A Short-Term Business Loan or a Credit Card: What Is Better?

“Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.” While this quote from Ayn Rand summarizes the concept of any small business, we can’t help but emphasize the importance of that specific tool: money! You may have a good business opportunity that requires you to act fast, but you can’t pursue it because at this moment you don’t have enough cash to do it. Sounds familiar? Don’t lose your opportunity! A short-term business loan or a credit card are valid options for fast and immediate access to funds. What are the pros and cons of each?

There is not a single answer to this question, as each of them is suitable for specific situations. As a rule of thumb, we can say a credit card is the best option if you need a small amount of instant cash (as for an emergency) that you will able to repay on a short amount of time, while a business loan is a better option for bigger investments and if you want to repay the loan with fixed quotes for a longer period. Some examples are always useful to learn the different usage of both financing options.

A different solution for each type of business

Case 1

Pedro has a landscaping business, and he has just finished a big project which required quite a big expense from his side. His customer, a wedding planner, will pay him in a week, but Pedro already has another project with a tight deadline and he wants to start as soon as possible. He chooses to pay the upfront expenses of the new project with his business credit card until the payment from the wedding planner arrives. This will be an easy way to meet deadlines: once the payment from his previous work arrives he will repay his credit card. It’s a fast, easy and non-expensive operation.

Case 2

Marina has been managing her restaurant for more than 5 years and she has been planning to improve the kitchen over the last months, but she is unsure due to the large investment required. She has been offered to buy a used kitchen from a restaurant that ceased business for $13,000. This is a great opportunity that Marina can’t miss: she will save a big amount of money on equipment that is almost brand new. The current owner is in a hurry and wants to sell to the first serious buyer. Marina has no time for the complicated process involved in a long-term business loan, but on the other hand, she thinks $13,000 is too much to be paid with her credit card. Since her business has been generating more than $50,000 a year she thinks she can easily take a short-term loan. Before approaching a lender she uses an online business loan calculator to know how much she needs to pay monthly. She resolves she can comfortably pay back $600 monthly for 24 months, and the lump sum of money she will get with the loan will be enough to buy the kitchen equipment.

Case 3

Rafael opened his barbershop two years ago and he is happy with how the business is going. He’s planning on changing the two chairs of the shop for two professional barber chairs to give it a better and more professional look. He is unsure if he should pay the $3,000 that the chairs cost with his credit card or through a short-term loan. If he uses his credit card he thinks he will be able to repay the amount in a month to avoid added fees, but this will leave him with no cash in hand if there is an unexpected expense during that month. He decides to use an online loan calculator and finds out that he can take a short-term loan and repay it at only $170 per month for 24 months. This will mean almost no load to his monthly income and will allow him to have remaining funds in case of the unexpected.

Have you ever been in a situation like these? You should always think carefully and be cautious to avoid strangling your business. If you’re unsure of which option suits you best, read here about short term business loans. Don’t lose a good business opportunity just because you’re short of cash. There are always alternatives to get the funds you need and grow your business.