Should You Get a Credit Card or Loan for Your Startup?

credit card

Just like a mighty oak tree that started as a small acorn, a billion-dollar company starts as a small startup. But most of the startups, unfortunately, fail to take root. Whether from problems related to money management, stiff competition, unrealistic expectations, or something else, many startup businesses fail to grow or, more tragically, fail to remain going concerns.

Money, or the lack of it, is one of the main reasons why many startups don’t grow and flourish. While some businesses bootstrap their way to success, others seek venture capital, angel investors, or other means to obtain growth financing. But what about credit cards or loans?

If you’re pressed for cash and don’t know what to do, should you consider getting a credit card or loan to help with growth, operations, and other things your startup needs to survive and thrive? The answer is yes, no, or maybe. In other words, it depends. Read on for a look at the pros and cons of getting a credit card or loan for your startup — and then decide for yourself.

Pros & Cons: Credit Cards

PRO-Relatively Easy to Get One

One of the reasons your startup might want to apply for a credit card is that it’s relatively easy to get one compared to a loan. On the one hand, credit card companies will weigh factors like your credit history as well as your credit score to determine whether or not you qualify for a card. If you have low score credit cards you don’t have to worry, consider applying for an unsecured credit card that will help you build a better credit history. On the other hand, a financial services institution will have a more onerous application process that may require you to submit your business plan and provide financial records before a loan-lending decision can be made for your startup.

CON-Competitive Rates Aren’t a Must.

You can’t be 100% certain that you’ll get a competitive interest rate. Different cards offer different rates. While you may be able to get a zero-interest introductory rate depending on the credit card you get, that introductory rate will be over soon enough. Getting a good rate post-introductory period will depend on your credit score. So if your credit isn’t great, then you could be dealt a blow each month if you carry a balance.

PRO-Build Business Credit

Getting a business card and using it properly will help your startup to establish and build business credit. While your personal credit score is what card companies will use to determine if you qualify for a business credit card, your use of that card will establish and build your business credit. You’ll want to use your card responsibly and pay off balances in full each month. The reason this is important is that it can make it much easier to secure a business loan later on and to obtain favorable terms.

CON-Personal Guarantee Might be Necessary

Before applying for a business card, it’s critical that you understand the terms. Check to see if a personal guarantee is required. A personal guarantee requirement means that you’ll be held responsible for the business card debt, and this could lead to the loss of personal assets should you be forced to default on the loan. It’s best to use credit cards sparingly if you think things will get out of control. 

credit card or loan

Pros & Cons: Loans

PRO-Lower Borrowing Cost

In a head-to-head comparison, you’ll likely find that the interest rate for a business loan is lower than for a card. So if you’re averse to having to pay out a lot of interest, you might want to prioritize getting a business loan over a credit card. Also consider that it’s possible, if you borrow from family or friends, to get a zero-interest loan.

CON-Collateral Necessary

If you apply for a business loan, you’ll most likely have to put up collateral to obtain the loan. In other words, you’ll need to secure the loan with some of your assets, such as business real estate or even personal assets. It’s critical that you know that defaulting on a business loan could put any assets used to secure the loan at risk of forfeiture.

PRO-Tap More Capital

Getting a business loan will give you access to far more capital than you’ll have access to with a business credit card. If your startup is particularly cash-intensive, a card simply may not be enough to meet your operational needs. So weigh your needs and determine whether you can meet them with a card or a business loan.

CON-More Paperwork

You can bet that you’ll need to fill out a lot more paperwork to get a business loan than to get a business credit card. This means you’ll need to have all of your relevant documents on hand, such as your business plan so that you can complete the application. In addition to the paperwork, you’ll also have to wait longer for a decision.

So should you get a credit card or a loan for your startup? Check out the pros and cons and decide for yourself. Depending on your situation, either can be a good option for your startup. While it can be argued that most startups would be better served with a business loan, no one knows your startup as well as you can. So only you can determine which is the best route to take.