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Should you choose a business credit card, overdraft or loan?

Should you choose a business credit card, overdraft or loan?

Consider these six things when deciding which borrowing option is right for your business.

Depending on the type of business you operate and what you’re after, the best borrowing option for your business' needs could be a credit card, overdraft or loan. Here are a few things to consider that can help you decide.

1. Be clear on the purpose

Some common reasons you may be looking to borrow are to:

  • Pay for business expenses
  • Manage your cash flow
  • Purchase a property or business
  • Purchase a car or equipment – asset finance may be suitable

2. Understand how each product works

Here’s a brief rundown of how the three borrowing options work and how interest is typically charged for each.

Business credit card

  • This could be suitable if you’re looking to pay expenses and manage cash flow
  • If approved, you’ll be given a credit limit – typically up to $50,000
  • All CommBank Business Credit Cards offer up to 55 days interest free for purchases except our Business Low Rate Credit Card – this means you won't be charged interest so long as you pay the full closing balance by the due date each month

Business overdraft

  • This could be suitable if you’re looking to manage your cash flow and cover unexpected expenses
  • A business overdraft is linked to your business transaction account and allows you to access extra funds (up to your approved limit) when your account balance reaches zero
  • Interest is charged only when you use the funds.
  • CommBank’s Simple Business Overdraft may suit small business owners looking for an option where no set term or security1 is needed

Business loan

  • This could be suitable if you’re looking to buy a commercial property or business
  • Your loan is delivered in a lump sum and you typically pay it off over a number of years – you can also tailor your repayment frequency to suit your cash flow, for example monthly or quarterly
  • You also have an option to secure the loan with residential property, commercial property, cash or a mixture of these, which can lower the interest rate
  • Interest is charged on the outstanding balance

3. Interest rates

For each option, the interest rate will determine how much you have to repay each month. Credit cards for example, have two common types of interest rates – purchase interest and cash advance interest rate. Make sure you understand when you could be charged both.This quick guide explains how interest is calculated.

4. How do you want to make repayments?

Each product option has different conditions around repayment, with some more flexible than others. For a variable business loan, for example, you’ll pay back an amount each month over a set period of time of up to 30 years. The amount you repay could change if the interest rate moves.

With a business overdraft or credit card, you can pay off as much as you want so long as it’s above the minimum monthly repayment (this may include the interest, fees and charges incurred in the month). However, additional fees may apply if not paid in full.

Before you borrow, make sure you have an idea of how much you can repay a month and whether this will vary. Creating a cash flow forecast can help you work this out by predicting money flowing in and out of your business for the next 12 months. Use the cash flow forecast tab in the CommBank financial plan template to help you do this.

5. Fees & charges

As well as interest, there can be other costs involved in borrowing. You’ll see the full list in the terms and conditions or schedule of standard fees and charges of whichever product you choose.

Loans typically have establishment, monthly service and exit fees (if you leave the loan before the end of the term). If you secure the loan, you may pay some extra fees such as valuation fees. If your contract is fixed and you choose to pay it out before the end of the fixed period, you may be subject to an Early Repayment Adjustment and administration fee.

Credit cards typically have annual, cash advance and late payment fees.

Overdrafts typically involve a line/limit fee, monthly account fee and interest. CommBank’s Simple Business Overdraft has no monthly account fee.

6. Other benefits

To fully compare and understand your options, you should also consider any other benefits offered.

  • CommBank Awards credit cards can earn you points for your business’ spending that you can redeem on a wide range of gift cards, merchandise, cash back, flights, electronics and more.
  • CommBank’s Simple Business Overdraft can potentially be funded the same day you apply for it, so you can use the funds straight away.
  • A CommBank Business Banking Specialist can explain each option in more detail and help you understand which may best suit your needs

1 Directors guarantees are required for companies. This guidance is intended to provide general information of an educational nature only. As this guidance has been prepared without considering your objectives, financial situation or needs, you should, before acting on the information, consider its appropriateness to your circumstances. Applications for credit cards, overdrafts or business loans are subject to the Bank’s normal credit approval and suitability requirements. Fees, charges eligibility and conditions apply. Limits are determined by an assessment of your business needs with no preferred minimum or maximum amount. View our Financial Services Guide at https://www.commbank.com.au/content/dam/commbank/business/pds/ADB2684.pdf and business banking rates and fees online at https://www.commbank.com.au/business/rates-fees.html You should consider seeking independent, professional tax advice before making any decision based on this guidance. Commonwealth Bank of Australia ABN 48 123 123 124 AFSL and Australian credit licence 234945.