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Business Credit Card vs. Business Loan for Funds

Funds

If you have long been looking for business funds, the multiple business financing options must have overwhelmed you. Many entrepreneurs don’t want to involve outside investors to raise capital for their lean startups to avoid entailing risks such as misaligned structure and timeline.

If you are one of them, business credit cards and business loans are some of the readily available options for you. Plus, these financing options are widely accessible for the entrepreneurs who want to self-finance their business.

Regardless of what options you choose, understanding their pros and cons is essential. But before we plunge into the details, let’s quickly split the difference between business credit cards and business loan to help you choose the most appropriate option for your business.

What Is the Difference between Business Credit Card and Business Loans

No doubt, it is one of the common questions that come to mind when it is about funding your startup. Typically, a business loan refers to a lump sum amount you are paid out that you need to pay back in the form of monthly installment over a specified period. A business credit card, on the other hand, is a credit line that allows you access to money or funds to a certain limit on a recurring basis. This credit line, like another credit amount, can be paid off through monthly payments or over any period of your choice unless you meet the credit limit of each month.

Business loans are generally installment debts; however, business credit cards are revolving debts. Although neither of these options hurt your personal credit scores in the long term if you pay them on time, it is worth noting that business credit card has more potential to affect your credit card scores.  If not paid on time, revolving debt may decrease debt to credit ratio.

Moreover, business loans undeniably offer large sums of funds and may have a lower interest rate as compared to business credit cards. However, qualifying for them is nerve-wrecking since the lending process is unnecessarily long and can take months.

Alternatively, business credit cards can offer you immediate access to funds or cash you need to invest in yours.  While their interest rate tends to be higher, you have an option to pay off your full bill each month. Besides this, the best business credit cards provide a slew of other reimbursements such as credit rewards, purchase protections, and perks that can particularly benefit business owners.

Business Credit Card or Business Loan- Which Can You Get Easily?

Having good credit card scores are necessary to qualify for both business credit cards and business loans.   In addition to that, to initiate the funding process, you will be asked to apply, along with the documentation showing your revenues. However, documentation for business loans tends to be more extensive and hectic. Not only this, you may find requirements for business loans stricter in terms of business profitability and length of time.

Overall, qualifying for business loans is more difficult than getting funds through business credit cards. The requirements become even more challenging to meet if your credit scores are low or you are a startup.

Luckily, Small Business Administration offers loans for startups. Although traditional lenders invest in these government-backed loans, guarantees up to 50% percent of the loan to make the process easier.

Business Credit Card or Business Loan- Which Can You Get Easily?

There is no easy answer to the question of whether one should opt for a business credit card or business loans. As mentioned earlier, to choose the best funding option, you need to compare the best features of each alternative.

Features Business Credit
Cards 		Business Loans  
Loan amount Up to $50,000 Up to $5million
Loan type Revolving credit line Installment loan
Repayment Monthly payments to the minimum credit limit to pay off a debt to avoid high interest Set payments to be paid monthly over a specified time that can go up to 25 years
Average APR 13 to 20 percent 8 to 10 percent
Eligibility Steady income and personal credit history Good  business revenue model and credit
Approval Time Seven days Weeks or a minimum of six months
Benefits Sign up bonuses, reward programs,  purchase protection, trip insurance Government-backed loans

Business Credit Card or Business Loan: What is the best Option for You?

You have compared the features of both options; it is the right time to decide which works best for you.

Business loans are Ideal for your business if you;

  • Need large sums of funds
  • Want investment for profit-generating projects that include purchasing equipment hiring staff or renting new locations
  • Want to expand an established business that generates revenues up to 100,000

Business Credit Cards are ideal for your business if you

  • are looking for options to separate finances  or sole proprietor
  • Want to use the payment option that comes with big rewards
  • Need to access cash immediately
  • Do not want to borrow money and need a payment option that allows you to pay in a month
  • Want to invest in a project that has 0 percent introductory APR and plans to make payments before its promotional period deadline

Factors to consider while Choosing Business Credit Cards and Business Loans

Your job is not done after you decide which option you want to choose and why.  There are certain factors you need to consider to make a safe choice.

  • Interest Rate–   it is important to choose the option that has a low-interest rate. The interest rate in loans and credit cards are compounding, and you will end up wasting a lot of money if you are not diligent.
  • Other fees–   choosing a business credit card means you will have to pay annual fees, foreign transaction charges, and late payment charges
  • Eligibility– applying for consecutive loans or credit cards may ding your personal credit scores by resulting in the new inquiry.  

