Business credit cards vs. business loans: Which is right for your company?

Itʼs no wonder that business owners may struggle to know what the right finance option for their business is. Juggling day-to-day operations, chasing invoices, and trying to grow your company is a lot to deal with, so researching options and understanding the differences between finance products can feel like a lot of extra work.

A 2024 Bank of England survey found that SMEs choose familiar types of finance, such as credit cards (50%) and bank overdrafts (24%), rather than alternative types of finance that might be more appropriate for their specific situation. Maybe youʼve gone for the first attractive looking credit card offer to land in your inbox, or perhaps youʼve been putting off that equipment purchase because applying for a traditional bank loan feels too daunting. If so, you might be either overpaying for flexibility you donʼt need, or be stuck with rigid repayment terms that donʼt match the ebb and flow of your cash flow.

As ever, knowledge is power. With a better understanding of how different finance products actually work – and more importantly, when they work best – picking the right option becomes much clearer. Itʼs all about choosing the right tool for the job. 

Key points:

• Business credit cards offer quick access to finance you can use for anything but can be expensive and offer lower credit limits

• Business loans offer fixed monthly payments and lower interest rates but applications require more information

• Funding Options by Tide can help when optimisation of working capital isnʼt enough, offering access to business finance up to £20 million

Pros and cons of business credit cards

Business credit cards are a popular type of small business finance as theyʼre easily accessible and versatile. You can use them for everything from office supplies to emergency repairs, and you only pay interest on what you actually use, when you use it. Theyʼre also a type of unsecured business loan, meaning you donʼt have to risk any collateral to access the finance you need.

A business credit card gives you instant access to funds, so for businesses with unpredictable cash flow, being able to find some financial breathing room quickly can be invaluable. Many also come with perks like cashback on purchases, expense tracking tools, and purchase protection, which could be useful for your business. 

That convenience comes at a price however. Interest rates on business credit cards typically range from 15% to 30% APR, making them one of the most expensive forms of business finance if youʼre carrying a balance month to month. What can seem like a quick fix for cash flow issues can quickly become an expensive habit unless youʼre very diligent with payments.

If you’re used to having a generous amount of credit to use on your personal cards, don’t assume you’ll get the same with a business credit card, particularly if your business is new. If you need a large amount of money for growth or a big purchase, the borrowing limit might well rule them out. 

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Pros and cons of business loans

Business loans differ from business credit cards in that you borrow an amount upfront and repay it over an agreed period, typically with fixed monthly payments. Knowing how much youʼll need to pay each month can be appealing, as it makes budgeting and planning ahead simpler.

Interest rates for loans are generally much lower than credit cards, often ranging from 6% to 15% depending on your business profile and the lender you choose. For larger purchases like equipment, property improvements, or significant stock orders, this cost difference can be substantial. A £20,000 equipment purchase, for example, could cost you thousands less in interest over the repayment period compared to putting it on a credit card.

The application process is where business loans become more demanding however. Lenders want to see detailed financial information, business plans, and often require security or personal guarantees. This means more paperwork, longer waiting times, and conversations about your businessʼs financial health. The approval process can take weeks rather than minutes.

Thereʼs also less flexibility once youʼve got the loan. Youʼre committed to those monthly payments whether your business is having a good month or a difficult one. Unlike credit cards, you canʼt simply pay less when cash flow is tight – the payment schedule is fixed, and any missed payments can have serious consequences for both your business and personal credit rating.

Are business credit cards or business loans better for short-term or long term needs?

Choosing between business credit cards and loans often comes down to timing and purpose. Business credit cards can be useful for handling the unpredictable, short-term financial challenges that every business faces, while loans can be better suited to planned, longer-term investments.

Business credit cards can be suitable for:

• Bridging cash flow gaps while waiting for customer payments

• Covering unexpected expenses like equipment repairs or emergency stock purchases

• Managing seasonal fluctuations in your business income

• Building business credit history when youʼre starting out

• Taking advantage of supplier early payment discounts when cash is temporarily tight

With credit cards, you can clear the balance quickly when your cash flow improves, avoiding long-term interest commitments. If you can pay off purchases within a few months, the higher interest rate becomes less of an issue.

