Credit Cards or Loans for your Startup
ConvenienceYou can use your personal cards to fund your startup. However, it’s a good idea to keep cards for personal use separate from cards for business use. If you have good credit and decent earnings, you can get a new personal or business card that’s used solely for your startup. The credit inquiry might ding your credit score just a bit. However, the additional credit you receive will ultimately raise your score by increasing your available credit and by decreasing the proportion of debt you carry in relation to your total available credit. One advantage of using business cards instead of a personal card is that it will allow you to start building a business credit rating. An advantage of getting a personal credit card instead of a business card is that you can probably get a higher credit limit with a personal card. Personal loans and business loans are both viable ways to cover startup costs. Personal loans are considerably easier to get and more convenient than business loans. You can apply online and usually have the money in hand within one to three business days. Getting approved for a business loan could take some time. This is true even if you have an excellent personal credit score. You might have to provide a detailed spending plan and other information to convince the lender that your startup represents a good credit risk. Your eligibility for a business loan will also depend on your existing personal credit history and credit rating. Getting a business loan can take anywhere from three days to six months. Getting a business loan from your bank might take seven days while getting a business loan from a non-banking financial company, or NBFC might take only 72 hours. Small business loans take the longest; getting approval might take three months or more. However, if you fund your startup with business credit cards and establish a good credit rating for your business, a business loan will be much easier to get down the road. Having cards and a personal or business loan, both of which are in good standing on your credit report, will boost your overall business credit score more than just one or the other alone.
BenefitsBusiness cards today can offer you some valuable perks and benefits. That’s a desirable feature when you’re trying to make your funds go as far as possible. Rewards cards can give you cash back on purchases, airline miles, hotel stays, rental car discounts, and airline lounge privileges. Some business credit cards provide additional cards for your employees at no cost. Others offer you anniversary reward bonuses. In most cases, you can get business rewards cards with no annual fee. Business loans offer none of these perks. Another feature to look for is cash-back business cards that offer you cash-back deals during the first few months after you get your card. Some of the better deals out there involve cash-back cards that will give you hundreds in cash back if you spend a few thousand using the card during the first three months after the credit card loan is initially issued.
CollateralA business loan may require you to supply collateral to secure the loan. The type of collateral required could include business real estate, business equipment, business savings, and even your personal assets. If your startup has no assets, getting a business loan could be difficult unless you put your personal assets on the line. If you default on a startup business loan, the lender may choose to sue you for what you owe, and you may have to forfeit your assets to cover the suit. Some business cards require you to supply a personal guarantee. If you supply a personal guarantee, you are telling the lender that you will be personally responsible for any debt accrued on your business line of credit. If you cannot repay your business credit card debt, your business and personal credit ratings can be adversely affected. You could even forfeit your bank accounts, home, automobile, and other assets to cover what you owe.
Interest RatesYou can get a fixed-interest business or personal loan with an interest rate that remains the same for the life of the loan. Business cards, however, might come with variable-rate interest. In other words, the interest rate might be low when you apply for the card, but it could increase over time. Additionally, if you ever miss a payment, your interest rate could soar to almost 30 percent. Cash in on zero-percent-interest business cards if possible. You can find zero-interest business credit cards with up to 18 months of zero interest on purchases. However, any balances that still remain after the grace period expires will generate high interest, and the APR that will kick in after the introductory period expires could be high as well. Be sure to determine what your interest rate will be after the introductory period expires. The APR will be based on your credit rating, and since your startup doesn’t have a credit score yet, the interest rate will probably be high. Regardless of how low your interest rate is on a business card, the interest on a business loan will always be lower. Small Business Administration 7(a) loans come with interest rates as low as 7.5 percent. SBA microloans go up to $50,000 and have interest rates from 8 percent.
Available CapitalYou can usually get more money for your startup with a loan than with a card, even if the credit card comes with a high limit. You can get a startup term loan from the Small Business Administration for up to $1 million, and the SBA will guarantee business loans up to $5.5 million. To maximize your capital, combine a few of the best business cards with a low-interest personal loan. After you establish a good credit rating for your business, you can then apply for a business loan to increase your available funds.
