All small-business owners need a little financial help to run and grow their enterprises at some point, whether it is to hire more employees, buy new equipment or market a recently launched product.
But how to meet these ongoing capital requirements — with a business credit card, term loan or line of credit — can be confusing.
Credit
cards: easier approval, perks and flexibility at a cost
Some 65% of small business owners use credit cards on a frequent basis, according to the U.S. Small Business Administration. Collateral is not required, which means no assets are pledged as security for repayment of any debt outstanding.
So what are the drawbacks? Because the charge amounts to an unsecured loan, cards tend to carry much higher interest rates than loans backed by collateral. Most business credit cards come with variable rates, so the amount of interest you pay on the card balance can change, depending on a market gauge like the prime lending rate used in the banking system.
Having a high balance on each card can negatively affect your credit scores. Both your business and personal credit score take your credit utilization ratio into account, so keep this in mind before racking up too much debt.
Business
loans: lower interest costs, but tougher approval
Business loans generally come in
two forms: a term loan, which provides a lump sum of money at
closing, repaid monthly at a fixed interest rate, and a line of
credit. This is a variable-rate loan similar to how a credit card
works, as you have access to a specific amount of money — say, $20,000 — and
you can borrow and repay funds up to that limit as many times as you wish.Term loans typically involve larger sums and are better suited for financing big-ticket items, such as new equipment, real estate, purchasing other assets or to refinance an existing debt. Lines of credit often are better for supplying working capital, as they provide flexible, convenient access to funds. The interest rate you receive on a business loan is likely to be far better than what you pay on a business credit card balance.
Keep in mind that term loans are generally backed by collateral, which means you'll have to pledge an asset to secure the debt. The lending requirements are also far more stringent for business loans than for a credit card.
The
bottom line
Business credit cards come with
numerous advantages over term loans and lines of credit, such as rewards for
spending, 0% interest introductory rates, sign-up bonuses and the ability to
track spending. However, because of high interest costs and other fees, they
are generally better suited for smaller regular expenses, or for business
owners who ca not qualify for other types of financing.Business term loans are generally a better way to go if you're looking to refinance an existing debt. Business lines of credit are typically more appropriate for short-term working capital and may carry much lower rates than credit cards.
If you would like more information about AltaOne’s business credit cards, please feel free to visit our website.
