Business Line of Credit vs. Credit Card

As a small business owner, you know the value of flexibility. Circumstances can change rapidly, for better or worse—a few days of bad weather or a positive Instagram post from a popular influencer can have huge impacts on a small business’ cash flow. In many cases, business is seasonal—companies need to prepare for a busy season while experiencing a slow season, meaning they need funds that aren’t flowing in as revenue. This is why many turn to business lines of credit. Business lines of credit are very flexible and don’t carry the stringent application requirements like some other forms of financing, like term loans. However, they can provide as much as $250,000 with interest rates as low as 8%.

How does a business line of credit work?

A business line of credit is a financing method that allows businesses to access money as expenses arise.

They are more similar to a business credit card than to a business loan because you don’t receive a lump disbursement all at once that requires monthly repayment.

If you access funds through a business line of credit, interest accrues on any balance that is not paid down through repayments. As you pay down the balance, the amount of credit available to use increases.

Limits on a business line of credit are set by a lender. Lines of credit are typically renewed over time, assuming the borrower’s creditworthiness remains in good standing.

Business lines of credit can be secured or unsecured. With a secured line of credit, a borrower puts up cash or assets as collateral in case of default. No collateral is required for an unsecured line of credit. If you want to access a large line of credit, as in greater than $100,000, a borrower might want you to put up collateral in a secured line of credit arrangement.

Business line of credit pros:

• Revolving access to credit, usually without the need for collateral
• Credit limits are often higher than with credit cards
• Interest rates are typically lower than credit cards

Business line of credit risks:

• Repayment terms might not be as good as other financing methods, like term loans
• Approval processing time is usually longer than with credit cards
• Credit cards are more likely to offer 0% APR introductory terms than business lines of credit

When to consider a business line of credit.

A business line of credit might work well if you find your business in one of these scenarios:

• Seasonal business fluctuations: If your business sees its fortunes rise and fall with the seasons, a line of credit can keep you afloat during the quieter months.
• Cash flow shortages: Consider a credit line when late payments from clients affect your daily operations. It can bridge the gap and help maintain smooth business continuity.
• Inventory purchases: Bulk buying often saves money, and access to a credit line means taking advantage of such savings without depleting your cash reserves.
• Capitalizing on opportunities: When an opportunity for growth presents itself unexpectedly, a business line of credit allows you to act swiftly and decisively.
• Emergency preparedness: Unforeseen expenses, such as equipment repairs or natural disasters, can strike at any time. A line of credit provides a safety net for these scenarios.
• Credit building: Establishing and using a line of credit responsibly can help build your business’s credit profile, opening the door to better financing options in the future.
• When you need a higher credit limit: Scaling your operations often requires more significant financial backing. If your business is growing faster than anticipated or you’re making pricier investments and you’re consistently maxing out your existing credit, it might be time to explore options for a higher credit line. This ensures you have the capital needed to sustain that growth while keeping your finances manageable.
• When credit cards aren’t an accepted form of payment: Sometimes, specific vendors or large transactions require alternate payment methods. A business line of credit provides the flexibility to easily handle such situations, ensuring that your operations run without a hitch.

How does a business credit card work?

Assuming you are one of the 191 million Americans with at least one credit card, you can probably understand that business cards are credit cards created for businesses.

Going a little deeper, a credit card is more than just a plastic rectangle. The card represents an agreement between the credit card company and a borrower. The borrower purchases goods and services from vendors using funds made available by the financier. As per the terms agreed to by both parties, the borrower then pays back these funds over time—typically with interest if a balance is not paid down within one repayment period.

Business credit cards are usually unsecured, meaning the borrower does not have to offer collateral as part of the agreement.

Business credit card pros:

• Approval period for credit card usually takes less than 24 hours, often just minutes
• Credit cards are usually unsecured and don’t require collateral
• Many credit cards have introductory offers or allow users to accrue points and cash back

Business credit card risks:

• Credit cards typically have higher interest rate terms than many other forms of small business financing
• Credit cards often have lower credit limits than business lines of credit
• Some bills, like rent, cannot be paid via credit card, but can be paid from a line of credit

When to consider a business credit card.

