Eventually, every business owner finds themselves without money. It’s not some huge growth venture that requires cash, it’s simply day-to-day operations. Buying supplies for a busy season. Paying payroll over a slow stretch. Replacing a broken piece of equipment. Should you get a business loan or a business credit card?
While both options provide cash flow, they couldn’t be more different. In fact, depending on what your business needs, one option will save you money and heartsache and the other will lock you into to a situation that fails to meet its needs.
Why Business Loans Seem Like The “Serious” Option
Loans feel like something that people with serious businesses would do. They feel more official. It’s a bank. It’s an application process. It’s approval for a certain amount of money, and it’s access to a set number of dollars deposited into your account to do with what you please.
This works out well if you know what you want from it. Constructing a new location? Purchasing a delivery vehicle? Hiring three additional employees? A loan gets you your number with a payback schedule to accommodate how you had anticipated using the money.
But loans do not correlate with the majority of small business expenses. You aren’t making one large purchase; you’re making hundreds of small ones spread throughout the month. Office supplies, software subscriptions, client meals, travel fees, payment for contract workers. These purchases don’t require 50k sitting in your checking account, they simply need some leeway.
When Credit Cards Make More Financial Sense
Business credit cards solve another problem. They don’t give you money and start charging you interest right away; they give you credit to access with interest only accruing on what is held past the due date.
For example, let’s say you need 10k to cover operating expenses over the next quarter. With a loan, you’re paying interest on 10k – at least – right away even if you’re stretching out that spend over the course of three months. With a credit card, you’re paying interest based on what you actually spend when you use it during those three months. And with a credit card, if you pay it off each month? There is no interest.
This difference in approach is much more significant than people realize. For those businesses without cash flow one month – they could be barreling forward for two months but have one poor month – credit cards can mean the difference between staying afloat or going under because this can help subsidize temporary dips instead of forcing the owner into debt repayment because a loan was optioned instead.
The Real Benefit? Flexibility That Loans Don’t Provide
Loans are definitive. They give you what you’ve applied for (if you’re approved) to pay back in increments whether or not your month anticipated needing that money for expenses or not. When you’re 1000 short one week, playing catch up becomes too complicated, resulting in late fees, credit damage or – worse – the loan being called due.
Credit cards allow flexibility. A bad month? Pay the minimum. A good month? Pay it off entirely. If cash flow is needed, one can adjust expenses and payments based on what’s happening in real time instead of what was predicted five months earlier when applying for said loan.
This is why taking the time to look into business credit card tips can pay off in the long run since knowing what benefits lend themselves to your specific situation improves how useful the card is.
When Loans Still Make Sense
Not every dollar value situation makes sense with a credit card either. Let’s say you need 100k for commercial property or to buy another company; a loan is truly your only option. Credit cards will never amount that high for newer businesses and even if they did, the interest would be astronomical if repayment isn’t reached quickly.
Loans also make sense when there’s projected return repayment. Some business owners like knowing they’re paying x number of dollars per month as opposed to managing balance. There’s nothing wrong with this type of operation as long as it works for them.
And believe it or not – loans can have lower percentage rates than credit cards as long as there’s strong credit and collateral involved. A secured business loan could get someone 6-8% APR while a business credit card would be higher – 15-20% or more.
But – but this only matters if there’s a balance to be paid. A person could pay off their credit card every month so the interest does not matter.
The Speed Advantage No One Considers
Getting a business loan is often a long process. Between applications, finances, tax returns, business plans and waiting days or weeks for underwriting, if cash is needed quick – equipment malfunctions, opportunities arise, emergencies occur – this timeline does nothing helpful.
Business credit cards – especially those tailored to start ups and smaller companies – approve you in minutes (some won’t even do a hard check to hurt your score). You could apply in the morning and begin utilizing the card the very same afternoon.
That kind of speed matters when running a business where time is everything. Missing out on bulk supplies because cash cannot get unlocked in time is real money lost.
Building Credit While Spending
Finally, an unnoticed advantage exists with business credit cards as they help build business credit history which helps get loans down the line (if they’ve been established beforehand).
Every on-time payment, every month using responsible amounts within reason and every low ratio – that builds the business credit profile. Do this for a year or two, when it comes time to get that big expansion loan, suddenly things will be better interest-wise since a profile history can vouch for responsibility.
They help credit too but only while being paid off; once it’s paid off, that account closes. A credit card remains open while building credit history for however long – as long as it’s handled correctly.
What Works Best For Most Small Businesses
For day-to-day operations, cash flow gaps and general expenses that come with running a business, credit cards win. They’re quicker, they’re more flexible and they’re less expensive – as long as someone’s disciplined about repayment.
If serious capital needed to be spread out over predictable payments then loans make sense – but only if there is discerned expensive purpose for doing so. The key is identifying how to tie the financing resource to what someone is trying to accomplish.
Most successful small businesses use both at different times: a credit card handles the day-to-day while a loan supports the large one-time purchase. There shouldn’t be a need to pick just one and stick with it forever; your business changes, your needs change and your financing should change too!