A Business Credit Card or a Business Loan: What’s the Better Option?

Written By
Julija A.
July 08,2023

There are many business financing options for covering day-to-day and unexpected expenses. Some of the more popular options for improving your cash flow are business loans and business credit cards. These have different eligibility requirements and interest rates. 

Deciding whether to go with a business credit card or business loan depends on the amount you want to borrow, what sort of repayment terms you’re comfortable with, and what you need the funds for. Our guide covers the pros and cons of both business loans and credit cards.

Taking Out a Business Loan

Taking out a small business loan is one of the most common ways to cover recurring or unanticipated expenses. Loans can also provide entrepreneurs with the capital they need to start or expand their businesses. Of course, just like with any other form of business financing there are a few downsides to consider.

When it comes to the business loan vs. credit card debate, the former is a good solution when you need a lump sum of cash for larger business expenses and purchases or simply to cover daily operational costs.   

The Benefits of Taking Out a Business Loan

If a business loan sounds like an appropriate solution for your needs, here are some of the advantages that this option offers: 

You get a lump sum to fund your business.

Whether you’re simply looking to cover the cost of doing business or need quick access to cash to explore growth opportunities, taking out a business loan is an excellent solution. There are different kinds of loans, but the amount you can borrow is typically higher than what other solutions offer. With online lenders, business loans can go up to $2 million, while the Small Business Administration offers loans that range from $30,000 to $5 million. SBA loans have low-interest rates, and repayment terms can go up to 25 years. 

The interest you pay on the small business loan is usually lower.

One of the important factors to consider when evaluating business loans and business credit cards is the interest. Traditional business loan interest rates that banks offer to financially sound businesses are typically low and fixed rates. For example, SBA loan rates for a loan higher than $50,000, with a repayment term of under seven years, can be as low as 6.5%.

Online lenders will also have better interest rates to offer when you compare a business loan and credit card. You'll often find APRs starting at a mere 6% for term loans and 8% for lines of credit. However, this is always influenced by your credit score.

You get fixed minimum monthly payments and longer repayment terms

Even though repayment terms vary by lender, some offer you the option to stretch out your payments for up to 25 years. Of course, with a higher number of installments extending across a longer period of time, you can enjoy lower monthly payments but will probably end up paying more in the long run in interest.

What Are Some of the Downsides of a Business Loan?

Both small-business loans and credit cards for businesses offer their share of perks and disadvantages. Below we’ll briefly discuss some of the downsides of business loans. 

You may need to put up collateral such as your home or business to get the loan.

A lot of small business loans are unsecured, which means that recipients don’t have to put up collateral. But in these instances, applicants may have to offer other guarantees and accept personal responsibility for paying back the borrowed cash. On the other hand, if the loan is secured, you’ll have to come up with valuable collateral such as your home or business. If you’re in the market for startup business loans, you’ll come across both secured and unsecured options.

You will have to pay interest on the loan, which can add up over time.

Interest can end up costing you a lot of money. This is especially true if you have a long repayment term. We’ve already touched on the fact that one of the key differences between a business loan vs. a business credit card is interest. And while it’s true that business loans typically come with low rates, you need to make sure you can afford to cover this expense over a period of many years. 

It can be difficult to qualify for a business loan if you have bad credit.

Even if you have a detailed business plan, it can be difficult to get a small business loan if you have a bad credit score. Lenders will often look at both your business and personal credit score when considering whether or not to give you a loan. If your credit scores are low, you may not be able to borrow the money you need.

Now that we've looked at the pros and cons of taking out a loan, let's do the same for credit cards. This will help you decide whether a business credit card or a small-business loan is a better choice for your individual needs.

Pros and Cons of Using a Business Credit Card 

Using a business credit card is another popular way to cover business expenses. Small business credit cards are an ideal option for small purchases. On the downside, credit cards generally come with considerably higher interest rates than business loans.

The Benefits of Using a Business Credit Card

In the following section, we’ll offer a brief overview of the pros of using a credit card as opposed to a business loan.

You can often get rewards, such as cashback or points, for using your business credit cards.

Most business credit cards come with some sort of rewards program. For example, you might get cashback on every purchase you make or earn points that can be redeemed for travel or other expenses. You can often get a 0% APR introductory rate on purchases and balance transfers as well.

You can build your business credit score by using a business credit card.

If you use a business credit card and make all or at least the minimum payments on time, it can help to build your business credit score. Using a good credit card for a newly-established business can be beneficial if you decide to take out a loan in the future.

Reasons to Avoid Relying on a Credit Card

There are several reasons why you might want to avoid using a credit card and go with a business loan instead.

You may be tempted to spend more than you can afford. 

It can be easy to spend more than you can afford if you have a business credit card with a high limit. This can lead to debt and damage your credit score. Unless you pay off your entire balance every month, you will also have to pay interest on your purchases.

You will have to pay interest on your balance if you don't pay it off in full each month.

The average APR for business credit cards is currently around 15%. When we’re talking about a business credit card vs. a loan showdown, cards have nearly double the interest rate. If you carry a balance on your card from month to month, you could end up paying a lot in interest.

If you max out your credit limit, it can hurt your credit score.

A higher balance means a poor debt-to-income ratio, which can make it difficult to get a loan in the future. It's important to use your business credit card responsibly and keep your balance well below your credit limit.

So, which of these is the better option for you - a business loan or a credit card?

Summing Up

Ultimately, the right choice comes down to your individual business needs. If you need a large sum of money for a major purchase or expansion, then a business loan is the better option. However, if you need a line of credit for short-term expenses or want to earn rewards on your business purchases, then go with a business credit card. 

Business loans and business credit cards both come with interest rates. The interest rate on a business credit card is usually higher than on a loan. That said, if you have an excellent credit score and pay off your card balance in full on a regular basis, you can avoid interest charges. 

Furthermore, loans tend to have stricter repayment terms, which means you'll need to be sure you can afford the minimum payments. On the other hand, business credit cards often offer 0% APR introductory periods, which can give you some breathing room when it comes to repaying your balance. But once that introductory period ends, the interest rate on your business credit card will likely be higher than the interest rate on a loan.

Both small business term loans and small business credit cards can damage your credit score if you fail to make regular payments. 

When trying to figure out which type of funding is right for your small business, make sure to calculate the total cost of borrowing the money. The business credit card vs. loan showdown is decided by weighing all the pros and cons.


Is business credit a good idea?


There is no one-size-fits-all when it comes to funding a business. Business credit cards are a good idea for businesses that need cash to cover day-to-day operational costs while earning rewards. Credit cards also help you separate personal and business expenses. It's important to consider your needs and your ability to repay any debt before deciding whether a business loan or a credit card is right for you.

When should I get a business loan?


You may want to consider a business loan if you need a lump sum of cash or if you have good credit and can qualify for low-interest rates. You should also think about whether you can afford the monthly payments before taking out a loan.

Is a business credit card considered a loan?


No, a business credit card is not considered a loan. A business credit card provider issues a credit limit that cardholders borrow from for short-term expenses. Business loans are typically used for larger purchases and business expansions. When making a choice between a credit card and a business loan, keep in mind that the interest rates on business loans are usually lower than on business credit cards.

About author

Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.

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