Final Thoughts

Overall, both financing options come with their perks and downsides. Given that, it is up to you when it comes to making the decision that meets the requirement of your small business.

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Smart Reasons to Use Business Credit Cards

Business credit cards

Whether you’re a startup or you run an established brand, a business credit card is essential for the financial well being. A business credit card is much more than a way to pay for your business purchases. It is a convenient mode for entrepreneurs to increase their company’s power. Not only does it enable access to revolving credit lines but also provide a range of lucrative rewards, fraud protection, and most importantly, smooth out the cash flow.

A business credit survey from Federal Reserve showed that nearly 52 percent of companies that have at least 50 employees use business credit cards for several purposes. With a set credit limit, the business owners make purchases, transact money, and withdraw cash. Many businesses use credit card although, like a regular consumer card, they carry an interest charge if the entrepreneurs don’t repay the balance in the billing cycle.

Despite a high-interest rate, using business credit cards is considered beneficial when it comes to making smart purchases. Here are some reasons why purchasing on your business credit card is more savvy and advantageous in the long run.

Why You Should Use Business Credit Cards

1. Brings You Travel Rewards

You may have seen many entrepreneurs putting marketing ad from Google and Facebook on their business bank cards. They use it for the monthly payments. The trick is tremendously advantageous for gaining an extra thirty days of cash flow at zero cost.  Plus, it is an easy way to scale their business quickly. 

To put it simply, the travel mile strategy with business travel credit card offers a plethora of lucrative rewards. However, to make the most of this strategy, you need to choose your business bank card wisely. That means if you typically fly from a specific airline, consider using the co-branded credit card of that airline.

 The idea is great to receive a variety of traveling perks that may include easy airline status, priority boarding, and checked bags at no cost. Choose a business bank card that comes with flexible travel rewards that you can use with more than one provider.

2. Better Reward Protection

If you have ever tried to use your business credit card to deal with outside or international vendors, you must know that it is critical to pay them through the plastic. In other words, making foreign transactions with business credit card protects entrepreneurs to dispute the payments or save their cash on hand.  The fraud protection strategy of business credit cards provides great fraud protection. The federal law doesn’t put fraudulent charges more than $50 on the cardholders. Many card issuers offer 0 percent liability.  It is worth noting that this offer is not the same when you use a business debit card as per federal law. So using a business credit card is a better and smarter choice.

3. You can Finance large Business Purchases

One of the significant benefits of using a business credit card is that the entrepreneur can leverage its equity to purchase things that help their business to grow. It is because come with a strong financing strategy, you can finance large or small purchases inexpensively. Use your business credit card with a relatively low-rate balance transfer or low introductory rate.

Also, remember that even you use a credit card that comes with a 16 to 20 percent interest rate is a cheaper option than other financing options for your business. They may carry hidden high rates.

4. Insurance Coverage

You might not have heard about that you can save on rental car or travel insurance by paying through business credit card. The travel saving insurance makes an excellent offer for traveling enthusiasts. Several business credit cards come with collision damage coverage when a customer rents a vehicle. This primary coverage means you don’t need to file claims for your auto insurers first. Some banks offer secondary coverage that provides many benefits if auto insurance does not cover the amount of damage or loss.

5. Help You Fund Your Startups

Business credit cards, without a doubt, offer multiple benefits if you’re a startup. As mentioned earlier, many small business owners spend hundreds of dollars to run online ads and make payments with their business credit cards. Using that for payments adds many reward points or perks may help business owner pay for other expenses and purchases.

The startup financing strategy of business credit cards often relies on the personal credit card scores or history; especially when issuers evaluate applications. That means these business credit cards offer you a financing option for your new businesses if accessing other finance forums is difficult for you. Additionally, you can use other sources than just business revenues to meet the income requirements of banks.

6. Save Money on Expenses

Cashback strategy includes in some of the popular rewards that any business or brand can use.  Your card can have flat cash reward on all your purchases. Also, you can have large cash back rewards for some specific categories of your spending.

Cards that come with a high reward may charge you higher fees. However, the best way to maximize cash back is to use multiple cards. Know that if you analyze your spending carefully, you will be able to determine and understand which business credit card is best for you.

7. Provide Excellent Employee Perks

Many smart entrepreneurs accumulate their cash back rewards of the year and use them for annual celebrations and bonuses. Others share travel perks and miles with competent employees. Thus, making purchases or using a reward that benefits in-house or even remote employees is an excellent idea.  This is undeniably a smart strategy to positively impact on employees’ productivity and satisfaction.

Final Thoughts

To crown it all, using business bank cards for purchases, payments, and rewards is an easy way to keep the business cash flow running. Thus, the given reasons are advantageous for using business credit cards smartly.

