Should you get a business credit card or a business loan?

Business loans and company credit cards are two of the most common and straightforward forms of lending available to businesses in the UK.

The best option for your company depends on what you need the money for, how long it will take to pay back, and your company's history and finances.

To make the right choice, you need to thoroughly understand how both types of lending work and the benefits and pitfalls of each approach.

What is a business credit card?

A business credit card works much like a personal credit card. It can be used for any legitimate business-related purchases. You'll generally benefit from an interest-free period on purchases, but if you don’t pay off the full balance by the due date, interest will start to accrue on the remaining amount.

You can use a business credit card to track monthly expenses, access business-related rewards, issue employees with company cards, and manage your company’s cash flow.

Your company’s creditworthiness and financial history are key factors in determining your credit card limit and the interest rates you’ll be charged. Using your business credit card responsibly can help build your company’s credit history, which may improve your chances of securing loans or additional credit in the future.

Read more: How to choose a business credit card

What is a business loan?

A business loan provides funding for specific needs such as start-up costs, hiring staff, expanding operations, or purchasing equipment and premises. Loans are typically repaid in fixed instalments over an agreed period, with interest.

Business loans come with fixed or variable interest rates and set repayment terms. Short-term loans typically last between 1 to 5 years, while long-term loans can range from 5 to 30 years. Repayments are usually made in regular instalments — often monthly — until the loan and interest are fully paid off.

You may also have to agree to a fixed monthly cost, and there could be penalties if you repay your debt early.

A loan isn’t a rolling form of credit, so once you’ve paid off the loan, your credit is exhausted. If you want to borrow more in the future, you’ll need to apply for a new loan, take out a credit card, or source another type of financing.

Differences between a business loan and credit card

While both business loans and credit cards offer financing, they serve different purposes and operate differently.

• Purpose: A business loan is typically used for specific, large-scale expenses like purchasing equipment, expanding your business, or funding start-up costs. You'll need to state the reason for the loan when applying, and the provider will assess whether it aligns with their lending criteria. On the other hand, a business credit card provides ongoing access to credit for general, day-to-day business expenses, such as office supplies, travel, or marketing. You don’t need to specify how the funds will be used when applying.

• Repayment structure: Business loans come with fixed repayment terms, where you pay back the borrowed amount plus interest over a set period, often in monthly instalments. Business credit cards, however, allow more flexible repayment options. You can carry a balance month-to-month, though interest is charged on any unpaid balance after the grace period ends.

• Credit limits and borrowing flexibility: Business credit cards typically offer lower credit limits than business loans but provide more flexibility for smaller, recurring purchases. Business loans, meanwhile, tend to offer larger sums but are typically suited for one-time, significant investments.

Other differences between a business loan and credit card

• Repayment flexibility Credit cards offer flexible repayment options, allowing you to vary your monthly payment as long as you meet the minimum. This flexibility can help manage fluctuating business finances. Loans, however, typically require fixed monthly repayments (including interest), which can be less adaptable to changes in your cash flow.

• Early repayment penalties You can pay off a business credit card balance in full to reduce or avoid interest charges entirely. Business loans, however, usually have a fixed repayment term and may impose penalties for early repayment, which could add additional costs.

• Interest rates Business loans typically come with lower interest rates than credit cards. However, interest on a loan begins accruing immediately. Credit cards tend to have higher interest rates, but many offer introductory 0% interest periods. If you pay off your balance in full each month, you can avoid interest charges altogether.

• Eligibility Securing a business loan can be more difficult, particularly for newer businesses, as lenders often require a strong financial history and a track record of success. Business credit cards are more accessible, especially for small businesses, but the terms you receive are largely dependent on your personal and business credit history.

Pros and cons of a business credit card

Pros

Improved cash flow: Using a business credit card allows you to make purchases on credit, which can help smooth out cash flow fluctuations, particularly for short-term expenses.

Rewards and perks: Many business credit cards offer attractive rewards, such as cashback, travel points, free international spending, or discounts, providing extra value for your business spending

Build your business credit: Responsible use of a business credit card can help establish and improve your company’s credit rating, making it easier to access larger loans or better terms in the future

Employee access: You can issue cards to trusted employees, allowing them to make company purchases without the need for reimbursements or complicated approval processes

Interest-free periods: Some cards offer a 0% interest rate on purchases for an introductory period, allowing you to spread out the cost of big purchases without incurring interest

Flexible repayment: You can pay off the balance early without penalties, potentially reducing or eliminating interest charges

Cons

High interest rates: If you don't pay off your balance in full each month, business credit cards can carry high interest rates, which can quickly accumulate and increase your debt

Fees and charges: Be aware of annual or monthly fees, late payment fees, foreign transaction fees, and potential fees for exceeding your credit limit

Risk of misuse: Allowing employees to use a business credit card carries the risk of misuse or fraud. Set clear guidelines and monitor spending regularly to reduce this risk

Impact on business credit: If not managed properly, a business credit card could negatively affect your company’s credit rating, especially if payments are missed or balances are carried over for long periods

Debt risk: Without proper control, it’s easy for the business to accumulate a large amount of debt on a credit card, leading to financial strain or a cycle of debt

Pros and cons of a business loan

Pros

Higher borrowing limits: Business loans typically offer larger borrowing amounts, making them ideal for significant expenses such as expansion, equipment purchases, or hiring

Budgeting certainty: With fixed monthly repayments, your business can more easily plan and budget, as you’ll know exactly how much needs to be paid each month

Credit rating boost: Timely repayment of your business loan can help improve your company's credit rating, making it easier to secure further funding in the future

Tax benefits: Interest paid on business loans may be tax-deductible, which can reduce your overall tax burden

Lower interest rates: Business loans usually have lower interest rates compared to business credit cards, making them a more cost-effective way to borrow for larger sums

Cons

Secured loan requirements: Lenders may require you to secure the loan against business assets (e.g., property or equipment), which increases the risk if your business fails to repay

Upfront fees: Lenders often charge arrangement, setup, and other administrative fees that can add to the initial cost of the loan.

Early repayment penalties: Some loans impose charges if you want to pay off the loan early, which can reduce the financial flexibility of clearing your debt ahead of schedule.

Rigid fixed repayments: Fixed monthly repayments can be inflexible, leaving little room to adjust payments if your business experiences cash flow difficulties.

How to choose between a business credit card and a business loan

The right financial product for your business depends on your specific needs, the purpose of the funds, and the terms offered by the lender. Here’s a breakdown to help guide your decision:

• Business needs If you need a substantial amount of capital for significant investments or business expansion, a business loan is likely a better fit. Loans offer higher borrowing limits and can provide the lump sum needed for large expenses. If your focus is on improving cash flow or managing day-to-day spending, a business credit card may be a better option. It allows you to make purchases on credit and manage payments more easily, especially for smaller, recurring expenses.

• Credit history and qualification If you’re a new operation with little or no credit history, it can be harder to qualify for a business loan. However, you might still be able to access a business credit card, though it may come with a low credit limit and higher interest rates until your business builds its credit.

• Repayment and flexibility Loans typically come with fixed repayment terms and monthly payments, which can be beneficial for budgeting but may limit flexibility. Credit cards, on the other hand, offer more flexibility in repayment, but you’ll need to manage the balance carefully to avoid high interest rates.

Ultimately, the best option depends on your business goals and financial situation. If you're uncertain, speaking with a financial adviser can help you make an informed decision based on your unique circumstances.

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