What are the pros and cons of using a credit card versus a bank when it comes to opening a new loan for my small business?

Kathryn B. Hauer, CERTIFIED FINANCIAL PLANNER (TM)

@KathrynHauer • 01/10/16 This answer was first published on 01/10/16. For the most current information about a financial product, you should always check and confirm accuracy with the offering financial institution. Editorial and user-generated content is not provided, reviewed or endorsed by any company.

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Hi! It’s so exciting that you are starting or growing a small business! If you’ve been in business for awhile, the first thing you might want to do is check in with your local Small Business Administration (SBA). Their main website is www.sba.gov. They offer various low interest loans to small businesses who generally meet these guidelines:

· In business at least 2 years

· Personal credit score is 660+

· Seeking at least $30,000

· At least $100,000 in revenues for the past 12 months

A loan they offer includes the 7a loan, which has a maximum loan amount of $5 million and averaged $371,628 in fiscal year 2015. The actual interest rate for a 7(a) loan guaranteed by the SBA is negotiated between the applicant and lender and subject to the SBA maximums. In January 2016, SBA 7A Loans range from 5.75% to 8.25%. Another type of SBA loan geared more toward the purchase of fixed assets like real estate or machinery is a CDC/504 loan. The interest rate on a 504 loan from the SBA as of this writing in Jan 2016 ranges from 3.78% to 4.39%, depending on the size of the loan and the amount being borrowed.

However, if you are just starting a brand new business, you’ll have to fund your business in other ways. This great WalletHub article by Miranda Marquit “Funding Your Small Business” explains more about small business loans.

In some cases, new business owners don’t have the option to get an SBA loan or a bank loan and are unable to attract investors. In that case, the only way to start up may be to use credit cards. The problem with credit card debt is that the interest rate is very high. That basically means that you are paying more for the money you borrow which in turn reduces your small business profits. If you aren’t able to make a go of it with your business, you’ll be left with debt to pay off at a high interest rate. Depending on how much you need to start up, it may be better to wait to open until you can save up enough to start up with little credit card debt.

I so hope that it works out that you are able to start/grow – and succeed! – with your business. Please write back if you have more questions. Best wishes to you and thanks for writing!

Kathryn Hauer, EA, CFP®

Admitted to practice before the IRS

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