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

Need capital for your enterprise? Whether you’re launching your business or simply covering its operating 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 power of both products — and how to get the right credit card or loan for you and your business.

Business loan vs. business credit card

The beauty of business credit cards

Ramon Ray, a small business expert and the founder of Celebrity CEO, 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 a credit score in the good to excellent range and enough income to show the issuer you can afford the payments.

All small business credit cards will give you a credit limit, which is typically higher than it is for personal cards. Some cards, such as the American Express® Business Gold Card, come with a flexible spending limit that adapts based on factors such as your purchases, payments and credit history.

A big advantage of business cards is their flexibility. You can charge whatever you want, when you want. Each billing cycle, you can repay the card’s minimum payment, the entire balance or somewhere in between, which can be helpful when managing your business’s cash flow.

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”.

— Ramon RaySmall business expert and founder of Celebrity CEO

Therefore, use your card for things that you know you can pay off within a few months. If you do get a 0 percent introductory rate, structure your payments so you’ll be debt-free before the regular rate goes into effect.

Interest rates on small business credit cards can be low, often starting at 18.5 percent, though they can also go into the upper 20s. If you never carry a balance, you’ll typically get an interest-free grace period on purchases each cycle, so no interest will be applied when you pay the entire bill by the due date.

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

• Boosted rewards rates
• A sign-up bonus
• A 0 percent intro APR offer
• Various business-related perks

But don’t let those benefits and perks tempt you to overspend. Bankrate’s Credit Card Debt Survey in January 2024 found that 49 percent of credit card holders carry a balance from month to month. The interest that accrues on purchases you can’t pay off in full each month can easily cut into the value of those rewards, bonuses and benefits.

Even so, about two-thirds (67 percent) of Americans with credit card debt still attempt to maximize credit card rewards, according to Bankrate’s Chasing Rewards in Debt Survey.

By going against the grain and focusing on paying off your balance every month, you stand to save money and preserve the value of your credit card rewards.

What to consider before choosing a business credit card

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

A cash back card, such as The American Express Blue Business Cash™ Card, is simpler to understand, but a points card, like Chase’s Ink Business Preferred® Credit Card, can land you a higher redemption value.

While a large bonus can be appealing, make sure you can meet the minimum spend requirement without getting into unmanageable debt. Some business credit cards have high annual fees, too, so weigh the cost against the benefits.

Before you apply for a business credit card, review your credit score to see if it’s in positive shape. If your score is poor to fair, take steps to improve it so you’ll be eligible for a greater variety of business credit cards.

Pros and cons of business credit cards

Choosing between a small business loan vs. a credit card means you’ll need to consider the pros and cons of each. Business credit cards can be helpful in some situations, but not all. Here’s what you need to consider with a business credit card:

Pros

• Easier to qualify for than a business loan
• Useful for optimizing cash flow
• Helps cover daily operating expenses
• Can help build business credit
• Often comes with rewards and benefits
• Paying the purchases balance within the grace period usually avoids interest
• Repay the balance and reuse your credit limit
• Valuable welcome bonuses
• Option for employee credit cards

Cons

• May have an annual fee
• Higher variable interest rates
• Fluctuating payment amounts make it harder to budget
• No set repayment period
• May enable overspending

The power of small business loans

A small business term loan, on the other hand, is a fixed amount of money that you receive all at once, typically for thousands to 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 pay the debt down is called the term, which is generally between one and five years, though it can be much longer.

The best small business loans, including business lines of credit, are designed to address short-term expenses. Some business loans are secured by assets, while others are unsecured.

According to Ty Crandall, CEO of Credit Suite, business loans are ideal 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 from the U.S. Small Business Administration — an SBA loan — has interest based on the prime rate (currently 8.5 percent) plus a percentage. The percentage changes based on the SBA loan type, 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 term loan that has a current rate starting at 7.00 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’ll only want to 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. However, if you know a business loan would be the best option for you, then you may want to consider some of the best business loans for bad credit until you’re able to improve your score.

What to consider before choosing a small business loan

To choose the best business loan for you, consider:

• How much you want to borrow
• Whether you want a secured or unsecured loan
• The loan’s term length
• Your anticipated monthly payment
• The interest rate
• Associated fees
• Total cost by the time the balance is repaid

Bankrate’s business loan calculator can help you determine the overall cost of borrowing.

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

Pros and cons of business loans

Business credit cards work well for handling daily expenses, but what if you need to purchase large equipment or finance expensive research and development costs? That’s where a business loan could be more effective. Understand whether a business loan is the right choice for you by assessing the pros and cons.

Pros

• Easier budgeting with fixed payments
• Concrete date for full repayment
• Helpful for larger one-time business purchases
• Receive a lump sum
• Your interest rate is locked in
• Can help you build business credit
• Typically lower interest rate than a business credit card

Cons

• Not useful for recurring purchases
• If you need more, you’ll have to apply for another loan
• Secured loans use your business property as collateral
• Harder to qualify for than a business credit card
• Costly origination fees

Treat all credit products carefully

As with your personal credit lines, you’ll want to manage your business credit responsibly.

In addition to paying on time, avoid keeping a high debt-to-credit limit ratio, also called a credit utilization ratio, on your credit card.

“In a pinch, you may need to buy something very expensive that will max out your credit line,” says Ray. “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 business credit rating. To protect your scores, you should make every attempt to keep credit card debt well below the limit.”

As for business loans, paying before the due date is generally a good idea.

“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, as you’ll be more eligible for preferable rates and terms, as well as higher credit limits and loan amounts.

The bottom line

While you do need to be careful with your business credit, whether you’re borrowing using credit cards or loans, don’t hesitate to take advantage of the funds you’re issued.

“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.”