A business credit card might work well if you find your business in one of these scenarios:

• For everyday purchases: Use a business credit card for routine expenses. It’s perfect for office supplies, software subscriptions, or travel expenses, all while helping you keep personal and business expenses separate.
• Reward programs: Choose a credit card that offers rewards like cash back, points, or travel miles. It’s a smart way to benefit from the spending that you’re already doing.
• Building credit: Just as with a line of credit, responsible use of a business credit card can bolster your company’s creditworthiness, potentially leading to more favorable loan terms in the future.
• Employee expenditures: Issue cards to key staff members to streamline procurement processes and expense tracking, while setting individual credit limits to maintain control over spending.
• Simplified accounting: Consolidate your business expenses on a credit card for clearer bookkeeping. Many cards offer integration with accounting software, making reconciliation processes smoother.
• Interest-free periods: Take advantage of credit cards that offer 0% introductory APR. It’s a great way to manage cash flow if you can pay off the balance before the promotional period ends.
• Easier approval: Sometimes, obtaining a business credit card is quicker and requires less documentation than securing a business loan or credit line, especially for emerging businesses.
• Tracking expenses: Keeping tabs on where your money’s going is essential for any business. Using a business credit card, you can easily monitor expenditures, thanks to detailed monthly statements and categorization of expenses. This clarity simplifies budgeting and highlights spending patterns, helping you identify potential savings and make informed financial decisions.

Business line of credit vs. credit card: The difference.

Business credit cards are good for everyday one-off expenses like office supplies and travel expenses. Business lines of credit are good for larger or recurring expenses, like rent or bills from vendors. Many of these types of expenses won’t accept credit cards but will accept funds from a line of credit.

Business lines of credit usually have maximum credit levels that are much larger than credit cards, so they are better for bigger purchases.

Approval for a business line of credit often takes longer than with credit cards, sometimes 1 or 2 weeks. In some situations, credit card applications can be approved nearly instantaneously.

Interest rates for lines of credit tend to be lower than for credit cards. Interest rates for lines of credit can be as low as 8%. Interest rates for credit cards are often between 10% and 20%, although many have introductory offers with 0% APR.

Imagine a yoga studio that is usually slow leading up to the holiday season but expects a large increase in class size after New Year’s resolutions to get fit and meditate more. With a business line of credit, the studio can buy equipment, rent larger spaces, and hire more teachers during the slow time so they are ready for the crowds on January 2.?

On the other hand, the yoga studio might want to take on expenses as they come—perhaps it realizes a week in that it needs more yoga mats. The studio can use a business credit card to cover this expense.????????

Which business line of credit vs. credit card works best for you?

Choosing between a business line of credit and a credit card will depend on how much credit you need, how fast you need it, and for what expenses. For seasonal industries that require large inflows of capital, like construction and healthcare, a business line of credit can be ideal. For others, like restaurant and trucking companies, you might have a lot of one-off smaller expenses like pots and pans or fuel. A business credit card might be best here.

ABOUT LENDIO DENVER

America’s largest online business lending marketplace, Lendio Denver, connects small business owners with more than 75 curated lenders, helping you secure the financing solution that best fits your business needs.

Our streamlined process makes it easy to apply in as little as 15 minutes, and almost all applicants get an answer within 72 hours.

With over 75 small business lenders in the Lendio Marketplace, our goal is to do all the shopping for you, collect as many loan offers from as many lenders as possible, and then negotiate the terms on your behalf.

Our goal is to secure the largest amount of money as fast as possible and for as cheap as possible based on your business goals and qualifications.

To learn more, call 303-747-3538 or Apply online at www.LendioDenver.com

www.LendioDenver.com provides loan options to small businesses.

Information provided on this blog is for educational purposes only and is not intended to be business, legal, tax, or accounting advice. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. While Lendio strives to keep its content up to date, it is only accurate as of the date posted. Offers or trends may expire or may no longer be relevant.