As a small business owner, you may have felt the frustration of feeling like you need money to make money. Sometimes it feels like a catch-22, right? You apply for a loan, only to be denied because you don’t have enough credit, or you get approved and get hit with sky-high rates and impossible terms that will do more harm to your business than good.
How are you supposed to build a business without capital? Maybe, you might have even found yourself leaning on your personal credit card to avoid the hassle and disappointment.
Building your business shouldn’t be just about what is easiest; it’s about finding the right financial tool for your unique business. You’ve worked hard to get where you are, and now it’s time to help make your next step the right one. Here are the pros and cons of a business loan vs. business credit card financing to help you find the best solution for your business.
What is a Small Business Administration (SBA) loan?
An SBA loan is a government-backed loan designed to help small businesses access funding with lower interest rates and longer repayment terms. While the SBA guarantees part of the loan, it's issued by banks, generally making it easier for businesses to get the financing they need.
What is credit card financing?
Credit card financing allows you to quickly access funds up to your credit limit to cover business or personal expenses. It’s a revolving line of credit: Pay down your balance, and you may borrow again. Interest applies to any balance carried over, so factor it into the cost if you can’t pay it off monthly.
What’s the difference between a line of credit and a credit card?
A small business line of credit and a credit card are both types of revolving credit, letting you reuse funds as you repay them. Each has a set limit, and interest is applied to carried balances. Credit cards are often great for quick, smaller purchases, while lines of credit are typically better for larger expenses.
Pros and cons of SBA loans
When choosing your funding options, consider the SBA loan benefits that may help make a big difference to your business. Knowing the pros and cons of SBA loans may help you decide if this is the right funding for you. Below, we’ll go into the main advantages and challenges you’ll face with an SBA loan.
Lower interest rates
SBA loans typically have lower rates than traditional loans, which may make them more affordable. Since the SBA caps rates, SBA loans are generally good for businesses that would only qualify for high-rate loans otherwise. With lower rates, you may save thousands over the life of the loan and use that money elsewhere in your business.
Longer repayment terms
SBA loans generally have longer repayment terms. Depending on the type of loan and its purpose, this repayment timeline may extend up to 25 years. The longer timeline reduces monthly payments, easing the cash flow burden on businesses, but may mean an extended commitment to debt repayment.
Application approval process
Applying for an SBA loan may be a complicated process. It may be more involved and time consuming than conventional loans. You may need to provide more detailed documentation and meet more specific criteria.
Eligibility requirements
Eligibility varies according to the SBA loan program, but there are some common requirements. You can’t be in an excluded category (gambling, religious, political, etc.); you have to be located in the U.S.; meet SBA size requirements; be a for-profit entity; and demonstrate you can’t get funding at a reasonable rate from a non-government source. You also must meet creditworthiness standards and be able to repay the loan.
Pros and cons of credit cards
Credit cards are a popular and flexible tool used by millions of people and companies. If you understand the good and bad sides of credit cards, you may make smart choices about how to fit them into your financial strategy. Whether you’re exploring how to use a business credit card effectively or just need to manage short-term expenses, these may give you the flexibility and quick access to funds that many businesses need.
Pros:
Flexibility in usage
Credit cards typically give you lots of options. They allow you to purchase a wide range of needs, from everyday expenses to larger, unexpected costs. They also provide the convenience of being accepted almost everywhere, both in-person and online. For those learning how to use credit cards for business, this may be helpful when managing cash flow or taking advantage of an opportunity.
Quick access to funds
One of the biggest advantages of credit cards is that they let you use money right away. Whether paying bills, making purchases online, or dealing with sudden problems, credit cards allow you to do so without waiting to get a loan or move money around.
Cons:
Higher interest rates
Credit cards may come with steeper interest rates than other forms of financing. This is particularly true if you plan to carry a balance from month to month. These rates may make them an expensive option if you don’t pay off your balance in full regularly, leading to significant interest over time.
Potential for misuse
As mentioned, one of the main advantages of credit cards is easy and quick access to funds. However, this feature may quickly become a liability as it also makes them prone to excessive spending and may lead to rapid debt build-up. It is easy to fall into a cycle of carrying high balances, which may negatively impact your credit score and financial stability.
Key differences between SBA loans and credit cards
SBA loans and credit cards are both popular options for funding your small business. Every business is unique, and choosing which is right for you comes down to the purpose of the funds and what features are most important to you. SBA loans are typically used for larger, long-term investments, like a business expansion or purchasing equipment. Credit cards are better suited for short-term cash flow needs. Here are a few things you should consider when choosing between an SBA loan and credit card financing:
Interest rates
Credit cards have higher interest rates, generally 20% to 30% or more, while SBA loans offer significantly lower rates than credit cards, although this may vary significantly based upon creditworthiness. Credit card interest rates are variable, meaning they may change based on economic conditions. SBA loans may be fixed or variable depending on the loan program.
Credit card interest starts accruing on any unpaid balance immediately; SBA loan interest accrues over the life of the loan. If you’re making a big purchase you can’t pay off quickly, using a credit card with higher interest rates could mean big financing costs over time. These costs add up fast and may increase the total cost of the purchase and strain your cash flow. Research and compare which is best for you.
Eligibility requirements
SBA loans have eligibility requirements, including criteria related to business size, location, and industry. Credit cards may be more accessible to a broader range of businesses because they typically require a faster credit check and proof of income.
Approval process
The SBA approval process is generally more detailed than the credit card application process. Loan approval may take weeks or even months and involve more documentation and evaluation. In contrast, credit card applications and reviews often happen in minutes or a few days.
Repayment terms
SBA loans have repayment terms and may even extend up to 25 years. This extended repayment timeline may help reduce monthly payments. Most credit cards require at least a minimum payment each month. With interest accruing, carrying a credit card balance month to month may add up fast. You will need to consider your budget and how much wiggle room you have to make the payments to decide which is better for your business.
Flexibility
Credit cards generally provide greater flexibility. They allow for small purchases and quick access to funds. SBA loans typically require more planning and are better suited for more significant financial needs and investments.
When to choose a SBA loan
An SBA loan is great when you need big money for long-term investments like buying equipment, real estate, or expanding your business. If you want lower interest rates and longer repayment terms to manage cash flow over time, an SBA loan may be for you. This type of loan is also good when your business has a solid plan and meets the SBA’s specific requirements. But if you can stomach the longer approval process and the extra documentation required, the benefits of an SBA loan generally outweigh the hassle. It’s a great fit for businesses that need significant capital but want to avoid the high costs of other types of financing.
When to choose a credit card
A credit card is typically better when you need quick and easy access to funds for everyday expenses or short-term financial needs. It’s good for smaller purchases, covering unexpected costs, or taking advantage of immediate opportunities where waiting for loan approval isn’t feasible. Credit cards may also offer repayment flexibility, allowing you to pay in full each month or carry a balance if necessary, though this will incur interest. They are generally good for managing cash flow gaps or when you need to make frequent, smaller transactions. Just use it wisely to avoid high-interest charges and debt accumulation.
SBA loan or business credit card? No matter which path you choose, understanding the pros and cons of a business loan vs. business credit card financing empowers you to make a decision that’s best for your business. Whether you choose the long-term security of an SBA loan or the immediate flexibility of a credit card, it’s about choosing the path that supports your vision.
