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 just like a personal credit card. You can use it for any legitimate business expenses and purchases. Debts you run up accrue interest unless you clear the balance in full each month.

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 determine the credit card limit and interest charged. 

Using the card wisely can build your business’ credit history over time, making it easier to get loans or more credit.

Read more: How to choose a business credit card

What is a business loan?

A business loan is money provided to a business for a specific purpose. You can ask for a loan for any reason, including start-up costs, hiring new employees or purchasing new premises or equipment. 

Business loans come with an agreed interest rate and repayment terms. For instance, you must pay off most loans over a specific time, such as five years. 

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 – 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

There are several key distinctions between business credit cards and business loans. 

One thing to remember is that you apply for a loan to meet a specific business need, which can be anything from purchasing office premises to startup funding. You usually need to give the reason for the loan when applying. The provider then considers this when deciding whether to approve your application.

However, you can use a business credit card for any legitimate business spending, and you don’t need to explain what the money is for to the lender even when you’re applying for the card.

Other differences between a business loan and credit card

Borrowing limits

Business loans tend to let you borrow more than a company credit card limit.

Credit period

Business loans provide a one-off discrete payment that you must pay back in full over time. If you need more credit later, you’ll need to take out a new loan. Credit cards are more flexible, allowing you to borrow and repay money continuously.

Flexibility

Credit cards allow flexible repayments as long as you make the minimum monthly payment. This means you can vary how much you pay according to the business’ finances. A loan might require you to pay a fixed monthly repayment, including interest. 

Early repayment penalties

You can pay off a credit card entirely, reducing or eliminating interest payments. In contrast, loans typically have a fixed term and impose penalties if you want to repay your borrowing early.

Interest rates

Loans typically have lower interest rates than credit cards, but interest starts accruing from the moment you take on the debt. Credit cards have higher interest rates, but you can get cards with a 0% interest free introductory offer. Also, if you pay a card off in full every month, there’s no interest at all to pay.

Eligibility

It’s often harder to qualify for a business loan, and your business may need to have been up and running for some time. Credit cards are more accessible, especially for small businesses, but the deals you get depend on your credit history. 

Advantages and disadvantages of a business credit card

Advantages

• You can improve cashflow by using a credit card to spend and make purchases 

• Many credit cards offer rewards such as cashback, frequent flyer points, free international spending and vendor discounts

• You can build your company’s credit rating by using the card responsibly

• You can give employees cards that allow them to use the credit card for company expenses

• 0% cards enable you to spread the cost of purchases interest free

• You can pay your debts off early with no charges

Disadvantages

• High interest rates if you don’t clear your balance in full each month

• Fees and charges, including monthly or annual fees, late payment fees and fees for using the card abroad

• Risk of employee misuse and fraud

• A card could negatively impact your company’s credit rating, making it harder to get credit in future.

• The company could rack up problem debt

Advantages and disadvantages of a business loan

Advantages

• You can usually borrow more money with a loan, which can give you an injection of capital to cover significant expenses needed for business growth

• Regular fixed monthly repayments can give your business more budgeting certainty 

• Making loan repayments on time helps improve the business’ credit rating

• Interest paid on business loans may be tax deductible

• Lower interest rates compared to a credit card

Disadvantages

• You need to pay interest on the loan

• You might need to secure the loan against business assets

• Lenders often charge fees, including arrangement and set-up costs

• You could be hit with early repayment charges if you want to clear your debts sooner than forecast

• Fixed monthly repayments reduce flexibility

• Once you have paid off the loan, you have no ongoing access to credit, so you’ll need to apply for another product if you need credit in the future

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

The right financial product for your business depends on what you need the money for and the rates offered.

If you’re a new startup, you might find it challenging to get a loan because the business has little or no credit history. On the other hand, you may start out with a low credit limit and high interest rate if you take out a credit card in these circumstances. 

If you need a substantial capital injection to grow your business, a credit card is unlikely to suit you. However, a card is better than a loan if you want to improve cash flow and track monthly spending.

Ultimately, the best funding option is different for every business. If you're uncertain about the most suitable choice for your company, you may wish to speak to a financial adviser for tailored advice.

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