Business credit cards vs. business loans
When your business needs access to cash, you have a couple of options. A business credit card might help you manage day-to-day expenses. But if you need a larger sum of money up front, a business loan could be the better choice.
Both business credit cards and business loans come with pros and cons. Here’s what to consider when looking at each one.
What you’ll learn:
- Business credit cards offer flexible revolving credit for day-to-day expenses and may include rewards, but they often come with higher interest rates.
- Business loans often come with lower interest rates, though they can be harder to qualify for.
- Business credit cards and business loans differ in terms of interest rates, fees and repayment structure.
What’s the difference between business credit cards and business loans?
Business credit cards and business loans are tools your company can use to access financing, but they differ in terms, usage and purpose. In some cases, using both may be necessary to meet your business needs.
Here’s a quick overview of the key differences between business credit cards and business loans.
| Business credit card | Business loan | |
| Type of financing | Revolving line of credit | Installment loan or line of credit |
| Typical loan amount | Usually up to $50,000 | $50,000 to $1M and up |
| Interest rates | Variable, often 18%-36% | Fixed or variable, often 6%-30% |
| Repayment terms | Minimum monthly payments with a balance that can be carried over | Fixed monthly payments over a set term |
| Approval time | Instant or up to a few days | Several days up to a month or more |
| Credit requirements | Typically requires good to excellent credit | Varies; typically requires good credit and may require collateral |
| General use | Regular business expenses (travel, office supplies or inventory costs) | Large one-time expenses (equipment, real estate or expanding the business) |
| Rewards available | Often includes cash back, points, bonus miles, etc. | Usually no rewards offered |
Business credit cards
Whether your business is a startup or an established limited liability company (LLC), business credit cards can be a useful way to manage expenses and cash flow.
When you need quick access to funds for variable or short-term expenses—like travel or office supplies—a business credit card can provide the support you need. Plus, using a business credit card instead of a personal credit card for company expenses helps keep your business and personal finances separate.
Some key advantages of business credit cards include:
- Flexible access to funds
- Easy application process, often with quick approval
- Helps establish credit history and build your business credit scores
- Potential access to rewards like cash back or bonus miles
- Often higher credit limits compared to personal credit cards
- May come with 0% annual percentage rate (APR) offers—or avoid interest charges by paying your balance in full each month
There could be a few potential disadvantages to using business credit cards. For example, late payments could affect your personal credit score. You might also run the risk of overspending while attempting to maximize rewards. Plus, if you don’t pay your balance in full before the grace period ends, you could face high interest charges and additional fees.
Business loans
If your business needs to cover larger costs—such as scaling up operations or purchasing expensive equipment—a business loan can provide a lump sum of money up front. Banks, credit unions and various financial institutions all offer business loans.
An example of a business loan is an SBA loan, backed by the U.S. Small Business Administration. These small business loans often offer lower interest rates, higher loan limits, lower fees and flexible terms to companies that qualify.
Business loans have their own set of advantages, including:
- The ability to borrow large amounts, often up to $5 million or more
- Lower interest rates for qualified borrowers
- Predictable repayment schedules with fixed monthly installments
- Longer repayment terms are often available
Qualifying for a business loan can be more challenging since lenders often require strong financials, a high credit score or collateral. The approval process may take time and involve more paperwork. And if you need additional funds later, you’ll typically need to start the application process over and qualify for a new loan.
Which is more cost-effective?
The cost-effectiveness of using a business credit card versus a business loan depends on a few factors. Both options can help your business save money in certain situations. Before choosing what’s right for your organization, it’s important to consider your business needs and weigh your options carefully.
Interest rates and fees
When comparing business credit cards and business loans, it’s important to consider the interest rates and fees involved. Often business loans are more cost-effective since they tend to have lower interest rates than credit cards—typically a fixed rate between 6% and 30%. That said, rates can vary widely depending on your creditworthiness, the loan type and the lender.
Business credit card interest rates are variable and usually range from 18% to 36%. However, you can avoid interest charges by paying your balance in full each month. Plus, some business cards offer a 0% APR introductory period.
Both business credit cards and business loans come with certain fees. Some business credit cards have an annual fee, which often can help offset the cost of premium benefits. Business loans may include origination, application or service fees, but they typically come with fewer ongoing charges.
Long-term costs
Interest rates, fees and other factors all affect the long-term costs involved with business credit cards and business loans.
Here’s a closer look at the long-term costs of a business credit card:
- Interest: If you carry a balance from month to month on a business credit card, interest charges can add up quickly. Over time, this can increase your debt and make it harder to fully pay off the balance.
- Fees: In addition to potential annual fees, late payments on your business credit card can result in late fees or a penalty APR. A penalty APR may stay in effect indefinitely, increasing your long-term borrowing costs.
- Impact on business credit score: Late or missed payments—or using too much of your available credit—can lower your business credit score, which can lead to higher borrowing costs in the future.
Here are some of the long-term costs associated with business loans:
- Interest: While business loans often have fixed interest rates and predictable monthly payments, interest still adds up over time. For example, if you take out a $50,000 loan with an 8% interest rate and a six-year term, your total interest charges could be around $23,000.
- Early payoff penalties: Some types of business loans, like SBA loans, might come with prepayment penalties. These penalties—a fee for paying off the loan before the term ends—help ensure lenders are reimbursed for the interest they would’ve received had they followed the initial payment schedule.
- Lost flexibility: Business loans require monthly on-time payments—often for years at a time. This can limit your cash flow and flexibility if your revenue decreases during certain times of the year.
What are the qualifications for each?
Lenders will need to approve your business for a business credit card or a business loan. Here’s what they typically consider for both:
- Business credit score: A good to excellent score can improve your chances of approval.
- Time in business: The longer your business has been operating, the better your approval odds are.
- Business revenue and profitability: Your business’s income and profit can help lenders evaluate your creditworthiness.
- Financial strength: Your business’s overall financial health shows your ability to repay the loan.
While these factors apply to both credit cards and loans, lenders usually require more detailed financial documentation and stricter credit criteria for loans, since loans often involve larger amounts and longer repayment terms.
To apply for a business credit card, you’ll typically need to provide details about your company, such as your name and contact information, the type of business and its legal structure, your Federal Tax ID, current revenue, monthly expenses and more. Most applications can be completed online, and if you meet the eligibility requirements, the card issuer should approve your application within a few days—sometimes even just a few minutes.
Applying for a business loan involves a similar process, but depending on the lender, you may be required to provide additional information, like tax returns, cash flow projections, your business plan and more. It can also take longer to find out whether you’re approved. Depending on the lender and the loan amount, you may need to wait a few weeks—or even up to a month or more.
How does repayment work?
The repayment terms for business credit cards and business loans differ in structure and flexibility.
Business credit cards typically require a minimum monthly payment, though in some cases you may be required to pay the balance in full each month. And to help avoid paying interest charges, it’s recommended to pay the balance in full whenever you can. Once you repay your balance, your credit replenishes, giving you access to your full line of credit once again.
With a business loan, you repay the amount borrowed in equal monthly payments over a set payment schedule, generally with longer repayment terms than business credit cards. Once the loan is fully repaid, the funds don’t replenish. You’ll need to apply for another loan if you run out of cash.
Key takeaways
When your business needs financing, you can typically choose between a business credit card and a business loan. Your decision depends on the size of the expense and your company’s goals.
If you’re ready to explore a business credit card to help manage your business expenses, earn great rewards and more, compare cards from Capital One. You can see what you’re pre-approved for before you apply, with no impact on your credit.
