As a small business owner, one of the most important decisions you can make is deciding what kind of financial tools to use to support and grow your business. Two common options are a credit card and a business loan. A credit card is a type of revolving credit that lets you borrow up to a certain limit, repay what you borrow in part or in full every month, and borrow again. You’ll owe interest on any amount you don’t repay when your next credit card bill is due. With a business loan, on the other hand, you borrow a specific amount of money as a lump sum and repay it with interest by an agreed-upon date.
If you’re wondering when to use a low-interest business credit card instead of a business loan, here are some scenarios to consider.
To cover daily or smaller ad-hoc expenses
A credit card is a convenient way to pay for day-to-day purchases or regular business expenses. If you subscribe to an online marketing platform, have monthly office supply deliveries or need to hire a caterer for an in-store event, a credit card is typically at your fingertips. Additionally, if you have employees who make purchases on behalf of your business, you may be able to have multiple cardholders on the same account, which could make it easier to track spending across your team.
Some business credit cards also come with helpful online resources for small businesses. For example, a CIBC bizline® Visa Card gives you access to CIBC’s free CreditSmart® tool, which allows you to budget, manage and analyze your spending.
A small business loan could be a better option if you have a specific business need in mind, especially if it’s a large amount of money that would max out your credit limit. Some examples include buying new equipment, launching a new product line or renovating a second brick-and-mortar location.
If you’re planning ahead for a long-term business expense, you could see if you qualify for the Canada Small Business Financing Program, which helps small businesses secure loans by sharing some of the risk with lenders.[1]
To have more flexible spending
If you prefer to have flexibility when it comes to borrowing and repayment, a credit card is probably a better bet. With a credit card, you can cover costs quickly as they come up. For example, a credit card may be helpful if you need to pay for an emergency delivery truck repair or for advertising costs to promote a big sale. The benefit of a credit card is that you have the option to repay your balance in full at the end of the month, and avoid interest, or pay what you can and carry the rest over to the next month. This can be particularly helpful if your cash flow tends to fluctuate.
With a business loan, you’ll likely be on a repayment schedule where you pay a certain amount of money plus interest each month, which is harder to pay off quickly. That said, if you want a predictable repayment schedule for a major expense, a business loan may be a better fit, particularly if it saves you from paying high credit card interest.
To earn rewards
One of the biggest differences between using a credit card or a business loan is that a credit card can help you earn rewards while you’re building your business credit history. Whether you’re looking to earn travel rewards, such as points or miles you can convert into airfare or hotel stays, cash back on purchases in specific categories, such as gas or rental cars, or statement credits that reduce your credit card bill, certain rewards could help you save on expenses every month.
As you improve your business credit over time, you may be eligible for a higher credit limit, a lower interest rate or better rewards in the future.
Find the right solution for your business
As a small business owner, particularly if you’re just finding your footing, it’s important to understand your options when it comes to affording your day-to-day costs and bigger picture goals and plans. Think through the ins and outs of a credit card vs. a business loan and weigh your priorities—perhaps both options can be useful in different ways.
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