Business loans might make more sense for:

• Buying valuable equipment or machinery that could generate income over several years

• Funding major renovations or business expansion projects

• Consolidating higher-interest debt from multiple credit cards

• Large stock purchases where you need a large amount of cash upfront

• Any investment where you need predictable monthly payments for budgeting purposes

The lower interest rates on loans become particularly valuable when youʼre borrowing larger amounts over longer periods. A five-year equipment loan at 8% APR will likely cost you a lot less than keeping that same amount on a credit card, even if youʼre making regular payments. If you donʼt want to be tied to regular monthly payments and regularly take card payments for sales, a merchant cash advance is another option.

How to choose between a business credit card and business loan

When choosing between these lines of credit for your business, ask yourself three questions: 

• How much does the business need? 

• How quickly can we repay it? 

• Is payment flexibility or cost more important? 

If you need £5,000 to cover a temporary cash flow gap and can repay it within three months, a credit card might feel like a good option, despite the higher interest rate. But if youʼre buying £30,000 worth of equipment that youʼll pay off over five years, a business loan could potentially save you thousands in interest.

Find business finance with Funding Options by Tide

Whether youʼre looking for a standard business loan, a short-term business loan, or something a little more specialist, like auction finance for property developers, weʼre one of the leading names in business finance in the UK, having helped facilitate over £1 billion in finance to more than 20,000 customers.

Checking if youʼre eligible is free, only takes a few minutes, and while a full application would impact your personal or business credit score, checking eligibility wonʼt. Just submit your details via the link below to find out if you could be eligible to borrow up to £20 million.

Find business finance.

FAQs

Can I use a personal credit card for business expenses instead?

While itʼs technically possible, itʼs not advisable for several reasons. Using personal credit cards for business expenses makes accounting more complicated, offers less consumer protection for business purchases, and can affect your personal credit score. Business credit cards also often provide better expense tracking and business-specific perks.

How does my personal credit score affect business finance applications?

For most small businesses, your personal credit score plays a significant role in both credit card and loan applications. Lenders often require personal guarantees, especially for newer businesses without established trading history. A good personal credit score (typically 650+) will improve your chances of approval and better rates.

Are business credit cards easier to get than loans?

Generally. Business credit cards have simpler application processes and less stringent requirements than business loans. Credit card applications often take minutes to approve and don’t require much documentation, while loan applications can take weeks and require detailed financial information, business plans, and sometimes collateral. 

What happens if I canʼt make payments on my business loan?

Always contact your lender if youʼre experiencing difficulties as they can offer options like payment holidays or restructured terms. Missing loan payments can have consequences, including damage to both your business and personal credit ratings, potential legal action, and loss of any collateral youʼve provided. 

Is it better to have multiple business credit cards or one large credit limit?

Multiple cards can provide backup options and help you separate different types of expenses, but they can also make financial management more complex. Having one or two cards with adequate limits rather than several smaller ones means there’s less chance of becoming confused over payments.

Do business loans require collateral?

Not always. Unsecured business loans are available, though they typically have higher interest rates and stricter eligibility criteria. Secured loans, which require collateral like property or equipment, often offer better rates and higher borrowing limits.

Can I pay off a business loan early without penalties?

Many business loans allow early repayment, but some lenders charge early repayment fees to compensate for lost interest. Always check the terms before signing, and factor potential early repayment charges into your decision if you think you might clear the debt ahead of schedule.

How long does it take to build business credit?

Building business credit typically takes 6-12 months of consistent, on-time payments. Start by obtaining a business credit card or small trade credit facilities, ensure all payments are made on time, and register with business credit agencies to track your progress.

What documentation do I need for a business loan application?

Typical requirements include recent business accounts, bank statements (usually 3-6 months), business plans for larger amounts, proof of identity, and details of any existing debts. Newer businesses may need to provide more detailed financial projections.

Can I use business finance to pay off personal debts?

Business finance should only be used for legitimate business purposes. Using business loans or credit cards to pay personal debts could breach the terms of your agreement, affect your businessʼs financial position, and create complications for tax purposes.

Whatʼs the difference between APR and interest rate?

APR (Annual Percentage Rate) includes both the interest rate and any additional fees or charges, giving you the true cost of borrowing. The interest rate is just the percentage charged on the borrowed amount. Always compare APRs when evaluating different finance options as they provide a more accurate picture of total costs.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

Itʼs important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicantsʼ circumstances and creditworthiness. Funding Options will receive a commission or finderʼs fee for effecting such finance introductions.