Every successful business owner knows the importance of having access to funds when they need it most. Whether expanding inventory or investing in a new project, having the right financing options can make or break a business. When it comes to funding, businesses have various choices available to them, and we're putting two of the most popular options head-to-head - business credit vs business loans.

In this article, we will explore the benefits and drawbacks of each option, providing you with the information you need to make an informed decision about which is best for your business. So sit back, grab a coffee, and let’s delve into the world of business financing.

What is a Business Credit Card? 

Business credit cards are becoming increasingly popular among entrepreneurs and small business owners as an essential tool for managing expenses and cash flow, especially in the current economic climate with rising interest rates and inflation.

These credit lines are designed to help businesses separate personal and professional expenses while earning rewards and benefits tailored to their specific needs and taking advantage of lucrative zero-interest offers.

However, they’re not just for startups or small businesses with limited budgets. Even established corporations use their business credit cards to streamline payment processes and maximize rewards programs. These cards often come with various benefits, including cash-back, travel points, and fee waivers that can significantly add up over time.

Moreover, they may help establish a good business credit score, enabling owners to access higher credit limits and loans with more favorable terms in the future.

What is a Business Loan? 

Like business credit cards, business loans are financing options that give business owners funds to help them grow their businesses. Business loans differ from personal loans since they are specifically designed to meet the unique needs of businesses, making them a great option to cover expenses such as inventory, equipment, or payroll.

With varying repayment options and interest rates, business loans are a viable solution for businesses looking to expand their operations or stay afloat during tough times. Simply put, business loans work by providing you with capital upfront with the expectation that the loan will be repaid over a specific period, with payments being due immediately with interest.

Business Credit vs Business Loans - Which is Best to Fuel Your Business? 

Benefits of Business Loans 

    1. High approval amounts

One of the most enticing benefits of business loans is the high loan amounts that come with them. Unlike personal loans, business loans can provide substantial funding to grow your company. This is especially important for startups and small businesses that require more funding than what’s available through personal loans or credit cards.

High loan amounts can cover a broad range of business expenses, such as equipment, technology, inventory, payroll, and operating expenses. 

However, it is worth mentioning that the amount of businesses able to access the capital they need has significantly decreased. Forbes reported that in 2019, 51% of businesses could get the total amount of funds needed, whereas in 2021, that number dropped to 31%.

    2. Fixed repayment terms

One of the most significant advantages of obtaining a business loan to finance your business is the fixed repayment terms. With a predictable payment plan, businesses can budget and plan accordingly, allowing them to make more informed financial decisions.

This predictability allows businesses to focus on growth and expansion rather than worrying about fluctuating interest rates or payments.

    3. No personal guarantee

One significant benefit of using business loans to fund your enterprise is bypassing the need for a personal guarantee when you offer collateral. Instead, the collateral for the loan serves as adequate security for the lender, reducing the need for additional guarantees.

The risk of putting your assets at stake can be considerable, so minimizing that potential loss is always wise. With collateral in place, lenders can feel confident they’ll be able to recoup their investment should you default on your payments.

And as long as you stay within the parameters of your agreement, you don’t have to worry about being held personally liable.

Drawbacks of Business Loans 

    1. Prolonged application and approval time

One of business owners' greatest challenges when seeking funding is the time needed for application and approval.

Unfortunately, getting a business loan approved can be lengthy and sometimes take weeks or even months. This prolonged period can not only be frustrating but can also be costly for business owners who need capital quickly.

Moreover, the scrutiny of lenders during the approval process can be rigorous, and even after weeks of waiting, a business owner may still be rejected. 

    2. Higher interest rates for some businesses

Another disadvantage of relying on business loans to finance your business is that you may have to deal with higher interest rates. While loans can provide an infusion of cash to kickstart growth or cover expenses, the cost of borrowing can add up quickly. In 2023, borrowers see the average term loan reaching an interest rate as high as 45%, dramatically increasing the monthly payment and the total paid over the life of the loan.

The interest paid on a loan is essentially the price you pay for using someone else’s money. With rates that fluctuate based on the lender’s risk assessment, you must do your homework and compare offers carefully.

Borrowers with less-than-perfect credit may pay significantly higher rates, resulting in a strain on cash flow and potential setbacks to the business’s financial health. 

    3. Collateral may be required

When seeking a business loan, lenders often require collateral in the form of assets that can be seized if the borrower defaults. This can pose a significant risk to the borrower, as they may be forced to relinquish valuable assets crucial to their business's success.

Additionally, collateral requirements can limit the amount of funds that can be borrowed, as borrowers may not have enough eligible assets to put up as collateral. 

