While debt is not necessarily a good thing, it can be instrumental to the success of your business—if used wisely and paid back on time. As a small business owner, there are times when you will need to expand your business or embark on necessary projects that cost more than you can afford. In such instances, you will need to go the way of debt financing.

When you want to take up debt as a tool for keeping your business alive, you have a number of options, including credit cards, line of credit, and business loans. You need to understand the differences between these options as well as the pros and cons of each to be able to make the right choice. Your ability to repay the debt on time hinges partly on whether you made the right choice or not.

Here we will be comparing business credit cards and business loans, explaining each and discussing its pros and cons. A business credit card is an electronic card that gives you to make purchases that are relevant to your business needs using loan money until you reach a specified limit. On making each purchase, you have a grace period, after which you will be required to repay the money along with interest.

Business credit cards are issued by banks and credit card companies. They provide a convenient way to quickly access financing for short-term needs and can increase the purchasing power of your company. However, as is the case with any other source of financing, credit cards come at a cost and so must be used carefully.

A business loan, on the other hand, is a sum of money that you lend with the agreement to pay back over a specified period, during which you pay fixed monthly repayments along with interest. Business loans are in the form of physical money and are usually given as a lump sum at the time of issuance. Having defined both in detail, let’s now discuss the pros and cons of business credit cards and business loans.

Business Credit Card: Pros

  • Qualifying for a business credit card is easier than it is for other funding options such as bank loans. Even business owners who do not have an impressive or a well established credit history can easily obtain a business credit card.
  • Credit cards are the peak of convenience. Business owners can quickly access funds for purchases or cash withdrawals much more easily than having to pay with cash or checks.
  • Credit cards make it dead easy for business owners to make purchases and complete transactions online.
  • Aside issuing a monthly statement, credit cards provide business owners with online tools to manage their accounts. They also issue year-end account summaries that help cardholders track their expenses and employee spending.
  • Credit cards offer rewards to business owners for using the card. These rewards could be discounts, airline travel miles, coupons, and so on. Some also provide “cash back” incentives, repaying card holders a percentage of their expenses.
  • When used responsibly, credit cards can be very good for building up a positive credit report. This will help the cardholder be more likely to qualify for loans or lines of credit that come at lower interest rates, in the future.

Business Credit Cards: Cons

  • Credit cards typically charge much higher interest rates than bank loans and other debt financing options.
  • Most credit cards require a personal-liability agreement to repay the debt, even if it’s a business credit card.
  • Business credit cards are prone to security issues stemming from unauthorized use by employees, scammers, and thieves.
  • Business credit cards carry less protection when compared with consumer credit cards.
  • Interest rates on credit cards fluctuate. That is, they go up and down.

Business Loans: Pros

  • Business loans can help with cash flow, and they provide a way out when your business is facing tough times.
  • Business loans attract less interest rates than credit cards, and their interest rates are usually fixed
  • Security risks are less with business loans when compared with credit cards.

Business Loans: Cons

  • Taking a business loan requires having a good credit score. Without this requirement, you may be unable to secure a business loan.
  • Business loans are issued in the form of cash or check, so they are not as convenient as credit cards.
  • Business loan funds are not easy to use for online transactions like credit cards.

Business Credit Card vs. Business Loans: Who wins?

If you can afford to pay back on time, then a business credit card will be the better option. However, if you will need a fairly long time to pay back, then a business loan might be more suitable.