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Does the Business Credit Card Affect Personal Credit Scores?

If you are trying to keep your startup finances separate from personal finances, you might be disappointed.  It is because the effects of your business credit card often show up on your personal credit score. Even if your business faces hardship or goes through any rough patch, it might affect your personal credit score.

That is to say, eliminating your all personal liabilities with your business credit cards is not possible as they need personal guarantees. However, if you‘re a startup, you can use a credit card that does not report your account activity to credit bureau to limit the risk. It may be one of the safest ways as some business credit cards don’t report to consumer credit bureaus but commercial credit bureaus. Also, there are credit cards that do not report a customer’s monthly payments.

But these are limited options. No matter how helpful your business credit card has been in building credit for your business, it does affect personal credit scores or credit history.

Luckily, there are some ways entrepreneurs use to minimize the risk factors related to their business credit cards and help personal credit scores instead of hurting them. Before exploring those ways, let us take a look at how business credit cards can affect your personal credit scores.

Effects of Business Credit Cards on Personal Credit

Typically, the following are the ways that can affect your credit score if you apply for or use a business credit card.

1. Credit Inquiry on Applying for Credit Card

 It is important to know that when a business owner applies for business credit cards, the card issuer considers both his/her personal credit card history and business track record. This may include investigating or checking personal credit, which may affect credit by dropping a few points in the scores.

This is one of the reasons many business credit card bureaus require a personal guarantee on applying.   That means if a business defaults on its payments, a business owner can be held liable to pay all the debts.

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2. Utilization of Ongoing Credit

Most of the banks and finance institutes report all account activities to the consumer credit bureau (Experian, Equifax, TransUnion) that includes the ratio of credit utilization of a customer. The credit balances are divided by the total amount of credit limits a user has. That means if you obtain the high balance on a business credit card, it can negatively impact your personal credit card scores.

According to credit experts, it is better to keep your credit card utilization below 30 percent. It makes your business credit cards easy to handle as they come with a high credit limit as compared to a consumer credit card. Plus, if you are planning to make a big investment in the business, it is better to apply for a loan than using your business credit card for it.

3. Reporting Delinquency

As mentioned earlier, some credit card issuers do not report monthly account activities of their customer to the consumer credit bureau. However, they may report your account if you don’t make your payments consistently.  Late payments are reported if they are delayed more than 30 days. If becomes a pattern, the negative marks do not only affect your personal credit card scores but also stay up on report for seven years.

A delinquent account is, without a doubt, an important thing to consider when it comes to improving payment history or personal credit card scores. Poor account scores or default account affects your ability to apply for loan affordable. Plus, late payments can trigger an APR penalty that can go up to 29.99 percent with some business cards.

Business Credit Card Issuer Policies that impact Personal Credit Scores

Although all credit card issuers have different policies pertaining to credit card activities, they might report the business information to credit bureaus on the same issues. It is always worth checking the policies.

  • Barclays:  may report in case of inconsistent payment record
  • American Express:  if your account doesn’t have good standing, it may report
  • Capital One: report all account activities
  • Citi:  doesn’t report account activity
  • Bank of America:  reports delinquent account
  • S.Bank:  doesn’t report account activity
  • Chase: reports when an account is delinquent more than 50 days
  • Well Fargo:  doesn’t report account activity

How to Use Your Business Credit Cards to Build Personal Credit

If you are concerned or apprehensive about the impact of a business credit card on your personal credit   scores, there are ways you can use to minimize the effects.

All you need is to practice poor credit behaviors with both your consumer and business accounts.  

Here are some of them:

Make Payments on Time

Your payment history plays a major role when it comes to building credit score or improving credit history.  It is important to pay at least half of your monthly payment on time, if you want to solidify your credit scores. Paying off the full balance each month is extremely helpful in avoiding interest entirely.

Keep Credit Balance Relatively Low

Keeping a low credit balance is always a good move as your credit utilization has a great impact on your credit scores. You can achieve it by making fewer payments through your credit cards or keeping the credit low.  In case your credit use spikes up in any month, you can manage the score by paying down the balance to help your utilization ratio come back to normal.

Use your Credit Card Wisely

There is no denying that business credit cards are a  good option to make payments for your operating expenses. But if you want to finance equipment or inventory, paying with a business credit card is harder.

 What is more, it may increase interest rate with any business loan you take.  That is why it is important to consider all your options first before you choose to make payments with your business credit cards.

Final Thoughts

In a nutshell, getting a small business credit card is a good idea for making payments, it is essential that you understand how it affects your personal credit score.            

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