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Updated: April 13th, 2020
When you’re on the hunt for business financing, it can be tricky to know where to begin.
If you find yourself trying to determine whether a term loan or credit card is best for business, you are not alone.
After all, every option out there — from invoice factoring to merchant cash advances — comes with its own unique set of perks and challenges, all of which have the potential to either enhance or hinder your success.
To help you find the best financing solution for your business, we’re taking a closer look at the key differences between two major forms of business financing: term loans and credit cards.
With a term loan, you borrow a set amount of money and pay it back over a set number of years. Once you’re approved for the loan, you receive all the money at once and begin making repayments on a schedule.
Your interest rate could either be fixed, meaning it’ll remain the same over the course of the term, or floating, which means it’s subject to change depending on the state of the financial market.
Term loans can offer a wide range of money — usually anywhere from $25,000 to $1 million for a period of one to 10 years, depending on the lender.
(For more info, check out our in-depth guide on term loans)
A credit card, on the other hand, operates on a revolving line of credit. That means you have a limit on how much debt you can accrue each month, and the amount of money available to you from month to month depends on how much you spend and subsequently pay off. If, for example, you spend $30,000 of your $50,000 credit card limit, but then pay off the $30,000, you’ll have access to the full $50,000 again.
Each month you’re required to make a minimum monthly payment, which is usually between 1-3% of your credit card balance. And unlike term loans, you can avoid accruing interest on your credit card if you pay off your balance in full.
Because credit cards allow you to keep borrowing money (as long as you pay down your balance), they often work best for short-term finance needs or smaller regular expenses, like office utility bills or other operating expenses.
To avoid racking up debt, it’s important to use your credit card responsibly by making payments on time and aiming to spend only what you know you can pay off in full at the end of the billing cycle. Doing this can help build up your business credit, which may make it easier to acquire funding in the future.
If you have a specific purchase in mind for your business and want all the money upfront, a term loan may be your best bet. Such business purchases could include buying a new office building, upgrading your equipment, or expanding your team. Term loans not only provide the financial support necessary to help grow your business, but also offer the consistency of regularly scheduled payments, which allows you to budget and plan more effectively.
If you’re interested in a term loan, Funding Circle may be the right choice for your business. The application process is free and takes just a few minutes. We offer fixed rates that are competitive with traditional bank loans, and because we believe in an honest, transparent borrowing experience, you’ll know exactly how much you have to repay each month with no hidden fees or prepayment penalties.
Paige Smith is a Content Marketing Writer and Senior Contributing Writer at Funding Circle. She has a bachelor's degree in English Literature from Cal Poly San Luis Obispo, and specializes in writing about the intersection of business, finance, and tech. Paige has written for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.