If you have good personal credit, it’s relatively easy to qualify for a business credit card. But if you’re planning to finance large expenses over time, using a credit card can get expensive.
Here are some alternatives to consider that may offer lower interest rates, or won’t charge interest at all.
1. Small business loan
If your business has been around for a while and has good financials, you may be able to qualify for a small business loan. Banks and commercial lenders can often offer lower interest rates than business credit cards, especially if the loan is partially or fully guaranteed by the U.S. Small Business Administration.
As you shop around, make sure you know each lender’s eligibility requirements, including how long you have to be in business and what your annual revenue needs to be to qualify.
Also, keep in mind that you may need to provide some form of collateral, such as real estate or business assets, to qualify for a low interest rate.
2. Business line of credit
A business line of credit is similar to a business credit card in that it’s a form of revolving credit. During the draw period, you can borrow money, pay it back, and borrow it again. During the repayment period, however, you can’t make additional draws.
A business line of credit offers a little more flexibility than a business loan, and depending on your business and the lender, you may be able to qualify for a low interest rate.
As with a small business loan, take your time to shop around and compare interest rates, fees, and eligibility requirements. Also, think about whether you want to secure the loan for a lower interest rate, and how long you want to repay the debt.
If your business is just getting off the ground, you may have a hard time getting approved for a low-interest small business loan or line of credit. You may, however, be able to qualify for a microloan.
On average, microloans are slightly less expensive than business credit cards, so make sure to borrow wisely. You can typically borrow up to $50,000, but the average is about $6,000.
The eligibility requirements are less strict than a small business loan or line of credit, and you typically don’t need to worry about collateral. You may also still be able to qualify if your credit isn’t in great shape.
One microlender that doesn’t charge interest at all is Kiva. It doesn’t lend money directly to you, however. Instead, you request money from people in your community and in Kiva’s community in $25 increments. The only downside is that the borrowing limit is $10,000. So if you need more money, compare what Kiva offers to other microloans.
4. 401(k) or life insurance policy loan
It’s generally not a good idea to borrow money from a 401(k) plan or a cash-value life insurance policy. But if you’re having a hard time finding cheap capital another way, it may be worth considering.
Interest rates on 401(k) and life insurance policy loans are typically low, and you’ll often have at least a few years to repay the debt. Whatever money you pay back goes back into your plan or policy over time.
You may, however, be limited on how much you can borrow. With a 401(k) loan, for instance, you can borrow up to the greater of $10,000 or 50% of your vested account balance, or $50,000, whichever is less.
With cash-value life insurance, you may only be able to borrow up to 90% of your cash value amount, which may not be much if you haven’t had the policy for long.
Also, with 401(k) loans, keep in mind that if you leave your job for any reason at all, the loan could come due immediately. According to the National Bureau of Economic Research, 86% of 401(k) loan borrowers with an outstanding loan when they leave the company default on their payments.
As you consider your options, weigh both the benefits and drawbacks to determine if these options are worth it to get what you need.
If you don’t want to borrow money at all and have a unique product, crowdfunding may be an option to get money without having to pay finance charges.
Crowdfunding works by going straight to your customer base through websites like Kickstarter and Indiegogo. You create a compelling video showcasing your product and ask for small investments from people who are interested.
In exchange, you offer early access to your product to the people who contribute. In other words, you get the cash you need, and in return, you give your customers what you want to sell them anyway.
Keep in mind, though, that it may be difficult to get a good crowdfunding campaign off the ground. You may need to hire someone to help you create the video and campaign, and you may not get the funding you need. Be realistic about your expectations, and make sure you have a backup plan in case the campaign doesn’t go as well as you want.
The bottom line
Business credit cards can be a great way to get rewards on operating expenses, and as long as you pay your bill in full each month, you’ll never have to worry about paying interest. But if you think you’ll end up carrying a balance from month to month, it may be better to consider some lower-interest alternatives.
As you look at these other financing options, take the time to determine what your business needs and your qualifications to pick the one that’s the right fit for you.
This article was originally written on March 13, 2019 and updated on December 10, 2020.