7 Instances When a Credit Card Make More Sense Than a Small Business Loan

Updated on: 15 Dec 2023 // 4 min read // Credit Cards
Author :(466 posts)

The ideal funding option for carrying out a business is always a Business Loan. You can fund a significant portion of the asset and have easy repayment schedules extending to seven years or more. However, for minor purposes, it is not feasible to opt for a Business Loan. The paperwork involved in applying for a business loan is strenuous. A business Credit Card can be handy under such circumstances.

A business Credit Card has several advantages over a Business Loan:

  • They offer flexibility to use and repay
  • You get an interest-free period
  • There is no need for providing collateral
  • You get the advantage of accumulating and using rewards points
  • The business Credit Cards are easy to get

Let us look at situations where a Credit Card makes more sense than a small Business Loan:

1. New to Business – Start-up Enterprise

Banks usually look for experience and continuity in business while processing Business Loans. There is the CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) backed loan facility available for start-up enterprises, but the paperwork involved is high.

You can reserve this facility for the more significant expenses as you can go up to 1 Crore without providing collateral. For smaller payments, a business Credit Card is ideal. The documentation involved in approving business Credit Cards is lessas compared to your Business Loans. Your personal credit score is enough to make you eligible for a business credit card. It is better to opt for a business Credit Card rather than a personal Credit Card because you can monitor it better, especially for tax-related purposes.

2. Hate Paying Interest – The Business Credit Card is a Better Option

The advantage of using a business Credit Card is that you get an interest-free period. If you make the payment of card bill in full every month, you get the benefit of an interest-free period that can extend anywhere from 20 days to 50 days depending on your billing cycle and the timing of your purchase.

You do not get this facility in a Business Loan. Even if you repay the entire Business Loan after one day, you still have to pay interest for one day.

3. Take Advantage of No-interest Promotional Financing

Credit Cards come with attractive features like no-interest promotional financing where you have the facility to repay in EMIs (Equated Monthly Instalments) with 0% interest. Specific cards come with such 0% APR (Annual Percentage Rate) financing programs during the introductory period. The manufacturers of business products also allow you to pay the amount in instalments without interest as part of the promotional activities. When you apply for an online credit card, you can check out the ‘Find the Right Credit Card for Me’ option to avail the benefit of such promotional financing.

4. Hate Paying Fees

The CGTMSE-backed loans are ideal for start-up units and established units as well. However, you have to pay the guarantee fee on an annual basis. It can go up to as much as 5% of the loan amount depending on your loan tenure. Also, you might have to pay pre-payment penalties should you decide to close your Business Loan before schedule.

You can avoid paying fees with a business credit card as you can use the accumulated rewards points to take care of the card renewal fees and other charges. These credit cards come with attractive cashback and discount offers that are not available with Business Loans.

5. Do Not Wish to Provide Collateral – No Need to Do So with a Business Credit Card

Business Credit Cards do not require you to provide any collateral whereas Business Loans do. You have the CGTMSE-backed loan where you do not have to provide collateral, but the primary assets financed by the bank are still under the hypothecation of the bank. The bank can resort to taking possession of these assets and collateral (if any) in case you default on your repayments. There is no such risk involved in credit cards.

6. Give Credit Options to Your Employees

You can give access to your Credit Cards to your employees by specifying employee spending limits. It is also easy to monitor their spending with a Credit Card as compared to a small Business Loan.

7. Take Advantage of Perks

Business Credit Cards let you pay for activities not connected with your business as well. You can pay your rent or restaurant bill with your business credit card. The banks do not verify the end use of Credit Cards. However, it is not possible to do so with your Business Loans. Secondly, business cards give you the facility of purchase protection. In case you are not happy with a particular purchase, you have the facility to cancel the purchase and apply for a refund. Such a facility is not available with your business loans.

We agree that Business Loans have their specific advantages. However, it makes sense to use a business credit card on occasions like the ones discussed above. You get better benefits with a business credit card as compared to a business loan.