Business credit card vs loan vs overdraft: which to use when

The three tools in one paragraph each

A business credit card is a revolving credit limit you spend against, with a monthly statement. Pay the statement in full and purchases cost nothing in interest; pay part of it and a variable rate applies to what is left. The limit is reusable: repay and it is available again.

A term loan is a fixed sum paid into your bank account, repaid in instalments over an agreed period, typically one to five years. The rate is usually fixed for the term, there is often an arrangement fee, and once you have repaid it the facility is gone.

An overdraft is an arranged limit on your business current account. You dip into it whenever the balance goes below zero and pay interest on the overdrawn amount, plus, at many banks, a fee for having the facility. Almost all UK business overdrafts are repayable on demand.

I run a small agency and have used the Capital on Tap card for a few years. It handles the working-capital job well. It is not a substitute for a loan when we have needed to buy something we would pay off over years, and I would not want it to be.

How each one charges you

The headline rate matters less than the structure of the charge, because the structure decides whether you pay anything at all.

Credit card

Capital on Tap’s credit agreement says it does not charge interest on card purchases shown on a statement if the closing balance is paid in full by the due date. Miss that and interest accrues daily on purchases until you next clear a statement in full. Cash withdrawals are different: interest runs from the day the cash leaves the account, whatever you do at the statement. There is no arrangement fee and, on the free card, no annual fee. The rate is variable and made up of a fixed business rate plus the Bank of England Bank Rate.

On rates: Capital on Tap advertises rates as low as 13.86% APR (variable) and does not publish a representative APR. Your rate depends on your personal and business credit history and the Bank of England base rate. The full list of charges is on our Capital on Tap fees and APR page, and the mechanics of staying at zero interest are in how to avoid business credit card interest.

Term loan

A loan charges interest from the day it is drawn, on the full amount, until it is repaid. There is no interest-free window. Arrangement fees of a few percent of the loan are common, sometimes added to the balance so you pay interest on the fee as well. Early repayment may or may not save you interest depending on the contract. The advantage is predictability: a fixed monthly payment you can put in a cash-flow forecast and forget.

Overdraft

An overdraft charges interest daily on whatever you are overdrawn by, usually at a variable rate above Bank Rate. Many banks also charge an arrangement fee when you set it up and a renewal fee each year, whether or not you use it. Going past the arranged limit is where it gets expensive, with unarranged rates and returned-payment charges. The cost is proportional to how much and how long you borrow, which is fair, but there is no way to borrow for free.

Speed and effort to get

A card is the quickest of the three to obtain. Capital on Tap states a decision in around 2 minutes and physical card in 2 to 5 business days, and its FAQ says you can create a virtual card or transfer funds to your business account as soon as the account is approved. The application asks for your average monthly turnover and business bank details. The eligibility rules are on our eligibility page.

An overdraft from your existing bank can be arranged in days if your account history is good, because the bank already sees your income and outgoings. Moving banks to get one is slow.

A term loan takes longest. Lenders want filed accounts, management figures and often a forecast, and for a new company they may want to see a year of trading. The trade-off is that loans go further: five- and six-figure sums over several years are ordinary for a loan and unusual for a card.

Flexibility once you have it

A card is the most flexible day to day. You can use it for anything Visa is accepted for, issue cards to staff with individual limits, generate virtual cards for subscriptions, and repay whenever you like. The credit agreement says repayment above the minimum is fully flexible. The catch is the limit. Capital on Tap advertises limits up to £250,000, but starting limits can be modest and increases are not automatic, which we cover in why the credit limit starts low and how increases work. Preloading lets you spend beyond the limit with your own money, which is useful for a one-off purchase but is not borrowing.

A loan is the least flexible: the money arrives once, the repayments are fixed and you cannot redraw what you have repaid. That rigidity is the point. It stops a long-term purchase turning into a permanent revolving balance.

An overdraft sits in the middle. You use as much or as little as you need, but the limit is set by the bank, reviewed periodically and can be reduced. Because it is attached to the current account you cannot ring-fence it for a purpose, so it tends to get absorbed into general cash flow.

What each is for

The simplest way to choose is to ask how long the money will be out and what it buys.

• Working-capital timing, under two months. Paying suppliers, software, advertising and travel before customers pay you. This is the card’s job. The interest-free window on purchases covers the gap, you earn 1% cashback on the spend, and the transactions land in your accounting software through the sync.
• Asset purchases you will pay off over years. Vehicles, fit-outs, machinery, a large stock order for a contract. This is the loan’s job. A fixed payment schedule matched to the asset’s useful life is cheaper and safer than revolving it on a card at a variable rate.
• A buffer against a bad month. Payroll falling due before a late invoice clears. This is what an overdraft was designed for. A card can do part of it, but not the parts that need a bank transfer, unless you use Bill Pay and accept the fee.

