Business Loans or Business Credit Cards: Which is Right for Small Business Owner?

Making the right financing decision is critical for unlocking the full potential of your business. Since businesses, especially small firms may often require access to small funds for smooth functioning; knowing your options in advance is useful

It is safe to say that business loans and business credit cards are the two most popular finance options the majority of small businesses consider. But which one is the best, and more importantly, ideal for your needs? 

This article will compare the key elements of both financing options and present you with enough facts to decide between both. Let’s get started. 

What Is a Business Credit Card? 

As the name implies, a business credit card is one that is used specifically for paying business-related expenses as opposed to a personal credit card. They can help companies improve their credit profile, and provide specialized offers and incentives. 

Business credit cards can be effortlessly acquired through various financial institutions, and the application process is similar to applying for a standard credit card. Although credit cards offer heightened levels of convenience, their interest rates are usually higher than traditional loans. 

Advantages of Business Credit Card 

1. Flexible Repayment Terms 

With business credit cards, you can spend up to your approved limit as you wish. You only have to make the monthly minimum payments and can pay as much higher as you want. If you repay the entire amount, you wouldn’t have to pay the interest amount or pre-payment penalties. 

2. Reward System 

The majority of credit cards come with numerous systems that reward you for spending. Such rewards may include coupons, free goodies and more. 

Disadvantages of Business Credit Card 

1. Interest Rates Are Higher 

As it is an unsecured form of lending, financial institutions typically impose a higher interest rate on credit cards as compared to business loans. If you repay the entire amount within a month, then interest rates won’t be an issue. But if you pay just the bare minimum, it might soon rise to a considerable amount. 

2. Eligibility Criteria 

Not everyone is eligible for credit cards. Along with a good credit score, your business must attain a specific annual turnover to be eligible. 

What Is a Business Loan? 

Also known as commercial loans, a business loan is a debt-based fund granted by a financial institution to a business. With business loans, you can acquire large amounts of money and repay it over a specified period of time. It is predominantly used to cover operational expenses, upgrade machinery, maintain physical assets, purchasing supplies, and more. 

The majority of business loans require collateral such as property, plant, or machinery. The applicant must also provide business loan documents such as balance sheets, ownership proof, and business continuity proof. 

Advantages of Business Loan 

1. Interest Rates Are Lower 

As opposed to credit cards, the interest rates for business loans are significantly lower. Of course, the interest rates are based on several factors such as the age of your business, the industry you are in, the intentions behind acquiring a loan, and more. 

2. Different Loan Types 

Unlike credit cards, business loans come in different forms. Depending on the specific need for which you are borrowing, you can choose a particular loan type such as equipment loan, vehicle loan, construction loan, and more. 

3. You Can Avail Large Amounts 

While credit cards help you meet small expenses of your business, business loans are primed to meet larger ones such as acquiring machinery or expanding infrastructure. 

4. Easy Repayments 

Since repayment of commercial loans is regular with a fixed period of time, they will be beneficial for easy budgeting. For smaller monthly instalments, you can opt for a longer tenure. 

Disadvantages of Business loan 

1. May Not Be Suitable for New Businesses 

Budding businesses may have a hard time acquiring a loan as financial institutions have several restrictions regarding a business’s age and annual revenue. This means companies may have to build their credit profile before applying for a loan. 

2. May Require Collateral 

Most business loans require collateral as it makes the lending process lesser riskier for the financial lenders. 

3. Strict Restrictions 

Even if you’re successful in availing a business loan, financial institutions may make it mandatory to maintain your debt-to-income ratio at a particular figure. This means, if your debt level rises beyond your equity, lenders may urge you to repay the outstanding loan amount. 

To Conclude

As you can see, both business credit cards and loans have unique advantages from a financial perspective. If you want quick access to small amounts of money, then credit cards will be a better choice due to the time it takes for loan approval. 

However, if you have a severe plan of expansion that requires building new infrastructure or acquiring machinery, business loans are the better option. Visit Fullerton India to know more about obtaining financial assistance for your business. 

Debbie Lentz

Accomplished Global Supply Chain executive with significant experience in the consumer products and retail industries with large brand name firms in the public and private sectors. Strategic and operational, drives change and creates efficiencies through integration of end to end process improvement focused on enhancing the customer experience and fostering company growth. Collaborative leader with high integrity who builds talented, results-oriented teams.

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