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7 Reasons to Use a Credit Card Instead of a Small Business Loan

June 15, 2018
8 min read
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A small business loan may be right for you if you need to finance a major real estate or capital purchase over a long period of time, particularly if you have established business credit. Interest rates remain low, so this is still a cheap financing option.

But more often than not — particularly for routine spending — the smart move may be to side-step a bank or government loan and use a small business credit card instead.

Unlike with a loan, you'll be able to earn rewards on major business expenses, like advertising. Plus, credit cards tend to offer more payment flexibility. You can even pay for expenses you wouldn't otherwise be able to, like rent or invoices, using a payment service like Plastiq, and still earn points or to more quickly meet spending requirements for welcome bonuses.

Let's look at seven reasons why using a credit card may be easier or more beneficial to you or you business than a loan or line of credit.

1. When Qualifying for a Loan Isn't Certain

It's not just a matter of convenience. Sometimes a business credit card might be your only option. If your business is less than two years old or you're looking to build your business credit, it could be difficult for you to qualify for a loan. But if you have a strong personal credit score, you should have little problem acquiring a small business card. And, if you're using a personal credit card now, consider a business credit card to help you separate your personal expenses from those exclusively business-related. This can be particularly helpful to you as you prepare your taxes.

Just make sure the card you choose fits your business' spending needs. If your business incurs significant travel expenses, consider something like American Express® Business Gold Card. If office supplies are one of your biggest expenses, a card like the Ink Business Cash Credit Card may be more in line with your needs.

2. When You Hate Paying Interest

If you pay your credit card bills in full every month (and you should), you're essentially getting an interest-free loan. Lenders will not cut you such a deal. It's debt from the beginning even if you pay off the entire loan or line of credit balance quickly.

Just make sure to pay your bill by the due date each month. You'll have a grace period following the end of the billing cycle and the due date to pay your bill without incurring interest on purchases made during that billing cycle. Be sure to know your credit card's grace period. The due date on the Ink Business Preferred Credit Card, for example, "will be a minimum of 20 days after the close of each billing cycle," according to Chase.

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3. When You Seek No-Interest Promotional Financing

You don't have to pay interest when financing big purchases for your business. Photo by Zero Creatives / Getty Images
You don't have to pay interest when financing big purchases for your business. Photo by Zero Creatives / Getty Images

You'll miss out not only on a grace period by using a loan, you also won't be able to take advantage of no-interest offers. These are most common on credit cards themselves, but you can also enjoy no-interest transactions for a limited time with Plastiq. The service is waiving its 2.5% transaction fee on payments of up to $250 though September 30, 2018 when you pay any bill or service using Masterpass to make a Plastiq payment.

Although they are less common than with personal credit cards, a number of small business credit cards offer 0% introductory offers for 12 months or more. These can be handy if you need to make a big purchase and want some additional time to pay off the balance without incurring interest. Just make sure to pay off the balance before the intro period expires (and don't make a habit of carrying a balance), as business credit cards tend to charge higher interest rates than their personal card counterparts.

Here are some current offers:

  • SimplyCash® Plus Business Credit Card from American Express — Pay 0% APR on purchases for 15 months. (After that it will be a variable of 14.49% to 21.49% APR.) (See Rates & Fees)
  • The Blue Business®️ Plus Credit Card from American Express — Pay 0% APR on purchases and balance transfers for the first 12 months. (After that a variable APR of 14.74% to 20.74% applies) (See Rates & Fees)
  • Ink Business Cash Credit Card — Pay 0% APR on purchases or balance transfers for 12 months. (After that it will be a variable 15.49% - 21.49% APR.)

4. When You Hate Fees

When you take out out a loan, you might get slapped with fees along with your interest payments. The Small Business Administration, for example, charges:

  • 0.25% of the guaranteed portion for loans with maturities shorter than 12 months.
  • 2% of the guaranteed portion for loans up to $150,000 on loans with maturities longer than 12 months.

You may also face prepayment penalties if you want to pay off your loan before the term expires. This is especially true for some loans with long maturities. SBA loans charge prepayment penalties on loans with terms of 15 years or longer.

You can avoid fees altogether with a business credit card, including annual fees (although you'll sacrifice some rewards-earning potential going this route). Some cards to consider including the Capital One Spark Cash Select for Business, which offers 1.5% back on all spending and offers a $200 cash bonus after you spend $3,000 within the first three months from account opening, and the Bank of America® Business Advantage Travel Rewards World Mastercard® credit card, which offers 3x points on travel booked through the Bank of America Travel Center, and 1.5x points on all other purchases and pays a welcome bonus of 30,000 points after you spend $3,000 in purchases in the first 90 days of account opening.

The information for the Capital One Spark Cash Select has been collected independently by The Points Guy. The card details on this page have not been reviewed or provided by the card issuer.

5. When You Want Less Risk

If you default on a business credit card, the issuer may come after you personally, but there's no risk you'll lose your house. When you default on a business loan, you could lose all of your business assets. Because credit cards are unsecured loans, you won't risk losing those assets should you fail to repay the loan.

You'll be required to put up collateral you have an interest in — like real estate, vehicles or equipment — on many loans, including SBA loans. In fact, the SBA says it expects "all available company assets be offered as collateral. If company assets are insufficient to fully secure the loan, liens on personal assets may be required. Often, this means a lien on residential real estate."

6. When You Want to Give Your Employees Access to Credit

It's safer to make your employees authorized users on your business card than it is to give them access to your firm's line of credit. You'll be able to monitor their spending more closely with a credit card. The Business Platinum Card® from American Express, for example, allows you to set employee card spending limits either online or by calling the number on the back of your card. The limit doesn't apply to restaurant tips and hotel stays extended beyond the original reservation period.

7. When You Want to Use Perks

Buy something with a loan or line of credit and then accidentally damage it and you may be out of luck. Buy that same item with a credit card and you may be eligible for purchase protection. Here's another perk some business credit cards offer that may tip the balance in favor of plastic over a loan: extended warranty protection. This benefit extends a manufacturer's warranty by a year on some cards.

Bottom Line

There's a time and a place for a small business loan. But responsible credit card users shouldn't be afraid to use this financial tool when it's in their best interests to use it over a loan — particularly if using a credit card is cheaper, more convenient or offers benefits unavailable when you make a purchase using a loan.

For rates and fees of the SimplyCash Plus Business Credit Card from American Express, please click here.

For rates and fees of the Blue Business Plus Credit Card from American Express , please click here.

Updated on 2/10/20

Featured image by Getty Images