Which is Better for My Business?
A Business Credit Card or Line of Credit
Photo by bruce mars on Unsplash
As the need arises for short term financing to meet immediate business expenses, you are provided with two seemingly similar options: a business credit card or line of credit. At first glance, they seem identical. Offering very similar benefits. However, as you weight these two options there is an important difference in their suitability to your business needs.
Business Credit Card
How it works: similar to your personal credit card, it is a revolving line of credit extended to your business with a limit set by your card issuer. You can only make purchases within the limit and repay what you used. The amount you haven’t repaid can be carried forward but there will be interest applied on it.
Pros of a credit card
  • Easy application: with business credit cards, the application process is often quick and may only take a few minutes to get approved.
  • Easy to qualify: minimal barrier to entry and it is possible to get qualified for one even when your business haven’t launch yet.
  • Because it is catogerized as unsecured credit line, you won’t need to present a collateral to apply
  • Usage flexibility: you have freedom in how you choose to distribute your funds
  • Some credit cards may include rewards such as a sign on bonus, miles, points, or cash back on purchases.
Cons of a credit card
  • You may get a double digit interest rate, making it expensive to carry a balance.
  • Steep annual fee especially if you are aiming to qualify for a premium business card.
  • Lower credit limit compared to a line of credit, reducing your purchasing ability
  • May require a personal guarantee, which makes you liable for your business’ credit card debts.
Line of Credit
How it works: it operates similarly to your business credit card by providing you a fixed credit limit where you repay what you borrow with interest. However, that’s where the similarity ends.
Unlike a business credit card, depending on how your line of credit is structured, it may not be a revolving line. Meaning that paying off your balance will not immediately free up more capital for you to take advantage on.
With credit limits, both business credit card and line of credit have a fixed limit set by the issuer but you will get a higher credit limit with a line of credit. Helping you cover a broader range of expenses as well as paying suppliers who do not accept or charge a fee on credit card payments.
One important advantage a line of credit has over its counterpart is when you need a cash advance. With a line of credit, you do not incur high fees to get a cash advance and are not limited to a small percentage of your credit threshold.
The right financing can change the future of your business. What are you waiting for?
Which One to Choose?
Choosing between the two really depends on your business financial goals. If you need a quick financing solution and get rewards, a business credit card is a great tool although you may not get the best interest rate. However, if you need a financing solution for bigger purchases with a lower interest rate, you have a better chance with a line of credit.
Aside from the usage purposes, consider the credit building potential of the two. A business credit card is revolving credit line which will help you build stronger credit score as long as you maintain a low balance with prompt monthly payments. With a line of credit, it’s harder to build your credit score if the structure is not a revolving line.
Our recommendation: give your business the benefits of a line of credit in tandem with the ease of a business credit card. You can use your line of credit to pay your suppliers while your credit card can be used for smaller business expenses.