Decision table

A worked, illustrative example

Suppose your company needs £6,000 to pay a supplier 45 days before the client pays you. Every rate below is illustrative, chosen to show the shape of the costs rather than to represent any lender. Capital on Tap advertises rates as low as 13.86% APR (variable) and publishes no representative APR, so I have not used a Capital on Tap rate here at all; your own rate would be on your credit agreement.

The pattern is what matters. For a gap you can clear at the next statement, the card is not just cheapest, it is negative cost once rewards are counted. Carry the balance and the card becomes the expensive option quickly. The loan looks poor here because a loan is the wrong tool for a 45-day gap; run the same numbers on a £30,000 van over four years and the loan wins comfortably, because the card’s variable rate applied to a balance that only falls by the minimum each month would cost far more.

Two simplifications: the card figure ignores daily accrual and the exact timing within the billing period, and the overdraft figure assumes the bank charges no renewal fee in the year. Real tariffs vary. The point is the shape, not the pounds.

Funding Circle FlexiPay: the pay-later hybrid

Funding Circle’s FlexiPay sits between a card and a loan. It is a credit line you use to pay a supplier, a bill or a card purchase, then repay in one, three, six, nine or twelve monthly instalments. Instead of interest there is a flat fee per transaction that depends on the term you pick, and Funding Circle’s pages describe card purchases repaid in a single instalment as fee-free. Its support page says a personal guarantee will be required from one or more directors, that cash withdrawals are not possible with the card, and its cashback card is limited companies only; at least one year trading; £30,000+ turnover.

That structure suits a specific case: a lumpy bill you want to spread over a few months with a known cost, without taking a loan. It is worse than a card for everyday spend you clear monthly, because a card paid in full costs nothing and earns rewards, and it is worse than a loan for multi-year purchases. If you are weighing it against a card, the Funding Circle cashback card itself is covered in our roundup of the best UK business credit cards.

The personal guarantee runs through all three

Whichever you choose, if your company is small, expect to sign a personal guarantee. Capital on Tap’s FAQ says: “Yes, we require a personal guarantee from a director or major shareholder of the company when you apply for a business credit card.” Santander’s business credit card page says a guarantee is required from all directors or members of a ltd or llp. Funding Circle says the same for FlexiPay. Banks offering overdrafts and loans to companies with short trading histories commonly ask for one too, though the product pages rarely say so up front.

The practical effect is the same in every case: if the company cannot pay, the lender can look to you personally. Limited liability protects you from company debts you have not guaranteed; it does not protect you from the ones you have. That is a reason to keep every facility no larger than the business genuinely needs. What a guarantee means for a director, and how to limit your exposure, is in our guide to the director’s personal guarantee.

Bill Pay: putting invoices on the credit line

The historic weakness of a card against an overdraft is that many business costs are paid by bank transfer: rent, some suppliers, HMRC in some cases, payroll. Capital on Tap’s Bill Pay addresses this. Its FAQ describes it as a feature that “allows you to pay suppliers and bills via bank transfer directly from your Capital on Tap account, even if the recipient doesn’t accept card payments.” You upload the invoice, confirm the extracted details and schedule the payment. It goes out as a BACS transfer drawn on your credit line.

It is not free. The FAQ gives two fee options: 2% fee, earning 1% back in points (net 1%), or 1% fee with no points (net 1%). Either way the net cost to a free-card customer is 1% of the payment. Bill Pay transactions are bank transfers, so they carry no chargeback rights and cannot be cancelled once authorised for immediate processing. Set against an overdraft, a 1% fee on a payment you clear at the next statement is often cheaper than 45 days of overdraft interest plus a facility fee, and it turns an invoice into a purchase that sits in the interest-free window. For a payment you would carry for months, it is the wrong tool. There is more in paying HMRC and suppliers by card.

Using more than one

Most small companies that manage cash well use a card for the day-to-day, keep a modest arranged overdraft they rarely touch, and take a loan only when there is an asset to match it to. The card earns on spend and costs nothing when cleared; the overdraft is insurance against a late payer; the loan converts a large purchase into a predictable monthly line. What you want to avoid is any one of them doing another’s job: a card carrying an asset, a loan funding monthly expenses, or an overdraft that has quietly become permanent.

If you land on the card for the working-capital role, the two things that decide whether it is a good deal are whether you pay it in full every month and whether the rewards are worth having. The first is under your control and the second is set out on our Capital on Tap rewards page.