Business credit cards and business loans are the most popular sources of funding for small businesses, according to the 2016 Small Business Credit Survey issued by the 12 Federal Reserve banks.

The one that’s right for your business depends on certain qualifiers, such as how fast you need the financing and how much funding you need. Do you need capital to expand your operations, run a marketing campaign or to survive a rough patch?

Chances are, one type of funding will be better suited for your company over the other. Choosing the best fit is crucial to your short-term and long-term success.

Comparing Small Business Loans vs. Credit Cards

In comparing these two financing options against the funding needs at your company, the choice may become clear. While there are pros and cons to every financing option out there, typically the size, history and needs of your company will determine the type that works best.

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Why Get a Business Credit Card?

Business credit cards are ideal for offsetting periods of low cash flow. They’re best used to cover small expenses you can quickly pay back.

Business Credit Card Pros

  • Having a business credit card potentially can increase your company’s credit score, which can help you qualify for a business loan.
  • The repayment schedule and borrowing limit are fluid and ongoing. As long as you make on-time payments, you can have your credit line increased as needed.
  • You only pay off what you end up spending. This can save you money if your expenses for a project end up being less than projected — and it can encourage thriftiness in your business operations.
  • You pay 0% interest if you pay off all your expenses on time. With a business loan, you pay interest on the financing regardless.
  • It’s easier to qualify for a business credit card than it is for a business loan. Often, there’s less money credited than what you would receive in a business loan. Plus, the interest rate is higher. Keep in mind, a business credit card can be the stepping stone to a future business loan.
  • Some business credit cards let you get a 0% APR in the first few months of carrying the card, so that monthly pay-off doesn’t start until later. This allows the line of credit to act as more of a loan for your business, which is especially helpful when cash flow is low.

Business Credit Card Cons

  • The financing amount is smaller: Some credit lenders give 5 figures to companies that meet high qualifications, but even those amounts are smaller than larger business loans.
  • The interest rate rises sharply when the card isn’t paid back on time. This can cause you to lose money and make things difficult if you encounter cash-flow issues.
  • Expect a faster repayment schedule: While the amount of debt may be less daunting, the payment schedule for business credit cards is month to month. You’re required to pay back everything spent on the card in a month’s time.
  • A business credit card potentially could hurt your credit score. Carrying an outstanding balance on a credit card or making late payments will look bad to lenders, hurting one’s prospects of securing a business loan.

Why Get a Small Business Loan?

Small business loans are an excellent funding option for stable companies with existing financial records and credit histories. That said, companies lacking a credit history still may acquire a loan by putting down collateral. Small business loans are a bigger commitment, but they’re the best way to secure large, long-term funding. Here are the pros and cons of business loans:

Small Business Loan Pros

  • You can obtain larger sums of capital than what business creditors offer on lines of credit. Securing long-term funding in this way gives you what you need to focus on growth instead of worrying about where your next funding is coming from.
  • There’s a much lower interest rate on business loans compared with the high-interest rates you pay on outstanding credit card debt.
  • The payment schedule is a lot longer, as it can stretch as long as decades, depending on the loan size. Rather than the amount being set on what you spend month-to-month, it’s set according to a set payment schedule that ensures you can pay back the initial loan you took out in manageable chunks.
  • Lenders are paid in interest fees regardless of your payments being on time, whereas creditors get paid more when your payments are late. Lenders are more willing to work with you to rearrange your payment schedule while maintaining the fixed interest rate. On the other hand, creditors can start charging sharply higher interest if a payment is missed, and you have no control over the repayment schedule.
  • Business loans build your company’s credit score as long as you make your payments on time. They look great for other lenders, as well as venture capitalists, and can help you establish a rapport that can help you qualify for other funding sources.
  • A business loan has less of a chance of hurting your credit score compared with a credit card. Indeed, credit card debt is more difficult to pay off with the fast repayment schedule and high interest on late payments. Business loans are paid off in more manageable amounts over a longer period, which can make them easier to pay off.

Small Business Loan Cons

  • It’s more difficult to qualify and get approved for a business loan as compared to a line of business credit. You’ll need to show prospective lenders your company’s tax returns and history of financial statements, which requires multiple years of history generating revenue. Lenders also want to see good credit scores, and if you don’t have one, you may have to offer collateral on the business loan.
  • If you end up offering collateral, you risk losing it. It could be your own money or one of your assets, like a vehicle.
  • It takes several weeks from the time of applying with different lenders to signing on the loan. Mostly, waiting to hear back from lenders as they look into your credentials is what takes the longest. If you’re in need of fast cash to fund a project or cover unexpected expenses or a bout of low cash flow, a business loan can’t be secured fast enough.

Small business loans are an excellent funding option for stable companies with existing financial records and credit histories.

Business Loan or Credit Card: Which Is Best?

Cash advances can catapult your business to new heights.

Deciding on whether to take out a business loan or apply for a business credit card ultimately depends on your company’s size and funding needs. Consider your financing goals and weigh the risks.

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