UK business borrowing during the pandemic hit record levels, with the highest amount recorded (£103.7 billion) by the Small Business Financial Markets report since its inception in 2012.
Even without the added pressure of a global health crisis, there’s always going to be the need to borrow money for business reasons. Whether it’s start-up funding, the cost of new equipment, or any other of the myriad reasons for businesses to borrow money, it’s important to research which funding option is best for your circumstances.
Two of the main types of business credit are loans and credit cards. And, depending on your situation, either of them could be the right option. To help you decide which might be the better source of funding for your business at any given time, we’ve broken down the main differences between the two.
Key Decision-Making Factors
Business loan: Eligibility will vary depending on the lender and type of loan, but generally your business will need to be established and running at a profit. Plus, you will need to have good business credit.
Credit card: Eligibility criteria is typically less strict than loans. A good credit history will be important, but you can look for a provider that carries out ‘soft inquiries’ during the application process, which don’t leave a mark on your credit score.
Reasons for Funding
Business loan: A business loan itself is applied for and based on a business’s specific need – from purchasing new premises to working capital needs. You’ll be expected to provide the reason for the loan, either at the application or interview stage, depending on the lender and type of loan.
Credit card: Business credit cards can be used for any funding need, and you don’t need a specific purpose to apply for and take one out.
Business loan: Loans generally allow the borrower higher amounts, however once the agreed amount has been loaned, you’ll only have access to that amount (unless you take out another, separate loan).
Credit card: Business credit cards typically offer lower monthly credit limits than a business loan amount would be, but they’re more flexible, credit limits can increase over time, and offer ongoing access to funds.
Business loan: Depending on the amount loaned and the agreed repayment schedule, you may be required to pay the same amount every month over the term of the loan (including interest), losing the option to pay off loan debt faster. Certain types of business loans require smaller monthly repayments with a much larger lump sum final payment, or ‘balloon payment’, at the end of the term, which can sometimes be a struggle for small businesses.
Credit card: Repayments are flexible. As long as you make the minimum monthly repayment (which are generally lower than loan repayments would be, depending on the level of credit), you’re free to pay an amount that suits your budgetary needs each month. This can be a great option if you’re looking to pay debt faster if your cash flow grows.
Business loan: Interest payments are based on the total principal amount you’re borrowing, and accrue straight away–whether you use it or not. Interest rates are typically lower than interest on a business credit card.
Credit card: Interest only accrues when you access the funds, and is generally calculated as APR (Annual Percentage Rate) but charged monthly. Interest rates are typically higher than the interest on a loan, but, unlike loans, credit cards can sometimes have an interest free period to begin with. That means that if you pay the full balance of purchases made on your card within that specified period, you don’t pay any interest.
Business loan: There’s no equivalent protection for loans like there is for credit card payments under the Consumer Credit Act. While you can get business loan protection insurance, once the funds are yours, they’re not protected in any other way.
Credit card: Payments are afforded certain protection under Section 75 of the Consumer Credit Act. If the seller has misrepresented their goods/services or breached their contract, you can claim from the credit card provider.
Business loan: You won’t earn any rewards if you use a loan to borrow money for business.
Credit card: Depending on the provider, you could benefit from different types of rewards by using a business credit card. This can include cash back, rewards points, and more.
The Bottom Line
Small Business Loans
If your business is established, with a long credit history and health revenue, and you’re looking for an injection of cash for a specific purpose (such as opening a new business location or purchasing high-value equipment), a loan might be a suitable choice.
You’ll be able to borrow a higher amount, but you’re likely to come up against stricter borrowing criteria and have less flexibility.
Business Credit Cards
For small or medium businesses looking for a continuous line of credit to support business growth and day-to-day cash flow needs, a business credit card could be the better option.
While your borrowing power won’t necessarily be as great, you’ll have much more flexibility, plus other perks you don’t get from a business loan. Small business credit cards from Capital On Tap offer the rates, rewards, and customer support that make running a business easier.