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Business Credit Card or Small Business Loan: Which Is Better?

August 16, 2023 By
Kenneth Choi
hands holding out of a fan of 100 dollar US bills

As a small business owner, you'll likely need access to funding at some point to support your business needs.

You may have to get through a seasonal slump, purchase additional equipment, or take advantage of bulk stock offers. Business credit cards and small business loans are two top choices for injecting cash into your business. Both are great options, but it's important to understand that they serve different financial goals. 

As a business owner, it might not always be clear what the benefits and pitfalls of these loan options are. When comparing a small business loan vs. a credit card, it's vital to the success of the business to choose the right one. 

Small business loan vs. business credit card

Choosing the right finance method can affect your future cash flow and whether your business can service the debt. Let's explore the difference between a business loan vs. a business credit card. 

Understanding small business loans 

A small business loan is a medium-term loan that's repayable up to 10 years. You get paid a lump sum, which you can use for business operations. Small business loan amounts are typically higher than credit card limits and can go up to $5 million. To qualify for business loans offered by banks, you may need a credit score of 680 or higher. 

A business loan is often used to service a long-term need. You may need one if you're: 

  • Covering the startup costs of a brand-new business that hasn't started generating an income yet – from shop fitting and initial stock purchases, to working capital.
  • Buying expensive equipment.
  • Expanding your business.

Benefits of a small business loan 

There are several reasons business owners may want to opt for a small business loan: 

  • Repayment happens in equal installments and is paid over a specified term, which can ease up cash flow.
  • Thanks to programs such as Small Business Administration (SBA) loans, business loan terms may be more favorable. The underwriting conditions on these loans may also be more relaxed.  
  • You still retain full ownership of the business since you don’t need to exchange equity for funding as you might have to with an investor. 

Disadvantages of a small business loan 

Business loans may have some drawbacks: 

  • It might be hard to qualify, especially when the business is a startup or still under the two-year mark. 
  • Repayments might not be manageable when the loan term is too short. 
  • The loan may not provide sufficient access to capital in the future. 
  • You may risk assets if the loan requires collateral. 
  • Some applications may be cumbersome, requiring detailed documentation.
a hand showing a blue credit card

Deciphering business credit cards

A business credit card provides funding on a revolving basis. This means you're able to access funds when needed and not all in one go. Traditionally, business credit cards had to be settled every month. However, more lenders are allowing businesses to pay the minimum installment, then charge interest on the outstanding daily balance. Some business credit cards offer an interest-free period between 30 to 56 days. Business credit card limits rarely go higher than $50,000. You typically need a FICO score of 670 or higher to qualify. 

Business credits cards are ideal for short-term cash flow constraints, such as:

  • Stock purchases throughout the month
  • Small appliances, tools, and gear
  • Travel costs
  • Petty cash

Benefits of using a business credit card

Business credit cards can ease short-term cash constraints. Here are some other advantages: 

  • They can be easier and faster to apply for than other loan types, which speeds up access to credit. 
  • They may offer purchase protection for faulty items or cancellations.
  • Credit cards are convenient for business travel. 
  • You can categorize spending to streamline accounting. 
  • It's easy to issue supplementary cards to staff and business partners with individualized limits. 
  • Revolving credit offers access to funds when needed.

Disadvantages of using a business credit card 

Using a business card requires discipline and careful planning. Before you decide, be mindful of these drawbacks: 

  • Maxing out a business credit card can be costly if you're only repaying the minimum repayment every month. Credit cards tend to have higher APRs than business loans. 
  • The limit might not be enough to meet your funding requirements. 
  • Cash advances are expensive if you're not only planning on making purchases. 

Consider your small business needs 

Before choosing a business loan or credit card, ask yourself a few questions: 

  • Will I need the funds for the short term or long term? 
  • Will I need revolving access to funds? 
  • Do I prefer a lump sum? 
  • Can I afford the monthly installments? 
  • How much do I need? 
  • Which is the most cost-effective solution? 
  • How does my business revenue affect which loan type I'm applying for? 
  • Will my credit score affect the application? Will the application affect my personal credit score? 
  • How long have I been in business? 

Laying the foundation for your business's financial success

Finding a finance option that works for you will depend on your business objectives. For long-term needs, a small business loan should be a good fit. Business credit cards better suit short-term needs such as stock purchases and travel. East West Bank is committed to supporting your business's financing needs by providing simplified loans, cash management tools, and supportive resources. If you're ready to take the next step, apply for a business loan today.