When you’re running a business, there are numerous things to think about. One of the most important is how you will finance your various business needs.
While many financing options exist, one of the best is getting a business line of credit. A business line of credit is different from a regular line of credit or a credit card.
In this article, we will discuss the differences when you're choosing between a business line of credit or credit card and why getting a business line of credit might be the better option for you.
Business Line of Credit: What Is It?
You might wonder, what is a line of credit and how does it work? A business line of credit is essentially a business loan. You can think of it as a flexible, short-term loan that you can use whenever you need it.
One benefit of a business line of credit is that it works for various situations. Use it to finance inventory, pay for marketing expenses, or even cover unexpected costs.
Business Credit Card: What Is It?
A business credit card is a type of credit card designed specifically for business owners. One of the biggest benefits of using a business credit card is that they often come with rewards programs.
Pros of Using a Business Line of Credit
There are several reasons why using a business line of credit might be the better option for you. Here are some of the most significant advantages to choosing a line of credit vs loan options.
The best business line of credit options give you more flexibility than regular loans. You only need to repay the portion of the loan that you use. It works differently from a loan, where you may end up borrowing more than needed. The added flexibility to access only the cash that’s required at any one time means you gain additional control over long-term interest costs.
Build Credit History
A business line of credit can help you build your credit history. This is important because it can make it easier to get loans in the future.
Lower Interest Rates
Business line of credit requirements usually involve lower interest rates than business credit cards. