With economic conditions tightening, it's important for business owners to determine the best financing solution for their business. When it comes to credit, business owners are often left weighing business lines of credit and business credit cards. In this article, we’ll take a look at these two different types of credit to help business owners consider which might make more sense for them.
A business line of credit allows business owners access to draw funds as needed over a certain period of time, up to a particular credit limit.
Unlike a business term loan, a business line of credit doesn’t appear as a lump sum in the owner’s bank account. Instead, the lender approves the business for a given amount of funds. The business owner can then tap the credit line accessing the funds they need, when they need. Interest is only charged on the amount used by the business owner rather than the total amount they are approved for. For example, if you have a $100,000 business line of credit and you use $75,000 the remaining $25,000 won’t be subject to interest.
Business lines of credit can be secured by company assets or remain unsecured, but secured lines often offer friendlier financing terms. To learn more about unsecured and secured credit lines, check out the blog Small Business Loans: Secured vs. Unsecured.
Each line of credit will have a draw period when funds can be accessed, which can be as short as a few weeks or as long as five years. To qualify for a line of credit, your credit scores, company history, and business plan will all be considered.
Here are a few important aspects to consider when opening a business line of credit:
Business credit cards work in the same fashion as personal credit cards, with a few minor differences geared toward running a company. Like personal cards, a business credit card is basically a one-month loan. Business owners can use the card for everyday purchases and pay back what’s owed at the end of each monthly statement period. And like a personal credit card, business credit cards can be used to boost the company’s overall credit rating. Better credit gives businesses access to better perks as well.
Here are some things to consider when applying for a business credit card:
Business credit cards and business lines of credit are two different kinds of financing and are best used for different types of purchases. Here are the ideal uses of business credit cards:
Credit cards are accepted pretty much everywhere, making them ideal for routine and everyday purchases. Business owners can use their credit cards for everything from items at the local hardware store to a company-sponsored lunch. They can even be used to cover travel expenses for business trips. Since the card must be paid monthly, recurring charges like electricity and internet can be put on the credit card.
One of the biggest benefits of a business credit card is the impact on the company’s credit profile if the card is used responsibly. Using a business credit card and paying it off in full each month will increase the company’s credit score over time. A better business credit score can be used to secure more favorable financing terms in the future.
Credit cards also offer the perk of quick financing. Once approved, a business owner will usually receive their credit card within a few days and can immediately start using it for purchases. Credit cards are also widely accepted, so many items can be acquired as soon as the card is in hand.
A business line of credit is a little more difficult to use for on-the-go expenses when compared to a credit card. You can’t walk into Home Depot and have your bank pay for your items. But since business lines of credit have larger limits than credit cards, they’re perfect for big-ticket items that must be acquired quickly.
A business line of credit makes managing cash flow easier than using a credit card. For example, if a business needs cash right away but has a large invoice coming due in the next few weeks, a business line of credit can provide cash today and the bank can be repaid once the customer pays the invoice. This is a better option than accruing balances on business credit cards since carrying a balance and paying cards late can be damaging to the company’s credit score. Businesses with accounts receivables — such as business-to-business organizations and companies working with wholesalers or retailers — should strongly consider a business line of credit.
Credit cards are useful for everyday purchases, but some vendors strictly do not accept credit cards for payment. A lease typically cannot be paid on a credit card, nor can credit cards be used to make payroll. For these types of funding needs, a business line of credit is the superior choice.
Business lines of credit usually have much higher limits than credit cards. If you need to purchase vehicles or expensive equipment for your company, a business credit card might not have enough runway to complete the transaction. But a business line of credit makes it easier to access large amounts, which is necessary for these types of purchases.
Deciding between a business line of credit and a business credit card? For some companies, both funding options have their place, but if you’re choosing between one or the other, here are a few key differences to consider.
How much capital do you need? If you only need a few thousand dollars and can repay quickly, a business credit card probably makes the most sense. If you have larger financing needs, a business line of credit is more beneficial since the limits on lines of credit are typically much higher.
Credit cards will carry late fees and the annual fee for certain cards. But that’s pretty much it unless you need to use the card for a cash advance. Business lines of credit provide access to greater sums, but they also tend to include more fees. Again, this depends on the bank or lender providing the funds.
Business lines of credit and credit cards have different interest rates depending on the creditworthiness of the borrower. An unsecured line of credit generally has a higher interest rate than a credit card, while secured lines of credit using collateral can garner more favorable rates. Note that the interest rate on a credit card won’t come into play unless you carry balances from month to month. If the card can be paid in full every 30 days, no interest will be charged on purchases.
Credit card issuers sweeten the pot a bit when competing for your business. Many credit cards carry special perks, such as an introductory zero interest period, cash back on purchases, or points that can be redeemed for business supplies or travel. With a business line of credit, you don’t receive perks or rewards, but access to cash can be a perk itself in many situations.
Both a business line of credit and a business credit card can be used in conjunction to ensure smooth cash flow and business operations. But if you’re picking between one or the other, consider your business type and capital needs.
Are you attempting to purchase a large amount of inventory or expensive equipment that will take time to pay off? Do your customers have 30- 60- or 90-day payment terms? In these scenarios, a business line of credit makes more sense than a credit card.
On the other hand, if you need to cover day-to-day expenses or pay recurring bills, a credit card is the better choice. Monthly usage with timely payments will improve your company’s credit score. Plus, credit cards often offer perks like cash back on certain purchases.
Aion provides business lines of credit with simple, transparent pricing and a quick, collaborative application process. We work closely with you to understand your business and ensure a financing solution that best meets your needs. Our payment terms are based on your customer invoice terms and our revolving lines range from $10K up to $2M. To learn more, submit an application here.