Secured Loans and Secured Credit CardsSecured loans and secured credit cards carry a low risk for lenders because they’re guaranteed by collateral. Mortgages are secured loans; if you default on a mortgage, the bank will take your home to cover the money you owe. Secured loans are a win-win situation for lenders, so the interest rates on secured loans are some of the lowest interest rates out there. Secured credit cards offer you a line of credit against a deposit amount you provide. If you deposit $1,000 into an account with the card company, the card company will give you a credit card with a limit of $1,000. If your card balance gets near $1,000 and you’re not paying it off, the credit card company will withdraw your deposit and apply it to your balance. Just like secured loans, interest rates on secured cards tend to be low. Secured cards are typically popular with people who have poor credit or no credit. If you need funding for your startup, a secured card won’t help you very much since it won’t generate additional cash flow. However, a secured loan could save you some money on interest if you’re willing to offer some collateral. Although interest rates on business loans are high compared to secured loans, they’re still lower than typical interest rates on credit cards.
Periodic Zero Interest OptionWill you always pay less in interest with business and personal loans than you will with credit cards? No. Credit cards have one big advantage over loans: You can potentially use the money every month without paying any interest whatsoever. For the first 30 days after you make a card purchase, no interest will be charged as long as you pay your balance in full by the due date. Most cards also have a grace period during which you won’t be charged interest. With loans, you’ll be paying interest every month whether you’re spending the money you borrowed or not. The bottom line is that every time you use a card to make a purchase and pay the balance in full by the end of the billing cycle, you’re getting a cost-free, short-term loan. What’s more, paying your balances in full every month will improve your business credit score. If you have a steady cash flow, this is an attractive option.
Credit Card Perks, Advantages, and BenefitsBusiness cards come with value-added benefits that personal loans do not offer. Card companies do this because they know that consumers perceive them as a more expensive way to borrow money than loans. They’re trying to compete, and they want your credit dollars. As a result, they offer a variety of benefits in addition to cash back, travel perks, and the opportunity to dispute charges. The benefits include:
- Rental car insurance
- Emergency travel insurance
- Roadside assistance
- Free museum entrance
- Trip cancellation coverage
- Extended warranty coverage
- Access to special events and concerts
- Concierge services
- Cell phone replacement insurance
- Guaranteed refund on returned purchases
- Price protection
Personal Loans Versus Business LoansSo far, you’ve learned about the advantages and disadvantages of using cards and loans as a way to get money to launch your startup. However, you might be wondering about whether to go with a personal loan or a business loan. Which one is a better option? The answer is up to you. It depends on which option would best fit your needs. Personal loans are easier and faster to get than business loans. However, interest rates are generally higher for personal loans, and the amount you can borrow is usually less. Business loans require you to jump through more hoops. Lenders will want a business plan, financial statements, revenue projections, and other information. Personal loans are about as easy to get as credit cards. Lenders will look at your credit history, your credit score, your assets, and your current income. Personal loans are easier to qualify for than business loans, and because they’re unsecured, you won’t have to worry about coming up with or losing your collateral. For small business loans, however, the lender will usually expect you to provide collateral in order to qualify for the loan. If you have no assets to use as collateral, the lender might ask you to collateralize the proceeds of your startup. If you collateralize the proceeds of your startup and then default on a business loan, the lender can seize your collateral to pay off your debt. Although personal loans usually don’t require collateral, you’ll pay a higher rate of interest. Over time, the higher interest will offset some of your profits. With a business loan, you’ll get a lower interest rate, and the profits you make from your business will be higher. If you default on a business loan, you’ll forfeit your collateral. If you default on a personal loan, the lender will hold you personally responsible for the amount you owe. You can be sued, and your wages can be garnished to pay off your debt. Every startup is different, and every business is unique. Fortunately, today’s financial marketplace offers an abundance of loan and credit card products that can be customized to suit your needs.
Chris Fuller went to the University of South Florida and has worked in the financial sector for over 20 years. He has extensive experience in all aspects of personal and small business lending, from personal loans, equipment finance to cash flow based solutions for small mom and pop businesses, and large corporations.