When unexpected cash shortages occur, a business line of credit and business credit card are two viable financing options. Both can be useful when you need funds to make a large purchase, fund operational expenses, or pay suppliers. There are some distinct differences between the two which may make one a better choice over the other depending on the circumstances. How you plan to use the funds, your credit score, and similar factors are considered when applying for business financing.
Business Line of Credit
A business line of credit offers flexibility not available with other financing options like business loans. With a business line of credit, you are allowed to borrow up to a certain amount and pay interest only on the amount that you actually use. As long as you do not exceed your credit limit, you can continue drawing and repaying the funds as long as you wish. This revolving line of credit is best suited for use as short-term working capital or as a safety net for unexpected costs.
There are some distinct differences between a business line of credit and a business credit card. First, a business line of credit is often secured, while credit cards are almost always unsecured. In addition, line of credit rates are often lower than credit credits and generally have higher credit limits.
Gaining access to funds is also easier with a line of credit. Unlike a credit card which requires a costly cash advance to retrieve funds, you are able to pull out cash easily and inexpensively with a line of credit. This can be useful if you want to avoid the up to 3 percent withdrawal fees that accompany cash advances.
- Even out your cash flow and maintain a cash cushion
- Gain access to fast cash when you need it
- Create a positive relationship with lenders
- Take advantage of flexible terms
- Build a good credit history
- Business lines of credit often have smaller borrowing limits than term loans
- New businesses may have trouble qualifying
- There may be upfront fees to obtain a business line of credit
Business Credit Card
Business credit cards work in the same way as personal credit cards but are available to businesses of all sizes. With a credit card, businesses are able to build up a positive credit profile and improve their future credit borrowing terms.
To obtain a credit card, you must fill out an application. When deciding whether or not you are eligible for a business credit card and for how much, the lender will look at various aspects like income and credit history.
Credit cards can be a better option for businesses in need of funds in certain circumstances. For companies who want to take advantage of rewards programs, many credit cards offer these perks. However, they can also come with annual fees which are not present with a business line of credit. In addition, payment plans for business credit cards are usually more regimented than they are with lines of credit. Unlike a business line of credit, credit cards are often more versatile. You can often find a credit card with a 0 percent intro APR period which can help you save money if it is paid back quickly.
- Introductory offers of low or no interest
- Build your credit history and score
- Ability to use your card on nearly any type of expense
- Access to attractive rewards programs
- Interest rates can be extremely high
- Annual fees may apply
- You could be subject to extra charges if you fail to make a payment on time
Learn More About Business Financing Options
Business lines of credit and business credit cards share many similar characteristics. However, the key differences are what you should consider when choosing one for your business. Both financial products result in monthly payments of any outstanding balance. However, a line of credit may come with more initial fees, while a credit card is often accompanied by an annual fee.
Still not sure which financing option is right for you? Learn more about business lines of credit and business credit cards or start the application process by contacting a business banking professional at FVCbank.