    4. Must start paying back immediately with interest

One significant drawback of using business loans to fund your business When a business loan is utilized, the borrower is obligated to start repaying the loan immediately, along with interest. This can create immense pressure on business owners, particularly those still in the early stages of their venture and do not have a consistent cash flow.

It can also hinder the growth potential of your business by tying up valuable resources in loan payments. If you are considering a business loan, it is essential to carefully consider the terms and conditions before committing to any agreements.

Benefits of Business Credit Cards 

    1. Availability

Unlike traditional loans or lines of credit, applying for a business credit card is often quick and easy, with online applications that can be completed in just a few minutes.

Additionally, once approved for a business credit card, you can access a revolving line of credit that you can use at any time, up to your credit limit. This means you don’t have to go through the hassle of applying for additional funding each time you need it, whether to purchase inventory, hire new staff, or cover unexpected expenses.

With a business credit card, you can access the funding you need when you need it, helping you keep your business running smoothly and achieve your financial goals.

    2. Flexible repayment terms

With a business credit card, entrepreneurs can pay their balances in full each month or make smaller monthly payments that are 1% of the balance they carry on the card to spread out the costs over time. This allows businesses to have more control over their cash flow and make strategic financial decisions that align with their business goals.

Furthermore, some credit cards offer 0% interest for an introductory period, allowing businesses to pay off their balances interest-free for 12-22 months.

    3. No collateral requirements

One of the most alluring aspects of using business credit cards to fund your business is the lack of collateral requirements.

Unlike a traditional business loan, which often requires collateral such as property or equipment to secure the loan, business credit cards utilize your creditworthiness as the primary factor for approval. This means that business owners don’t have to worry about putting their personal or business assets at risk in the event of a default. 

    4. Only pay what you use

A noteworthy benefit of using business credit cards to fund your business is that you only pay back what you use. This feature makes it easier for small business owners to manage their finances effectively and avoid debt.

With a business credit card, you won’t be stuck with a large loan amount you must pay back in one lump sum. Instead, you have the flexibility to pay off the balance as soon as you receive your revenue, or you can schedule payments over time. This method allows for smoother cash flow management and decreases the stress of managing business expenses.

Drawbacks of Business Credit Cards 

    1. Interest rates

While business credit cards are a convenient way to access funds for your business, high-interest rates can present a significant drawback if not used correctly. Once the zero-interest term has ended, the card will carry an average interest rate of 14% to 22%.

Each time you carry a balance, you accrue interest, which can compound and lead to significant debt in the long run. However, it is straightforward to avoid this pitfall if you desire to use this type of funding in your business.

With a strategy known as credit card stacking, business owners can leverage all of the benefits of business credit cards (including the zero-interest), even after that introductory offer has expired. Check out this free resource to learn more about how credit card stacking works.

    2. Annual fees

When exploring business credit card options from different banks, many will offer valuable rewards and travel perks but charge an annual fee to take advantage of them. While the card typically offers perks that outweigh the cost of the annual fee, it is money wasted if you’re not taking full advantage of and using those rewards.

Therefore, it is essential to determine your spending habits and intended use for the card before acquiring it to make sure the card's perks align with what you could use.

If you do not think the rewards make sense for your business, plenty of business credit card options offer incredible rewards and perks without the hefty annual fee, such as this offer.

    3. Limited spending power for some applicants

Because business credit cards are approved based on the borrower’s personal credit score even though they don’t report to it instead of using collateral, sometimes applicants can experience an initial limit in how much they are approved for.

Many lenders will base their approval amount on their relationship with the applicant. In other words, if you have been banking with a specific institution for over five years, you may receive $20,000. Alternatively, a bank you have never had a banking relationship with may only approve you for $2,000.

Fund&Grow has been working with entrepreneurs since 2007 to overcome obstacles like this and help them get approved for high-limit business credit cards in just 30 days. To learn more about how our process works, check out this free masterclass, where we dive into more tricks like the one mentioned above to help you quickly access the funding your business needs.

Which is Better: Business Credit vs Business Loans? 

After exploring and comparing the pros and cons of business loans and credit, the question remains: which option is the best option? While there are benefits to both, it ultimately comes down to your specific business needs and financial goals.

However, if you’re looking for a way to access the business credit you need while maintaining 0% interest long-term, our free resource can help. By clicking and registering for our free training, you’ll learn the ins and outs of securing the credit necessary to take your business to the next level.

AFFILIATE LINK DISCLOSURE: Some of the links in this article may be affiliate links, meaning that, at no cost to you, Fund&Grow gets a commission if you decide to accept an offer or make a purchase through our affiliate links.

Please read our full Affiliate Link Disclosure via https://www.FundandGrow.com/affiliate-link-disclosure