Business loans vs business credit cards

By   |   Verified by David Boyd   |   Updated 30th September 2021

Business loans vs Business credit cards
  • Two in three Australian small businesses fail within their first three years – but a business loan could keep you afloat or help you expand.
  • An unsecured loan means no collateral, but the trade-off is a higher interest rate and stricter terms.
  • Not keen on a loan? A business credit card could help your business grow, add more staff or simply manage cash flow.

Whether it’s investing in more staff, expanding to a new location or simply finding a way to better manage your cash flow, a small business loan could be exactly what you need to get ahead of the competition.

But how do you even start that conversation? You’re in luck – we’ve got all the information you’ll need when choosing a business loan.

What is a business loan?

In its most basic terms, a business loan is simply a lump-sum amount of cash you receive from a lender — whether that’s a traditional bank, alternative lender, friend or family member, or otherwise.

Business loans can be secured (meaning you put up an asset like your car or house as collateral) or unsecured (riskier for the lender so your interest rate will be much higher), and you then repay those funds over a fixed period.

Business loans vs personal loans

It's important to note how business loans differ from personal loans. There are similarities and fundamental differences.

Business loans

  • Most lenders will ask for business plans, long-term projections and assurances that your business will have the capability to repay the loan in full.
  • Alternative and online lenders typically require fewer details before approving a loan, compared to traditional banks.
  • It may be wise to keep your personal and business finances separate for tax purposes.
  • All funds must be put towards the business.

Personal loans

  • Your credit score is a determining factor.
  • The lender will review your personal finances.
  • You must provide proof of income.
  • Self-employed business owners may need to provide their previous two years of tax returns.
  • If approved, funds can be used for personal or business purposes.

Types of business loans

Not all businesses are created equal — and neither are business loans. Depending on a range of factors such as your profitability, cash flow, assets and more, you may decide to go for a secured or unsecured loan.

Secured business loans

Arguably the most common business loan on the market, a secured loan essentially means you ‘secure’ business funding against a physical asset that you or the business owns. This collateral could be anything from a residential property to cars or other machinery of value.

While you always run the risk of your collateral being seized in the event you default on your business loan, a secured loan means you’ll enjoy lower interest rates and often longer loan periods than with unsecured funding. What’s more, because the lender will deem you as less risky, you’ll be able to access a higher amount.

Unsecured business loans

For many entrepreneurs — particularly those who have a greater risk appetite and are keen to grow their new company fast — the freedom of an unsecured loan is enticing. You won’t have to put up any collateral, which means there’s no chance of the bank liquidating your assets to reclaim their loan.

Your business’s financial health and outlook are also taken into account during the application process, and in addition a healthy personal credit score is almost essential to getting approved.

There are drawbacks, however, most notably the much higher interest rates and stricter loan terms. Most unsecured loans are for shorter periods (around three months but rising to three years for some lenders), and while funding is available fast, you will be liable for severe penalties if you miss any repayments – which could end up costing you more than the loan is worth.

There are various other funding avenues to explore, such as equipment financing, merchant cash advances and debtor financing, but it’s recommended you speak with a finance professional about those options.

Business credit cards

If putting your home up as collateral sounds too risky for your business venture, there are alternatives. If you don’t require a huge amount of funding – just enough to maintain solid cash flow or purchase new stock – then a business credit card could be the ideal solution.

Much like a personal credit card, a business credit card is a convenient way to conduct your affairs with generous repayment terms and timelines. What’s more, you can earn rewards and airline points every time you make a business purchase – which will likely see you racking up way more points than you could with just a personal credit card. There are so many options on the market.

Note that a business credit card is different from a business charge card since you can’t carry a balance month-to-month on a charge card.

Would a line of credit be better?

A line of credit is a little different from a standard business loan in that it is more flexible and isn’t linked to a card or bank account. Essentially it acts in the same way as a credit card — you draw down the amount of money you need within a set limit of funds, and you only pay interest on the amount you use.

It’s a great option if you need to steady your cash flow — particularly helpful for small businesses in the retail industry who are prone to seasonal fluctuations — and if you make on-time payments it’s a fast way to boost your credit score.

On the negative side, there are some quite strict criteria you’ll need to hit and you’ll be liable for regular fees. Most lenders will also want to see a long history of positive business trading before they even consider offering a line of credit.

Which option is best for you?

All things considered, the bottom line is this: no one knows your business like you do. There are a variety of factors you need to consider when planning your short-term and long-term business strategies, and luckily you have a wealth of funding options at your disposal.

Think about what you and your company need, and what type of financing could help elevate you above the competition.