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?

Determining the optimal financing method depends on the specific circumstances at hand. In general terms, a credit card proves advantageous when seeking immediate access to a small amount of cash that can be promptly repaid. This scenario is ideal for situations like acquiring Sales and Franchise CRM solutions or purchasing essential business equipment. On the contrary, a business loan emerges as a more suitable choice for substantial investments, particularly if the intention is to repay the loan through fixed installments over an extended period. To illustrate, undertaking larger-scale initiatives such as expanding business operations or launching a new product line aligns well with the structured repayment plans offered by business loans. In essence, the choice between a credit card and a business loan hinges on the scale of financial requirements, repayment terms, and the specific nature of the business investment in question.

Here are a few more examples to help you understand the subject matter better.

A different solution for each type of business

Case 1

Pedro has a landscaping business, and he has just finished a big project that 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 inexpensive operation.

Case 2

Mike, a passionate hairstylist from Brookefield, is ready to turn his dream of owning a salon into reality. Facing the initial expenses of starting his business, including acquiring equipment and securing licenses, Mike explores various funding options. Instead of going the traditional small business loan route, Mike decides to tap into the expertise of his local Small Business Development Center (SBDC). They point him in the direction of a government-backed loan specially crafted for the beauty and wellness industry. With the capital in hand, Mike has two options, either build an entire new salon studio from scratch or look for one of the best salon suites for rent in Brookefield. Setting up a new space would undoubtedly demand more elbow grease and capital. On the flip side, the second option offers Mike a sweet deal – a private, fully equipped space nestled within a larger salon facility. It’s like having his own corner of the world, creating a personalized and intimate environment for his clients, all without the hefty overhead costs of managing an entire salon.

Case 3

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.

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.