How to Choose Between Small Business Loans and Business Credit Cards

How to Choose Between Small Business Loans and Business Credit Cards

Credit cards and small business loans in the world of business and finance remain the two most popular sources of financing for business owners. Almost 86% of all applicants today seek a business loan or business lines of credit, whereas 30% apply for credit card financing.


The decision of whether or not you get small business loans or a business credit card loan to meet your business financing needs all depends on various factors; including how well you intend to use the loan, and whether your credit score now, has the right strength for your business finances.


As you read this guide, here is a clear comparison of the two financing options, as well as the pros and cons. You will learn about how you can choose the suitable one for your small business operational needs.


Business Credit Cards Vs. Small Business Loans: What’s The Right Choice for You?


Small Business Loans

This option is usually a suitable and reliable choice if you are searching of ways to buy real estate, refinance your existing debt, make large investments, or buy new business equipment since these loans help to provide a larger and better sum of money. Typically, repaying them is possible on a monthly basis, with fixed rates of interest, which makes them a suitable option for small businesses that want large investments over a long period. The SBA itself doesn’t give this loan, but it provides it through banks and lenders like Aurumfi, giving them the rules and guidelines.


Compared to business credit cards, these loans are harder for approvals, and they may require some form of collateral, which could take it a longer funding time, also depending on the lender. They are ideal for most established businesses, since they are sure to receive stronger revenue, and the finances to qualify.


Business Credit Cards

In general, these are best-suited options for working capital and ongoing expenses. A line of credit offers you the flexibility and lets you pay more interest on what you can borrow until it reaches your business credit limit. Know that business credit cards can also carry several benefits, like spending rewards, sign up bonuses, percentage rates, and the ability to build a suitable business credit. However, all these also revolve around the line of credit that comes with other fees and high costs of interest.


The Pros and Cons of Small Business Loans

The Pros


The Amounts to Borrow are higher: The SBA loans, guaranteed by the U.S. Small Business Administration allow businesses to borrow as much as $5 million, whereas other lenders provide about $2 million. This also makes it better for small business loans to purchase or even renovate their building, work on major expansions, finance inventory, buy equipment or refinance debt.


Lower Costs: Usually, traditional banks offer you the lowest possible rates with the strongest finances. For example, SBA loans, backed by lenders like banks are likely to carry some low-interest rates compared to business credit cards. Note that these rates are all set using the prime rate. If you get an SBA loan of over $50,000, you can pay it off in seven years, as an example, it will carry an interest rate of about 6.5%, whereas a loan of $25,000 or less paid off in seven years will have an interest rate of 9%.


Local Lenders Usually Offer Lower Interest Rates in This Case

The Cons


In some cases, small business loans often require some form of collateral, or you can say assets like inventory, equipment, or real estate that the prospective lender may seize if you plan to make any payments. Personal and collateral guarantees are often necessary as security on SBA loans.


In addition, qualifying for the loans is much harder. You need to have a good credit score, and working bank statement of your business (about three years of its operation) to ensure you receive the loans. You must have a good business or personal credit, and collateral for loan approvals or you will need down payment.


Note that most business lenders need a solid record of your business finances and a good credit score for your loan approval.


The Pros and Cons of Business Credit Cards

The Pros


You may receive some rewards like cash back, similar to regular credit cards. However, these rewards are just for business expenses. As an example, some cards offer cash back offers for spending on cable, and internet, or gas and supplies or phone services. Other cards may offer to sign up bonuses.


You don’t need any form of collateral for this option. Unlike the SBA loans, you don’t have to pledge any of your assets in the form of security for the repayment of your money.


The Cons


If you have a high balance on your credit, this can affect your credit scores. Keep in mind that both personal and business credit score consider your credit ratio.


For more information on these two loan options, it is advisable that you contact local banks and lenders in your area.


You may also have to assign some personal guarantee since collateral is not necessary. This will make you liable for unpaid debts. If you are not able to make the payments to the bank, they may then go after your personal assets.




Nancy Coleman is working as a Content Strategist. She is a Blogger who loves to write on different topics including health, lifestyle, small business loan and many more. Her goal is to educate people about various topics which educate and benefit readers. She is a passionate writer with the vision to guide people about latest trends in different categories.

Nancy Coleman

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