Small Business Loans vs Business Credit Cards: Making the Right Financing Choice

Small Business Loans vs Business Credit Cards: Making the Right Financing Choice

Small Business Loans vs Business Credit Cards: Making the Right Financing Choice

It’s great if your business grows without ever having to borrow a dime. But most businesses use some form of financing, whether it’s a business credit card to pay for purchases, or a line of credit for times when cash flow is tight. 

Deciding which type of financing to use when can feel daunting. Businesses are often flooded with offers for credit cards and financing. If you wait to look for financing when you desperately need it, you may pay too much. Lining it up before you’re in a cash crunch gives you time to make an informed decision. 

Understand the Current Financial Landscape

If you haven’t shopped for a small business loan before, you may be in for a surprise. There are many more types of business loans than consumer loans, each with its own set up costs, benefits and features, as well as eligibility requirements.

In the past couple of years, interest rates have been rising and those rate hikes apply to many small business loans too. That means it’s more important than ever to make sure you get the right loan for your business. For some entrepreneurs, the best option may even be a business credit card.

Here’s how to decide—and find—the right financing for your small business. 

How Do Business Loans Work: Structure, Features and Benefits

There are many types of business financing, and each one works somewhat differently. Here are the top 3 features and benefits of the top types of small business funding. (Learn about each one through the in-depth articles linked to the type of financing).

Top Features and Benefits of Small Business Financing Options

Business line of creditAvailable when needed for working capitalFlexible repayment (minimum payment to full balance)Interest only charged on amount borrowed
Term loansLump sum to finance specific projectsPredictable repayment scheduleGenerally predictable payments (fixed or variable interest rates)
Equipment financing or leasing Acquire equipment without paying upfrontCredit requirements may be flexibleMay be available to both newer or established businesses
Invoice factoring or financingBorrower may not need good credit to qualifyVery fast fundingMay be available to newer or established businesses with B2B invoices
Merchant cash advancesBorrower rarely needs good credit to qualifyVery fast fundingMay be available to businesses with strong debit or credit card sales
Commercial real estate loansAvailable for large projects involving real estateGenerally favorable rates and terms for qualified borrowersRepayment terms as long as 10-30 years
Vendor termsPersonal credit is rarely checked. Purchase supplies and pay later. (Net-30 gives 30 days)Suppliers may offer fairly easy approval to business customers. 
CrowdfundingCredit rarely checkedSeveral types for businesses (rewards, investment, loans)May not require payments (except for loan-based)
MicroloansMay be credit flexibleInterest rates generally reasonableOften come with business services like mentoring
SBA loansSeveral types of loans available, generally for borrower with good creditCompetitive interest ratesPredictable monthly payments with reasonable terms
Business loan options. Source: 

Pros and Cons of Business Financing Options

Each type of loan is different. Some require daily or weekly payments, and others have monthly payments. 

Loans from online lenders can often be approved and funded in hours or a few days, while loans from banks, including SBA loans, may take weeks or months to be approved. 

That means pros and cons can vary significantly. However, here are some overall pros and cons of small business loans. 

How Do Business Credit Cards Work: Pros/Cons, Strategic Usage

Small business credit cards are offered by the same companies that offer personal credit cards. They offer a very convenient way to pay for purchases the business needs, and many offer free employee cards along with other perks.

Top Features and Benefits of Small Business Credit Cards

Business credit cards offer a variety of features and benefits that entrepreneurs find useful.

Widely Available

Many of these cards are available to a wide range of small businesses, from freelancers and independent contractors who operate as sole proprietorships, to LLCs or corporations with employees. 

Startup Friendly

Most business credit card issuers will evaluate the applicant’s personal credit scores and income from all sources when deciding whether to approve an application. That means that even new businesses may qualify, as long as the owner has good or excellent personal credit and sufficient income from all sources,  not just the business. 

Low Cost Financing

There are a few ways to get low-cost financing on a credit card. Almost all credit cards allow you to purchase items and pay for them later, and many include a revolving line of credit you can use to finance purchases over longer periods of time. 

  1. If you pay your statement balance in full each month and your card offers a grace period as most do, you can avoid interest charges. 
  2. Some cards offer 0% intro APR financing for several months or even a year or longer. This can provide low cost short-term financing for the business.
  3. The card issuer may offer the option to pay for certain purchases over time for a fee, while paying for other purchases in full to avoid interest. 

Just remember that if you do end up with you can’t pay before an intro APR expires, you’ll pay interest at a higher rate.

Larger Credit Limit

You may find that you can get a larger credit limit on a small business credit card than you would on a similar consumer card. Issuers are aware that business customers tend to charge more and have greater financing needs, and they may offer larger credit lines as a result.


Many business credit cards offer rewards such as travel points or miles, or cash back. Welcome offers may provide bonus cash back or bonus miles if you charge a certain amount of business expenses on the card within a certain period of time after account opening. Again, because small business owners often have greater spending needs, these rewards can be quite lucrative.

Fraud Protection

Credit cards are the safest way to pay for purchases. That’s because federal law limits your liability in the case of fraudulent use to know more than $50. Most issuers won’t even hold you responsible for that first $50 of unauthorized charges. In addition, you can dispute certain purchases if what you buy isn’t delivered as agreed. 

