When you need access to cash for your business, you might immediately think of applying for a loan. But there are other options available. In the right situation, a low-rate business credit card can provide a fast and convenient funding option to fill in short-term cash flow gaps.
Let’s explore when a low-rate credit card might make more sense than a loan.
Evaluate the cost of borrowing
You may shy away from a credit card as a financing option because a standard card has an interest rate of 20%. But not all credit cards are the same. Some low-interest business cards offer rates that are comparable to a business line of credit.
For example, CIBC’s bizline Visa Card offers rates as low as CIBC Prime plus 1.5% and comes with no annual fee. Fixed-rate low-interest cards are also available if you prefer more predictability. A low-rate card can significantly impact your total if you have to carry a balance. For example, a $5,000 balance will cost you around $83 per month at a 20% rate, while a low-interest card with a rate of 9% costs just $38.
With a business loan, the rate depends on factors like your credit profile, the type of loan, and the lender you choose. You also have to factor in setup fees, renewal fees, and the time it takes to complete a loan application. Plus, you’ll pay interest on the full lump sum of the loan.
When a low-rate credit card makes sense
There are some scenarios when a low-rate card might make more sense than a loan, including:
You need a smaller amount for a short period
When you know money is coming but you need help covering costs in the meantime, a low-interest credit card may be the right tool. For example, you have several client invoices that will be paid by the end of the month, but you need to pay your supplier in the next two days. You know the money is coming; it’s just a matter of timing. A low-rate credit card can help bridge the gap, so you can pay your supplier on time.
Another benefit of many credit cards is that you can take advantage of the interest-free grace period, which is typically around 21 days after your statement closes.1 During this time, no interest is charged on new purchases, provided you pay your balance in full.
When used strategically, you can access short-term financing at no cost. If your cash flow gap is small, you can pay back the money you borrow before your payment is due and incur no interest charges.
You require immediate access to cash
Whether a pipe bursts in your shop or you run out of stock during a busy day or month, in some situations, you don’t have time to wait for a loan approval. A credit card provides immediate access to funds that you can use right away. By comparison, it can take anywhere from a few days to a few months to receive funding through a business loan.
You want flexibility
With a low-interest credit card, you can borrow money up to your credit limit, pay it off, and then borrow again. You only pay interest on the money you use, and you can pay off your balance any time, without penalty.
When a loan makes sense
There are some scenarios when a loan might be the more appropriate choice:
You have a large, planned purchase
A loan is often a better fit when you need to make a significant purchase that exceeds what your credit card limit can comfortably cover. Loans are best for one-time costs, where a lump sum amount with structured monthly payments makes sense. For example, say your landscaping company needs $50,000 to purchase new commercial equipment for the upcoming spring season, or you need $75,000 to renovate your new space. These are scenarios where a higher borrowing limit and longer repayment term are likely a better fit.
You want predictable, fixed payments
A loan provides fixed monthly payments that can make it easier to budget and manage cash flow. Unlike a variable-rate credit card, where your interest rate can shift based on the prime rate, with a loan, you know exactly how much you need to pay each month for the full term.
How to decide which option is right
To evaluate whether a loan or a low-interest credit card is the right fit for your business, you can ask yourself these questions:
- How much money do I need and for how long? If the amount you need is lower than your credit limit and you can pay it off in the short term, you might opt for a low-interest credit card. If you need a large sum of money for a longer term, a loan can be a lower-risk option.
- How soon do I need the money? A credit card provides more immediate access to cash, while a business loan can take a few days to a few months.
- Do I need a lump sum or access to revolving credit? A credit card provides access to revolving credit. You can use it, pay it back, and then use it again without reapplying. A loan provides a single lump sum payment. If you need another loan, you’ll have to reapply.
- Do I want fixed or flexible payments? Some low-interest credit cards come with a variable rate that can change over time. With a fixed-rate loan, your payments stay consistent, making it easier to budget.
Which financing option is right for you?
When choosing between a low-interest business credit card or a loan, the right tool depends on the specific scenario. Generally, a low-interest credit card is a good fit when you need fast access to cash for the short-term. A business loan is typically better when you need access to larger amounts for a longer term. By asking a few key questions, you can narrow down which option makes the most sense for your business.
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