Deciding between a business line of credit vs. credit card? At first glance, these two financing options may seem to have a lot in common. For starters, they both provide businesses with access to money up to a set limit, which can be valuable in a pinch.
Nevertheless, there are some fundamental differences between how they’re structured and used. Depending on the situation and your business’ needs, it may be more beneficial to use one over the other.
If you’re curious about how a business line of credit vs. credit card compares, this guide will detail everything you need to know.
Business lines of credit are similar to personal lines of credit. They give you access to a reservoir of cash you can use to cover expenses as they come up. You can borrow as much as you need from your total credit limit, and only pay interest on the funds you use.
Business lines of credit come in various forms, depending on your needs and business. Unsecured lines of credit, which are more accessible than ever, don’t require collateral to qualify. Revolving lines of credit, on the other hand, allow you to access cash again as you pay them down.
A secured line of credit is backed by an asset, also known as collateral. A lender may require you to pledge something you own in exchange for a line of credit, especially if your credit history or financials aren’t the best. A home equity line of credit is one type of secured line where your home is the underlying asset.
Keep in mind that a line of credit could fall under one or more of these categories.
A business line of credit allows small businesses to finance ongoing expenses, one-time purchases, pursue new opportunities for growth, and withdraw cash. Many small businesses will also use a line of credit as an emergency fund.
Business credit cards work in the same way as consumer credit cards, but the latter are intended mainly for transactions. After receiving a card, you can use it for transactions up until the total credit limit. As you pay it back, you gain renewed access to that total limit.
If you don’t pay your balance in full by the due date, you’ll be charged interest on your remaining balance. Credit card companies are notorious for charging high interest rates, which means they’re not the best option for large expenses that may take time to pay down.
While there are secured credit cards available, most types of credit cards are unsecured.
A business credit card is essentially a line of credit. You’re drawing from a set limit, and more funds become available as you pay down your balance.
The major differences between a line of credit vs. credit card lie in how businesses can access funds and the way interest rates are structured. As a result, each financing solution is better for different purposes.
Here are the top differences between a business line of credit vs. credit card.
Lenders are more willing to extend you a higher limit on a business line of credit vs. credit card. If you need a larger amount of money, or if you want to have a reservoir to use as an emergency fund, a business line of credit would be the way to go.
Business credit cards, on the other hand, are better suited for predictable day-to-day expenses like supplies.
It’s always useful to have extra cash lying around, as some business expenses can only be paid in cash. If you want peace of mind knowing that cash is readily available, you’re better off with a business line of credit vs. a credit card.
Business lines of credit are more likely to allow you to withdraw up to 100% of your limit in cash. On the other hand, the maximum of cash you can withdraw on a credit card is usually only 20% of your total limit. Credit cards are also mainly intended for transactions.
In some cases, credit card companies might even charge you additional fees for cash advances.
Credit cards are known for high interest rates, which means they’re not always the best option. If you don’t pay off your entire balance in full by the due date, you’ll have to pay interest. This can translate to hefty expenses, or even accumulating debt.
It’s possible to qualify for a credit card promotion offering 0% APR. However, these promotions are usually for a set time frame. Once the promotional period is over, you’ll be subject to higher rates on unpaid expenses.
Most credit cards come with variable interest rates that can change depending on market conditions. It’s possible your rates could go up, and you could find yourself paying more than you anticipated. Depending on the credit card company and how you use it, you may also be subject to fees.
By contrast, a small business line of credit usually comes with a fixed interest rate. This adds more certainty about future payments and allows you to plan out future expenses. Your line of credit may also have fees, but these are usually transparently communicated and related to draws. Before signing an agreement, be sure to verify fee structures.
Overall, a line of credit tends to be more affordable for business owners when it comes to fees.
Business credit cards require you to pay off your entire balance in full at the end of each billing cycle in order to avoid excessive interest rates. If you’re planning to repay the balance over a period of time to offset the burden, you may end up paying much more than originally owed.
Business lines of credit, on the other hand, offer more room for flexibility. Based on the term you qualify for when you apply, you’ll have more time to pay this balance down. While you should verify the financial details with your lender, most lines of credit won’t charge higher interest as time goes by.
When comparing business lines of credit vs. credit cards, credit cards are better when it comes to rewards and other bonuses. It’s possible to rack up cashback rewards or points that can be redeemed for travel and other items.
Even though business lines of credit usually won’t offer reward programs, they feature lower interest rates and fees. In the long run, this normally makes them much cheaper.
Many businesses also find they have to pay annual fees in order to access more favorable reward programs.
Considering the many differences between lines of credit vs. credit cards, you may find yourself confused on which is the best choice for your business.
It all comes down to your unique financing needs. There are situations in which it would be more beneficial to use one over the other. Here’s what you need to know.
If you prefer lower interest rates and a flexible payment schedule, a business line of credit would be best. Lines of credit are also ideal if you want to have extra cash at your disposal for any random needs, and would like a larger credit limit.
Lines of credit are a favorite among small business owners because of the flexibility they provide. By having ongoing access to a reservoir of funds, you can cover unexpected expenses as they come up. This is helpful in the case of emergencies, but also for pursuing new areas of growth.
You can use your business line of credit to open up a new location, buy inventory, cover cash flow disruptions, invest in inventory, smooth over payment delays, implement marketing campaigns, and much more.
A business card is a good choice if you’re confident you can pay off your balance in full at the end of each month. If you value rewards, but don’t need access to cash, you may find that credit cards are the best option.
Business cards are most ideal for day-to-day purchases and transactions. You can use them to pay for business lunches, office supplies, travel expenses, and more. However, you’ll want to avoid making large purchases on a credit card, or relying on it for access to cash.
If your credit card balance becomes too large, you might not be able to pay it off in a lump sum. If this is the case, you’ll be charged high interest rates. Overall, it’s better to make larger purchases with a business line of credit rather than a credit card.
Still debating between a business line of credit vs. credit card? The answer lies in which type of financing is most important for your business.
Business lines of credit offer more access to cash and can be repaid over a longer term without an APR increasing. They can also be used for a variety of different purposes, such as an emergency fund or to pursue growth opportunities.
The best part? The funding process for a business line of credit usually lasts only 24 hours. Qualifying is also a lot easier than you may think.
Get in touch with a National Business Financing Advisor about no collateral, flexible, revolving lines of credit catered to your needs.
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