Business credit card or business loan: which is right for you?

No matter how steady your profits or loyal your customers, your business will eventually need money to finance its growth. It takes cash to upgrade equipment, renovate the office, hire a temporary contractor, or wait out a market downturn. 

When you get there, remember: the choice between small business loans and credit cards is a fluid one; most entrepreneurs will use a combination of both to meet their business targets at some point. The trick is to manage those choices strategically.

We saw this play out during the 2020 pandemic. In a survey conducted by U.S. News & World Report,  52 percent of small businesses owners said they relied in part on a business loan or business credit to weather the economic slowdown. 

That same study found that 48.5 percent sought at least some assistance from their personal finances – a combination of bank accounts and credit cards. It’s a bit too early to know how they fared, but the risk to their personal income is clear. Is it a risk worth taking? 

Before you answer, here are some straight facts about business credit cards and business loans.

Business credit cards: flexibility when you need it

For immediate access to needed funds, business credit cards offer freedom, flexibility, and some much-needed security. Consider: 

• Once approved, your business card spending is only limited by your good judgment and your credit limit (as much as $50K). You don’t need to justify, explain, or seek permission for your purchases. 
• You can use your business credit card statements to track routine expenses - business travel, office supplies, client recruitment and the like. Put them on the company card, and you can review your spending habits monthly.
• When invoices have slowed down but the bills are as punctual as ever, your company card can keep your business’s finances in sync. 
• Business credit cards can tide you over in an emergency. That air conditioner that dies an hour before 3000 people descend on your banquet facility? Put it on plastic. Your working capital will keep working. And your happy client will remain happy.
• Business credit cards are not secured by collateral, so if your company hits a rough patch, your assets cannot be seized by the card issuer. 
• If your start-up is trying to build up its credit profile, making timely payments on your first company credit card is a way to do it. 
• There are deals to be had. Many credit card issuers will offer sign-on bonuses, cash-back deals for spending a certain amount, or low introductory APRs to attract a promising new cardholder.  Check out NerdWallet’s ranking of business credit card offers. 

The price of credit

All of these perks come at a price. Depending on your credit profile, the interest rates you will pay for a business card can range from 12% to 25% (or higher) –  a potential disaster if your balance lingers (or grows) from month to month. And, depending on what’s in the fine print,   you might find your interest rate spikes by double digits (or you are assessed extra fees) for cash advances, late payments, or spending in excess of your limit. 

Business loans: financing the big picture

Small business loans offer the cash, the interest rates, and the payment schedules that make big picture thinking accessible to startup entrepreneurs. If it’s time for your company to finance a new product line or expand your headquarters, consider some of the benefits of paying for it with a small business loan:

• Depending on the lender and the product, small business loans can range from $2 million to $5 million and have up to a 25-year pay-back period.
• Loans backed by the Small Business Administration (SBA) offer the lowest rates and best terms. For instance, under the SBA’s 7(a) program the rate is set using the Federal Reserve’s prime rate plus a spread that is negotiated between the bank and the borrower. To keep these loans affordable, the SBA limits the spread. Find out more about SBA loans.
• SBA-backed loan products can be accessed through a number of online lenders, traditional banks, and community agencies. 
• Traditional loans from a bank or online lender may also be able meet your specific needs. Hiscox partner Fundera provides a single application for competing offers from small business lenders, so you can choose the loan that best meets your needs. 
• Small business loans designed to assist minority owned businesses are available through a number of sources, including the SBA’s Community Advantage, Microloan, and SBA 8(a) Business Development programs. Banks.com has put together A 2021 Guide to Small Business Loans for Minorities that gives a great overview of the resources available to underrepresented groups. 

Related: Missed out on the PPP loans? Here’s what you can do instead

The price of loans

The long-term benefits of a small business loan are undeniable, but they will cost you in paperwork, time, and requirements. 

• Documentation. Small business loans generally require more proof of your business’s stability and financial health - tough bars to clear if you are starting out. Be prepared to deliver a comprehensive business plan that maps out your plans for growth. Include a business credit profile, your business and personal credit scores, a profit/loss analysis, and a recent tax statement.
• Collateral and/or down payments. To qualify for a loan or to obtain a lower interest rate, you may be required to put forward a down payment or any number of business assets – such as equipment, buildings, or unsold inventory. Whatever you put up can be seized if you default on your loan.
• Time. Depending on the lender, your application could take anywhere from 24 hours to a few weeks to process. You may be able to speed this up a bit by applying to an online lender but remember you might be paying for that convenience with higher rates or more fees.
• Fees. Depending on the lender, your small business loan might require origination fees, underwriting fees, and closing costs. A loan guarantee fee that is usually charged to all SBA-backed loans, was waived as a part of a COVID-19 relief measure. Find out more about SBA loan rates. 

Related: How to get a startup business loan

Credit matters

A good business credit score can boost your chances of getting approved for a loan or a card with great terms and low interest rates.  If you are just launching a business, evaluators will likely review your personal credit score and personal financial history. If your business has established some history, evaluators will review your business credit score, which is an integral part of your business credit profile. Find out more about how to establish business credit.

It’s important that you know your personal and business credit scores. This will allow you to address discrepancies and borrow strategically. By law, personal credit scores are all measured on the same 0-800 scale, but different credit reporting agencies might assign a slightly different score to any given individual’s profile.  A good personal credit score is generally one above 700; a minimal score of 620 to 640 will qualify you for consideration for an SBA loan. You can obtain your score by contacting Equifax, FICO, Experian, or TransUnion.  

Business credit scores have different scales, depending on the agency that compiles them.  All of them evaluate factors such as your business size, its payment history, its credit utilization, the type of credit it already has, and the amount of credit it has available.

Find out what the SBA has to say about how to enhance the power of your business credit file.

What if your application is rejected?

If you are serious about growing your business, take this as a call to action, not a personal slight. With focus and determination, you can emerge victorious. 

Start rebuilding by making sure that, as the business owner, your own finances remain impeccable. They will be scrutinized the next time you apply for a business loan or card. 

Then, make sure your business aggressively utilizes its current credit, pays all of its bills on time, and responsibly maintains any lines of credit it has open. U.S. News & World Report has some great pointers on how to respond to a loan rejection.  They’ve also compiled an updated list of “bad credit loans” that may give you some options you didn’t know you had.  

If you’ve been rejected for a business credit card, remember that card issuers are generally competing for your business. Consider reapplying for a collateral-backed card to build your credit. Or try opening a line of revolving credit with a merchant, supplier, or service with whom you’ve already established a good working relationship.  This is not about increasing your spending – you were already purchasing goods and services from these vendors -- but it will change how the credit reporting bureaus view your creditworthiness.

Courage is your best form of revolving credit

In 1986, legendary filmmaker Spike Lee had to max out his personal credit cards to produce his first release. Interest rates aside, it was a smart business move for Lee, then a grad student:  his $35,000 credit card bill financed She’s Gotta Have It, a flick that grossed more than $7 million at the box office.

Was that nail-biting uncertainty worth it? Ultimately, that’s up to Lee to answer. But millions of movie-goers would agree that Lee’s courage, passion, and talent were worth a lot more than he ventured.  If you’ve got a business dream, don’t forget to bring your vision, your courage. And consider partnering with Hiscox. We’ll bring the insurance.