Financing your small business is never a process anyone would define as “fun.” Even if you’ve gotten lucky with a good loan at a fantastic interest rate, you still probably hate seeing money go out the door every month to make repayments. And if you have a not-so-great loan—or even more frustrating, no loan approval at all—then you might feel even more frustrated.
If you can relate to the latter, you’re not alone. Only 26.5% of small business loan applications get approved. That leaves everyone else with only a few financing options at their disposal; one of which being a business credit card. Business credit cards are often easier to get, require less financial history than loans, and let you pay for a lot of the same things a business loan would.
As with personal credit cards, business credit cards offer the lure of quick access to funds—albeit at steep interest rates. Charge more to your card than you can pay off every cycle, and you’re likely to be on the receiving end of some pretty hefty interest charges. Miss payments altogether, and you’ll start to see your business credit score (and sometimes your personal score!) plummet. So when does it make sense to pull out your plastic to fund your business?
The Short Answer? It Depends
Small business loans are usually your best answer in almost every scenario. They avail you to more money and typically charge less interest than a credit card account. Loans provide you with a lump sum of cash after approval, and you pay off what you’ve borrowed steadily during a set period.
Business loans are harder to get than business credit cards, however. Most lenders only want to work with companies that have a long business track record, a good credit history, and who can demonstrate their ability to pay the loan back. Some loans, such as Small Business Association (SBA) loans, require much more information than that. It’s not always possible for every small business to provide all of these details, or for this information to have enough detail to make them suitable loan candidates. Especially if you’re just starting out. In this case, credit cards might be your best option—if not one of your only ones.
When To Finance a Business With a Credit Card
Financing your business with a credit card isn’t typically your best option. In fact, it’s usually your option of last resort. But there are moments where using a credit card for financing so makes sense. Here’s when you might want to consider using a credit card to finance your business, and when you should run for the hills.
If You Need Fast Cash
Credit cards are a wonderful option if you only need to make minor purchases, or have one-off expenses that require you to have quick access to cash. These examples may not feel like they’re under the business financing umbrella, but credit accounts are still a loan, strictly speaking. Your card company fronts you the money for your purchases, and you pay them back every statement cycle. So in this case, you’re taking out small loans every time you’re charging something to your card. If you’re occasionally low on cash, then credit cards might work for you.
If You’re Approved for a 0% APR Card
You can essentially use your credit card as an interest-free loan if you’re lucky enough to qualify for a card with a promotional 0% APR. These cards offer you a set number of months without interest on your purchases, which means that you can carry a balance across several statement cycles without owing a single penny in interest. So long as you pay off your balance before the introductory period ends, that is.
Bear in mind that these cards usually go to applicants with stellar credit, as well as a substantive business credit history. If you’ve got both of these qualifications covered, you’re probably a good candidate for a conventional business loan, which might be a better long-term financing solution for you.
If You’re Out of Options
Odds are that you’re considering financing your business with a credit card if you’ve exhausted your other loan options. Sure, you may balk at the substantial interest rate that comes with your credit account, but sometimes it’s better to suck it up than have no financing at all. You’ll build a credit history while you make steady payments, which still helps you build up the kind of track record lenders want to see when they review your loan applications down the line.
When Not to Finance a Business With a Credit Card
If you’re considering financing your business with a credit card, it’s probably not your ideal choice. Nor is it your first. That’s for good reason: financing with a credit card is a risky proposition and is almost always a worse option than getting a business loan. The list of reasons why you’d want to avoid using a credit card to finance your business is long; here are a few of the main reasons.
When You Have Other Options
If you have other loan options aside from a credit card, use them. You’ll save a fortune in interest, save yourself from the uncertainty of fluctuating monthly payments, and build your credit history all the while. Small business loans also provide you with more money than credit cards, which is ideal if you need to make major capital investments. Even the steep interest rates that come with short-term loans are usually smaller than a credit card’s APR, making them a relative bargain. Basically, if you’ve got another option out there, explore it before you commit to financing with a credit card.
If You Can Borrow from Friends, Family, or Investors
Not all financing has to come from a bank. The best alternative financing source is often your loved ones, with whom you can work out specific repayment terms. You won’t have to undergo credit checks, piles of paperwork, or any of the other procedures that come with conventional borrowing (unless your Uncle Sal asks you for a background check, of course). Alternatively, investors may also be a good option for you if you’re willing to give up equity in exchange for cash. Be sure that you’re comfortable giving up shares of your business in the early stages, as a 2% stake of a $100,000 company is far different than a 2% interest in a company that grows to $2,000,000 over time.
If You Can Find Alternatives to Loans
Loans might seem like the go-to option when you need small business financing, but there are other sources of cash to help you get your business off the ground. Many municipalities offer small business grants to help promote growth within their towns and cities. Other groups offer grants to women and minority entrepreneurs to help them build their companies, which could be another avenue worth exploring.
There are several ways to finance a business—each offers its benefits and drawbacks. Term loans, lines of credit, and SBA loans are great options if you qualify. Credit cards are a good option when there are no other options left. So long as you’ve thought about every option available to you, you’re equipped to make the right decision for your business. The key here is to do your homework, choose wisely, and only borrow what you can afford to pay back.