Business Loan vs. Charge Card: What are the Differences?

Here's a look at business loans and charge cards and their similarities and differences.

As a contractor, how you choose to finance your business is a crucial decision that could influence the outcome of your projects and also your overall business.  

And while you might already have cash saved up, you may need to look elsewhere for additional funds. For example, business loans and charge cards are popular options that construction companies and businesses explore when faced with cashflow challenges.

To fully take advantage of these credit facilities, you must understand their purpose, fees, interest, qualification requirements, repayment terms, and duration.

Here's a look at business loans and charge cards and their similarities and differences.

What is a Charge Card?

A charge card is a type of credit card that allows businesses to borrow money from credit card issuers to purchase items or withdraw cash. Unlike a typical credit card, charge cards do not allow you to carry a balance from month to month. Instead, they require you to pay the entire balance monthly.

This requirement makes charge cards preferable to credit cards for business owners and private individuals that need to borrow money but don't want to get into debt.

In addition, since you must pay all balances in full every month, you will not quickly rack up debt like on regular credit cards, and you can avoid paying interest on the balance, thus, avoiding any extra costs.

In this way, charge cards are considered cheaper because they incur no interest.

Charge cards are not as popular as regular credit cards. Still, a few good options are the Toolbox charge card and the American Express Platinum Card.

The Toolbox charge card lets you make purchases without worrying about interest payments. It gives you 30-45 days to pay your balance.

The Toolbox charge card stands out because it caters to the needs of contractors and construction companies. In addition to providing easier access to much-needed funds, Toolbox allows contractors to track their expenses. Thus, helping them make sound financial decisions. In addition, the card is interest-free, comes with no annual fees, and doesn't require a personal guarantee.

What is a Business Loan?

A business loan is a fixed amount of money given to a business by a lender. The lender (often a bank or financial institution) expects the money to be repaid in regular installments, including interest.

The interest is a percentage charged as consideration for the time it will take to repay the loan.  

So if you take out a 2-year business loan of $750,000 at 5% interest per annum, you've to pay back $750,000+$75,000 = $825,000.

Furthermore, business loans can have either fixed or variable interest rates (3% to 10%).

A variable interest rate may change based on market rates, while a fixed interest rate will not change over the life of the loan.

Companies use loans for various purposes, such as starting a new business, expanding an existing business, buying equipment or inventory, or even covering daily expenses.

Business loans can be a great way to help your business grow and succeed. There are different business loans available, each with its own requirements. Some loans are geared toward small businesses, while others are designed for larger firms.

For example, start-up loans and working capital loans are designed to help businesses get off the ground. These are designed to help companies to meet their short-term cash needs.

So when trying to obtain a loan, it is vital to research all the options available and find the one that best suits the business's needs.

Businesses can apply for business loans through various lenders, including banks, credit unions, and online lenders. The application process is simple, and the approval process is quick.

One thing to keep in mind when applying for a business loan is that you'll need to provide detailed information about your business. It includes:

  • Information about your business history
  • Your current financial situation
  • Your plans for the future
  • A solid business plan
  • A good credit history

Lenders want to ensure you're at a reasonable risk before they lend you money. Therefore, it is essential to be transparent and accurate when providing information, as wrong information may lead to your application getting disqualified.

The terms and conditions of business loans vary, so make sure to look around for the best interest rates and terms.

Business Loan vs. Charge Card: Similarities

Business loans and charge cards are similar in the following ways.

  • You can use both business loans and charge cards to help you expand your business operations. A business loan can provide the necessary capital to purchase equipment or hire new employees. At the same time, you can use a charge card to cover the cost of inventory, materials, supplies, or fuel.
  • Both loans and charge cards can also be expensive for businesses. Interest rates on business loans can be high, and late payment fees on charge cards can add up quickly after months of no repayment.
  • Another similarity is that both business loans and charge cards can help a business build its credit history. Regular payment of charge card balances and loans will improve your credit score, making you eligible to take out even bigger loans in the future.
  • Both business loans and charge cards can be secured or unsecured. The security on the loan or charge determines the credit limit and loan terms.

Charge Card vs. Business Loan: Differences

The following are the differences between charge cards and business loans.

  • One of the most significant differences between charge cards and business loans is the amount of money you can borrow. Depending on the lender, you can borrow up to $500,000 or more with a business loan. Charge cards tend to have lower limits that expand with good repayment history.
  • Another key difference is that a business loan is typically secured by some type of collateral, such as the business's assets or inventory. In contrast, a charge card is not guaranteed by any collateral. It means that if a business fails to make payments on its charge card, the credit card company can't seize any of the business's assets to cover the debt.
  • Charge cards are considerably easier to get compared to business loans. A charge card has flexible requirements and doesn't require a personal guarantee or security deposit. The Toolbox Charge Card, for instance, does not require a personal credit check and usually approves applications within 24 hours.
  • Business loans have higher interest rates than charge cards. As mentioned earlier, charge cards do not incur any interest or fees as long as you pay the monthly balance.
  • Charge cards cover a larger scope as they can be spent on anything. Business loans, on the contrary, have strict rules. You can only spend business loans on the specific need for which they were approved.
  • Finally, there is a difference in repayment terms. A business loan requires you to repay the loan over a period, usually between 1 and 7 years, sometimes more. But with a charge card, you have to pay the balance in full every month.

Summary Table of Difference: Charge Card vs. Business Loan

Business loans
Charge Cards
Credit limit  $500,000 to $5 million  No preset spending limit  Collateral  Required   Not required   Interest rate 6% to 10%  No interest    Repayment terms Monthly installments  Total balance must be paid every month  Access to funds   4 to 8 weeks after approval  A few days and sometimes immediately  Qualification requirements  Collateral, annual revenue, business plan, and good credit.  Good credit history   Credit type Term loan   Revolving credit 

The Benefit of Using a Charge Card Over a Business Loan

  • Charge cards don't have interest rates. In other words, you don't have to worry about being charged extra for paying with your card. As a result, it can help you save money in the long run and stay out of debt.
  • Charge cards can also help you build your credit history. You can improve your business credit score by using your card responsibly and paying your bills promptly. It will also help you secure business loans and other financing alternatives.
  • A charge card allows you to avoid the hassle of paperwork and the long wait for approval. Moreover, you can access the funds not too long after authorization.
  • Business loans usually need to be secured with collateral. Thankfully, charge cards are unsecured, and you don't have to put up any assets as collateral. It is, therefore, an ideal financing option for those who don't have any assets to use as collateral or don't want to risk losing them.
  • Additionally, charge cards offer a variety of rewards programs that can benefit your business. For example, some charge cards offer cash-back rewards or other benefits. They also provide additional services such as payment protection and insurance products.  

Should You Choose a Business Loan or a Charge Card?

Business loans and charge cards are both great financing options for your business.

Business loans can finance large purchases and even settle existing debts and are generally ideal for large, established businesses.

Similarly, charge cards are great for everyday business expenses and can also cover large purchases if you are approved for a higher limit.

So, when choosing between a business loan and a charge card, it's essential to weigh the pros and cons of each option and decide which is the best fit for your business. Whatever choice you make, make sure you repay the money borrowed on time.

The Toolbox charge card is one of the best charge cards out there, especially for contractors. With its expense tracking features, you will be getting two services for the price of one. You can get one now by filling out an application online.