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Small Business Loans vs. Business Credit Cards: Which Is Right for You?

Running your own business can be challenging, and you’ll need access to funds to grow your company to achieve your goals. There is a range of options to choose from for additional funds, like small business loans and business credit cards. But it can be difficult to choose which is the best option. Read on as we discuss these two types of business finance, the pros and the cons, and which is right for your company.

Small business loans: Pros and Cons

These loans are there to help small businesses achieve their goals. This could be to help them grow, invest in marketing, purchase new equipment, or hire new staff. There are a range of small business loans to choose from, varying in amounts so there’s something to suit everyone. Whether you’re looking for a smaller amount to improve your cash flow or a larger amount to enhance your brand. There is also a range of lenders that offer these loans so you can choose whichever you prefer. There are lenders that will consider borrowers with bad credit, and lenders that operate solely online, so you can decide which is the best option depending on whether you’re eligible. So, what are the advantages that come with this type of finance?

  • Additional capital: The most obvious benefit is that these loans give you access to capital which is crucial for kickstarting and growing a business, that you may not have access to otherwise.
  • Lower interest rates: These loans can have lower interest rates than other types of loans depending on your credit score and lender, so may cost you less in the long run.
  • Flexibility: There are a range of small business loans to choose from, varying in amounts, repayment terms, and eligibility conditions; this means they can suit a variety of business owners.

To weigh up whether they’re right for you, you’ll also need to consider the disadvantages, which include:

  • Debt: Small business loans come with debt that you’ll need to be sure that you can pay off in line with the requirements set out by your lender. You should only apply for a loan if you are able to manage the payment terms.
  • Qualification: Depending on the loan amount and the lender you’ve chosen, qualifying for your chosen loan may be difficult, especially if you have a low credit score.
  • Repayment: You will have to repay this type of finance, which can be made more difficult if your business ends up struggling down the line. You should have a repayment plan in place to ensure you are on the right track to being debt free.

Business credit cards: Pros and Cons

In comparison, if you’re not sure whether you’d like to take out a small business loan, you could consider business credit cards. This option allows business owners to make purchases and access the credit they need to manage their finances effectively. They are different to small business loans in a few ways, but to help you compare the two, here are a few reasons why choosing to apply for a business credit card may be a good idea for your business:

  • Convenience: Business credit cards are convenient. Once you’ve applied, you can use them for purchases to spread out payment, which is helpful for larger, more expensive purchases.
  • Rewards: Business credit cards offer rewards programmes for borrowers, so you can earn points when you spend, or benefit from cash back on your purchases.
  • Credit building: As a small business, you may not have had time to build up a strong credit score. Making small purchases on your credit card and paying them off on time means you can build credit so you can apply for finance in the future.

And the cons?…

  • Personal liability: When applying for a business credit card, you may need to give a personal guarantee, meaning you will be held responsible if your business cannot make the necessary repayments.
  • Temptation: Having access to credit could lead you to spend more than you need to just because you can. This can lead to further debt that you may not be able to manage.
  • High-interest rates: Some business credit cards have high-interest rates which can add to your balance each month and make the total amount more difficult to pay.

Which is best for you?

This can depend on a few options. If you need a larger amount of funds, a small business loan may be the best option, credit cards have limits that prevent larger charges. You should also consider the repayment terms – small business loans have longer a longer repayment period and therefore allows businesses to spread the cost more easily. However small business loans can come with terms and conditions surrounding how you spend your cash, whereas there are no limits to where you spend with a credit card.