As the saying goes, “If all you have is a hammer, everything starts to look like a nail.” When it comes to your financial toolkit, a credit card can feel the same way. It’s so easy to put everything on your card that you might not realize you have other options.
Before reaching for that magic plastic rectangle, consider a loan when your business needs money, which can have several advantages over credit cards. These factors can help you decide whether a loan vs. credit card is the right choice for your business.
Should I Get a Credit Card?
Spending on a credit card is delightfully simple. If you already have a business credit card, you can make purchases right away up to your credit limit. And if you don’t have one, you can apply and receive a card in a few days, assuming your credit score is high enough to qualify you.
Outside of essentially borrowing money for free for up to one month (if you’re paying off your monthly balance on time), there are often other incentives to sweeten the pot. Some credit cards let you earn rewards like free flights, free hotel stays or cash back whenever you make purchases. You earn these benefits just for making your normal business purchases — and it’s pretty hard to argue with that!
Credit cards can charge extremely high-interest rates. The average interest rate in 2017 for business cards was 15.37 percent, according to ValuePenguin. Credit cards can also come with penalties, such as if you make a payment late or spend more than your credit limit allows. If you’re slow to pay your bills, credit cards can get expensive fast.
There are also times when you simply need cash, like to make payroll. While you can use a card to get a cash advance, credit card companies start charging a high-interest rate the second you receive the money, and they add an extra cash advance fee.
Should I Get a Loan?
With a short-term loan, you have more time to pay the money back than you would if you used a credit card, usually several months or years. Interest rates on loans also tend to be lower than what you’d owe on a credit card. With loans, you may be able to borrow larger amounts as well. For example, small business loans can range from $5,000 to $500,000. Finally, you get cash, which gives you the most flexibility because you can spend it however you want.
Since you’re paying off a loan over several months, you will likely owe interest. It’s not like a credit card where you can avoid owing interest by paying everything off within a month.
Another drawback is that it can be more difficult to qualify for loans. The lender might require that you’ve been in business for a minimum number of years or that your sales are past a certain threshold.
Loan vs. Credit Card
Credit cards are better for short-term, smaller needs, like paying your utilities and restocking inventory. They work well when you can pay everything back within a month. Loans tend to be better when you need a larger amount of money or want more time to pay it all back. They also make more sense when you need actual cash.
Just as a toolkit with only a hammer isn’t much of a toolkit, to build your business and help realize all its potential, you’ll need more than one financing option in your pocket. The next time you find yourself mulling over the question, “Should I get a credit card or a loan?” be sure to weigh the advantages of each option so you can confidently make the decision that’s best for your business — now and for the future.