So you finally got your business up and running, and although you can see good things coming your way, you also realize that your company’s piggy bank could use some help while your profits slowly build.
You have a number of financial aid options available for your business - help from family and friends, resources from an investor, rob a bank, win the lottery - but the two most common sources for small business funds (and credit) are credit cards and small business loans.
Chances are, you are already aware of the necessity for building a positive credit history in your personal life. A good credit history is also vital for your company. So even if you do win the lottery or find a wealthy investor who thinks your business will go off like gangbusters, you still need a way of creating and growing a positive credit reputation for your small business.
So which option works best for you: business credit card or small business loan?
The Credit Card Contender
Business credit cards offer a few bonuses for your small business, from a revolving line of credit that is always ready to go for you to points and other rewards from the credit card companies themselves. A credit card can also establish a good start for your company’s credit persona; however, opening a business card will depend mostly on your personal credit score since your small business is still finding its footing.
If you have personal credit cards, you may already be aware of the perks that come with using credit for everyday purchases versus paying with cash. Office supply orders, catering orders, and even the coffees you pick up the tab for during a meeting with a new client can garner you extra rewards if you use your small business credit card. A number of business credit cards offer cash back and/or points that can be traded in for plane tickets. If you are traveling a lot for business, these types of rewards can end up saving you some serious cash.
One possibly under-considered perk is the time that is saved on the accounting end when you move business purchases to a business credit card - you have less paperwork and receipts to deal with since all of your business purchases are clearly laid out in a monthly statement. Some credit card companies offer their own tools to help you track business expenses.
The Business Loan Softpaw
The small business loan option does not necessarily have cash back rewards or travel bonuses, but it does offer some positives for you and your business. For starters, the interest rate on a small business loan will likely be considerably lower than a credit card. Most business credit cards have an interest rate that ranges from 6% to even 20%. The current prime rate for a small business loan is just 3.25% and most banks can go as low as 2.25%.
Small business loans can also be a better option if you are needing thousands of dollars (more than $20,000) for your company as the limit for a credit card averages around $10,000. If you have decided to purchase property or vehicles or a large amount of equipment for your business, you may want to look into applying for a small business loan in lieu of a credit card.
One downside to the loan option is the application process - many banks require that the business be running for a specific amount of time and be bringing in a certain amount of monthly revenue. Both the business owner and the business itself are taken into consideration for the loan application; if your credit history is less than stellar, it may be a deterrent for a bank to approve a $100,000 business loan.
Can it be both?
Business credit cards are ideal for routine and travel purchases, and the approval time for a credit line is much faster than a loan. Through a credit card, your business would have quick and consistent access to additional funds, if ever needed.
Small business loans are best served for major financial needs, and your company will already need to have a positive track record for the bank to consider the investment. They are generally not meant for daily or monthly expenses so much (although you can use the funds however you see fit).
You may find, for your small business, that both options can be over service to you over time. Many credit card companies also offer small business loans to their business credit customers, and if you already have a good history of timely payments, then some of the application hassles may not even exist.
One Last Note
Whether you opt for a business credit card or a small business loan (or both), you may also need a professional service like 1-800-Accountants to keep your business accounting on-point and compliant with all state and federal tax laws.