know the real cost of the card.
Expect a business credit card to have annual fees, late payment penalties, and foreign transaction charges. Some cards charge a higher penalty APR when you miss a due date or change terms after a promotional period. Check with the card provider about how and when they will notify you of any changes.
Many cards offer cash-back rewards or travel perks, allowing you to earn value on your spending. Research these perks to maximize the card’s usefulness to your specific needs.
Business Loans
Even quickly approved business loans spell out fees during the application process rather than using fine print. Your responsibility is to find a lender who is upfront about costs. Shop for reputable lenders using customer reviews and interviewing them yourself. Look for someone who will explain unfamiliar penalties rather than try to hide them.
Depending on the lender, business loans could carry origination fees, prepayment penalties, service charges, closing costs, and late payment fees. Fit the loan to your business needs. For example, if you plan to pay off your working capital loan before the term is up, find a lender who offers options without prepayment penalties.
The Winner: Your Business
Ultimately, the right financing option comes down to your goals, business model, and needs. A business credit card could be your best ally, or maybe you want a business loan on your side. Some businesses even use both. As long as your financing option supports your business, you come out on top.
