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Choosing Between Business Credit Cards and Business Lines of Credit

Have you ever heard or repeated the phrase, “You have to spend money to make money”? If so, you might be the owner of a small business. Access to a business line of credit allows small businesses to execute daily functions, cover daily expenses, purchase inventory, hire staff, and much more. Business owners know that keeping a company’s ship afloat means understanding cash flow and profits–it’s not all about how much you have in the bank at one time.

Fortunately, there are options for small business owners. Many rely on loans, credit cards, or lines of credit to balance their bills. This is why it is important to understand the difference between a business credit card and a line of credit. Only then will you be able to choose the option that makes the most sense for your business.

Key Differences Between a Line of Credit and a Credit Card

We are all familiar with a credit card. It is a system that allows you to make payments or purchases that you pay back later with interest. They can help a business set recurring payments and keep their information on file and build a transaction history.

A business line of credit, on the other hand, is a revolving credit line that you and your bank agree upon which you can borrow money against. Depending on your credit scores and other qualifying factors, your business may be eligible for secured or unsecured lines of credit or credit cards.

There are a few distinctive differences between credit cards and lines of credit. For example, a credit card may offer points or rewards programs while lines of credit do not. However, credit cards usually have higher interest rates and additional fees (such as cash advance fees). Let’s take a look at some of the other main differences between credit cards and lines of credit.

Business Credit Cards

According to a 2017 survey by the Small Business Administration (SBA), 46% of all small businesses use personal credit cards. When business owners need a quick and easy way to pay bills, make business purchases, or cover other expenses, a business credit card is a flexible tool to have on hand. Depending on the issuer, the restrictions on a business credit card are relatively few and can accumulate travel miles, cash back on purchases, or other reward programs.

There are a few instances in which a business credit card cannot be used. Property leases, payroll, and specific vendors do not accept business credit cards as payment. They also come with credit limits that are much lower than a business line of credit.

Business Line of Credit

Sometimes called revolving credit, a business line of credit works much like a Home Equity Line of Credit–or HELOC. Instead of receiving one lump sum of money in the form of a bank loan, a business is approved for a credit limit which they can borrow against as they need. For example, if a business is approved for a $50,000 line of credit, it can take out $30,000 now, $5,000 later, and $15,000 down the road. You are not required to use the full amount or take it all at one time.

A business line of credit is a great solution for short-term funding for large projects. They are especially helpful if you do not know how much money your business will need at a time. Common expenses might include moving into a new office space, hiring and training new employees, or increasing inventory. Amounts typically range between $10,000 and $100,000, depending on your financial institution, credit score, and other business-related factors.

How do I know which is best for my business?

To begin, you must understand which financial options are available to your business. If your credit isn’t quite up to snuff, your financial institution might require you to begin with a secured credit card to establish a better credit history.  

When choosing between a credit card or line of credit, it largely depends on your business needs. If you have bills that cannot be covered with a credit card or large project to fund temporarily, a line of credit is the best option. If you value rewards programs and are looking to cover recurring business expenses, a business credit card might be the best choice.

Remember that whichever option you choose will affect your credit score. Late payments and cash advances come with fees and can drastically impact your credit. If you ever find that you cannot pay your bills on time–whatever the reason–reach out to your lender for assistance.

Falcon National Bank is a friend to small businesses throughout Central Minnesota. For more information or financial guidance for your business, contact us today.