Business loan

Business credit card vs. SME loan: which one is right for you?

Need capital for your business? Whether it’s to help start the business or just cover operating costs, a business credit card or small business loan can come to your rescue. Both offer many compelling qualities. Plus, you don’t have to choose one over the other.

Here’s what you need to know about the beauty and power of both products, and how to get the right credit card or loan for you and your business.

The beauty of business credit cards

Ramon Ray, a small business expert and founder of SmartHustle.com, believes every entrepreneur should have at least one business credit card. “These are great tools to have in your toolbox,” says Ray. “Compared to business loans, credit cards are easy to get. “

To qualify for most business credit cards, you’ll need good to great credit scores and enough income to show the issuer that you can afford the payments.

All business credit cards will give you a line of credit, which is generally higher than personal cards. Business cards, such as the American Express® Business Gold Card, come with no preset limit. A big advantage of business cards is their flexibility. You can load what you want, when you want. You have the option of sending at least the minimum payment, which will fluctuate based on your balance, the entire bill, or somewhere in between.

The interest rate on small business credit cards can be low, often starting at 13%, but can go up to 20 years. If you never keep a balance, you’ll have an interest-free grace period of at least 21 days, so no interest will be charged when you pay the entire bill by the due date. If you do not use the card at all, no fundraising fees will be added.

Depending on the account, a business credit card may also be accompanied:

Awards

As you invoice, you will earn rewards, which can be cash, miles, or points. If you pay off the balance before interest is added, you will benefit from using the card for your business expenses.

Sign-up bonus

This is a one-time offer that provides a fixed amount of rewards after reaching a minimum spend, which is typically a few thousand dollars within three to six months of opening the account. In general, the larger the bonus, the higher the minimum spend.

APR 0%

This is a limited-time promotional feature that allows you to charge and run balances with no interest added to debt for a set period, often around 18 months.

Advantages

Each business card has its own set of benefits, which can include purchase protection, extended warranties, insurance products, credits for certain business expenses, car rental offers, and a wide range of benefits. travel benefits, such as free TSA preclearance and entry into airport lounges.

Business credit cards are best used for short-term financing needs, especially when the interest rate is high. “Credit cards are the tool you’ll want to use for the things your business needs when you can pay off debt quickly, not long-term financing,” says Ray. Therefore, use your card for things that you know you can pay off in a matter of months. If you benefit from the 0% introductory rate, structure your payments so that you are no longer in debt before the normal rate takes effect.

How to choose a business credit card

There are many small business credit cards on the market, so it will be important to compare and contrast the offers before you apply.

A cash back card, such as the Ink Business Cash® credit card, is more versatile, but a points or miles card, such as Capital One Spark Miles for Business, can have a high refund rate. While a big bonus can be appealing, make sure you can hit the minimum spend without getting unmanageable in debt. Some business credit cards also have high annual fees, so weigh the cost against what you get for the benefits.

Before you apply, take a look at your credit scores to see if they are in good shape. If they’re bad to fair, take steps to improve them to qualify for a wider variety of business credit cards.

The power of small business loans

A small business loan is a fixed amount that you will receive all at once. It can be thousands or hundreds of thousands of dollars. You repay the loan in equal monthly installments, with interest built into the total loan amount. The time you have to pay down debt is called the term, which is usually between one and five years, but can be much longer. Some business loans are secured by assets, while others are unsecured.

According to Ty Crandall, CEO of CreditSuite, which helps business owners improve their business credit and obtain financing, business loans are ideal when you need a large sum for a specific purchase, such as work equipment. particularly expensive. “You might want to pay something like this over a few years,” Crandall explains. “This is when a business loan can really come in handy. “

Be aware that commercial loan interest rates vary widely. For example, a loan that you would receive from the US Small Business Administration (an SBA loan) has prime rates (currently 3.25%) plus 2.25% to 4.45%, depending on how much you borrow and the length of the term.

You can also get small business loans from banks, credit unions, and online lenders. Their interest rates can be very low (like the Bank of America Secured Business Loan whose current rate starts at 3.5%), while those offered by alternative lenders can be much higher and therefore much more expensive. .

Not all small business owners would benefit from a business loan as opposed to a credit card. In most cases, you will only get one out when you need it to cover a large and significant cost.

Additionally, business loans can be more difficult to obtain than business credit cards. “Some lenders won’t talk to you unless you have three years of business tax returns, enough collateral, and an established business credit history,” says Crandall.

How to choose a small business loan

To research and identify the right business loan for you, consider the following:

  • How much do you want to borrow
  • Whether secure or unsecured
  • Mandate’s duration
  • Monthly payment
  • Interest rate
  • All associated costs
  • Total cost at the time of repayment of the balance

Since you can’t avoid interest on a loan, you’ll need to be careful about borrowing enough to meet your business needs, without sacrificing your business goals.

Treat all credit products carefully

Your activity with credit products will show up on your credit reports, so you want to manage them responsibly.

In addition to paying on time, avoid keeping a high debt ratio on your credit card. “It’s a good goal,” says Ray. “In a pinch, you may need to buy something very expensive that will maximize your line of credit. You may need to make only the minimum payments for a period of time in order to be able to accumulate money. But remember that anything you do with your card will affect your credit rating. To protect your scores, you need to do everything you can to keep credit card debt well below the limit.

As for loans, it is better to pay off before maturity.

“For business credit reports, a day late can damage your credit, not when you’ve missed a full billing cycle,” says Crandall. “Sign up for automatic payments to always be on time. As soon as you receive an invoice, pay it. The earlier you pay, the higher your business credit scores will be. The more impressive your personal and business credit, the better. You are more eligible for preferable rates and terms, as well as higher credit limits and loan amounts.

Finally, do not hesitate to take advantage of the funds of a credit issuer. “Think about borrowing, whether with a loan or a credit card, as an investment in your business,” says Ray. “When you do it right, you create wealth. Your business is like a plant that you water with money from a bank. You give him what he needs to grow.


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