Impact of Loans and Credit Cards on Your Business Credit Score

Business loans and credit cards can have varying effects on your business credit scores. Companies offering small business financing have the option to report account information to business credit reporting agencies. However, it is not mandatory for them to do so, resulting in some companies reporting all account activity, while others only report negative activity. Furthermore, each lender has the freedom to select the credit reporting agencies they wish to report to.

Business Loans

Loans from traditional banks and credit unions, as well as some financing companies, are often reported to the Small Business Financial Exchange (SBFE), which then makes information available through Certified Vendors which include all the major commercial credit reporting agencies. Other types of financing may report to the SBFE, or directly to individual commercial credit bureaus.

Again, the lender or financing company may choose to report account information on a monthly or quarterly basis, or may choose to only report negative information if the borrower falls behind.

Business Credit Cards

Most business credit card companies report accounts on a monthly basis to the SBFE and/or one or more major credit reporting agencies. Find out how business credit cards report to business credit here.

A few small business credit cards report information to the owner’s personal credit on a regular basis. Most don’t, but they reserve the right to do so if the cardholder falls behind on payments and defaults.

Common Hurdles in the Loan Application Process and How To Overcome Them

Before you apply for a business loan or small business credit card, it’s helpful to understand the most common requirements. 

Business Loans and Financing Qualifications

Requirements vary significantly depending on the type of financing and the lender’s policies. however the three most common factors that small business financing companies evaluate are:


Some issuers check personal credit, some check business credit, some check both, and a few don’t check credit at all. When issuers check personal credit, some may be looking for a specific minimum credit score, While others are simply trying to rule out very bad credit, or red flags like a recent bankruptcy or collection accounts.

Similarly, some issuers will check business credit. They may be looking for a minimum business credit score but more often they are evaluating whether the business has established business credit and whether there are any red flags like late payments, tax liens, judgments, or collections accounts. 


Some types of business financing can be obtained simply by having strong business revenues. Most lenders want to ensure the business is making enough money to repay the debt. Many will require copies of business bank statements or will want to link to the business bank account to review that information.

Time in Business

New businesses have a high failure rate. Small business lenders will often require that the business have at least one or two years in business, and sometimes more.  That’s one reason why  it can be helpful to set up a business entity as early as possible. that will give you an official start date for your business. If you aren’t ready to take that step, you may want to at least get an employer identification number from the IRS (you can get an EIN for free),  and obtain any required business licenses from your state.

Get our guide: 15 Steps to Make Your Business Legit


Some lenders prefer to lend into certain industries or will avoid certain industries. you may have a lender for example that loves to lend to restaurants while another may not.  Your business industry will be indicated with a SIC or NAICS code. Research this before it’s requested so you can provide the correct information when you apply for a loan. This code may also appear on your business credit reports, so make sure that information is correct.

Business Credit Cards Qualifications

Most business credit card companies have two main qualification criteria: 

Credit scores

Most credit card issuers will review the applicant’s personal credit. Most business credit cards require good to excellent credit, though there are some credit cards like secured business credit cards that are available to business owners with no credit or bad credit.


Issuers often have minimum income requirements, though they rarely reveal the exact number. The difference between a business loan and a business credit card is that credit card issuers frequently allow you to include income from personal sources on yur application. This can include household income, such as your spouse’s income, if it can be used to help repay the debt. 

Understand Key Business Loan Terms: Interest Rates, Fees and Affordability

Costs vary widely, depending on the type of financing and borrower qualifications such as credit history. 

Bank loans often offer lower interest rates, for example, but are harder to get. Some alternative financing options carry higher interest rates, or may not even state an annual percentage rate, and instead describe the cost of financing as “factor rates” or fees. 

Fees may include underwriting, origination or application fees; draw fees; annual fees;  guaranty fees (for SBA loans guaranteed by the US Small Business Administration) and more. 

Some business loans carry fixed interest rates which means the rate will stay the same over the entire term of the loan. Many will offer variable interest rates, which means that the rate can go up when interest rates in the economy rise. 

Recap/Comparison: Small Business Loans vs Business Credit Cards

Both small business loans and small business credit cards can be used to help businesses finance purchases over time. 

Business credit cards can be ideal for very short-term financing, or may be used strategically by new business owners to fund start up costs. 

Business owners looking for large loan amounts to finance major purchases will often need to use loan options like term loans, equipment financing or even commercial real estate loans. 

Remember, it doesn’t have to be all or nothing. Most business owners will find that they use more than one type of financing. It’s very common for a business to have business credit cards, a line of credit, and other financing they tap depending on their business needs. 

Repayment Strategies

No matter which type of financing you choose, you’ll want a plan to repay the financing. Sometimes it makes sense to pay it faster to reduce the amount of interest you’ll be charged, but other times the cost is built into the loan upfront and paying faster won’t save money. 

Keeping your accounting software up to date can make it easier to analyze your business finances and create a repayment strategy. 

Stay Competitive With Your Business Credit Score

One way to increase the financing options available to your business is to establish business credit and build good business credit scores. Some lenders will use business credit when reviewing credit applications or to help set rates or loan terms. 

Check and monitor your business credit with Nav

Best Small Business Loans

Nav can help you find financing. Connect your data to find small business loans and financing based on your qualifications. 

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This article was originally written on March 17, 2024.

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