Business Loans vs. Credit Cards: Pros, Cons, and When to Use Each
Understanding the pros and cons of credit cards and business loans is essential when managing business finances. Each option offers unique benefits and risks, so knowing when to use one over the other can make a big difference in sustaining financial health.
The Benefits of Using a Business Credit Card
Business credit cards offer several advantages for small expenses. One of the top benefits is the ability to earn perks, with many cards offering 1-3% cash back on purchases. If a business consistently funnels transactions like utilities, gas, or other recurring expenses through a credit card, these rewards can add up, potentially offsetting costs and contributing positively to the bottom line.
Credit cards simplify expense tracking and tax preparation, as all purchases are documented on a single account. Many credit card providers offer tools that organize spending categories, which can help monitor business trends and make data-informed decisions. For companies with multiple employees authorized to spend, credit cards create accountability by providing a transparent view of all transactions, aiding in tracking and budgeting.
Potential Drawbacks of Business Credit Cards
Business credit cards come with significant risks despite their convenience, mainly due to high interest rates. Failing to pay the balance in full each month can lead to interest charges as high as 20% or more, which can quickly eat into a business’ cash flow.
Additionally, the easy accessibility of credit cards can lead to overspending if not managed carefully. Business owners should be disciplined, ensuring necessary purchases and fit within the budget to avoid a debt snowball effect.
Advantages of Business Loans Over Credit Cards
Small business loans often provide better terms than credit cards for larger purchases or cash flow management. They also provide flexibility with lower interest rates, allowing businesses to borrow at a more affordable rate. Small business loans are ideal for larger expenses, like significant equipment purchases, because they provide a fixed amount with structured repayment terms. Unlike credit cards, these loans often come without prepayment penalties, allowing businesses to pay off the loan early without additional fees. This flexibility can be helpful when cash flow fluctuates, or additional capital becomes available.
Choosing the Best Option for Your Business
Business credit cards and loans have their place. Business credit cards can be incredibly convenient for day-to-day expenses but should be used cautiously to avoid high-interest debt. On the other hand, business loans are better suited for larger purchases or cash flow needs, providing a healthier, more affordable alternative.
Understanding the pros and cons of each option allows business owners to take a strategic approach to finance, ensuring that they make decisions that support growth and financial stability. When chosen carefully, both options can contribute positively to a business’ financial management.
Download Live Oak Bank’s free Guide to Ownership Transition or connect with Andrew Kennedy, VP of Funeral Home and Cemetery lending, at https://info.liveoakbank.com/guide-to-ownership-transition.
