Line of Credit vs. Business Credit Card

Today, business is very concerned about the way to get access to capital. And in this article, we will focus on two popular methods of capital: business credit cards and business lines of credit.

Benefits to utilizing business credit cards

Small and mid-sized enterprises can get credit easily by applying for a business credit card. Advantages of business credit cards include accounting interconnection, free-of-charge cards for staff, and, in certain cases, travel incentives like access to airport lounges and gratis protection.

One key distinction between a business credit card and a personal credit card is that the former allows you to establish your business credit history. When you have a great business credit history, you receive access to more advantageous borrowing conditions when your company needs funds in the future.

When a business credit card may be the best option

A business credit card may be beneficial to any company that needs access to quick business capital. The strength of a business credit card is to increase the liquidity of the company. Using a business credit card may be most advantageous to small business owner:

  • Making everyday purchases
  • Building business credit
  • Obtaining quick, collateral-free financing

Business Line of Credit (LOC) Advantages

A business line of credit (LOC), like a business credit card, provides your company with simple access to finance for satisfying business demands, you can access funds through a business checking account, credit card or mobile app. While company credit cards are normally unsecured, a business LOC may be guaranteed by real estate or inventory.

LOCs, like credit cards, provide revolving credit up to specified limitations, and whenever you repay the amount used, it becomes available to borrow again. Other than a loan from a bank, which payments covers the interest on the total borrowed amount, a business LOC charges interest just on the borrowed sum, not the whole balance. Since, LOCs often are secured they tend to have greater credit ceilings and lower interest rates than company credit cards.

 

When a business line of credit is most beneficial

Line of credit is popular and widely accepted in numerous industries, so it may be helpful due to some limitations of a credit card. If your company experiences regular seasonal fluctuations, you may consider obtaining a business LOC. And these are some of the most popular applications for corporate LOCs:

  1. Paying for purchases you can’t charge. A LOC are on demand funds that can be used for payments such as: inventory, vendor bills, payroll & leases. You don’t want to be dependent on your LOC for operating cash flow, but it can provide assistance during seasonal slow periods.
  2. Covering larger purchases. LOC tend to have higher limits than credit cards, so it’s convenient to use them for big purchases instead of maxing out credit cards.

The Cost of borrowing

Both access to capital have cost accrued in very different ways, interest rates differ vastly between LOC and credit cards. Because the interest rates on a company line of credit are typically lower than those on a business credit card, LOC interest rates can vary between 2% to mid-4% vs credit cards typically charge 20% and up. While LOC have significantly lower interest rates, they may have an initial purchasing cost, so once capital has been granted, they will have an up-front charge that may be paid from the LOC. Credit cards may or may have an annual charge, and charges even higher interest on any cash advances. Business credit cards are fairly easy to obtain, even though LOC can take a couple of weeks to qualify for they are more cost effective.

The takeaway: Obtaining business capital can be extremely beneficial for growth in your business and can be relatively simple to obtain. The better your business credit the more favorable your terms will be, but business capital can be obtained with no business credit if your personal credit is fair. We have multiple funding solutions to fit your business needs, we can help find the right type of financing options for your business. If you’re interested in knowing your business funding options give us a call or schedule a free consultation.

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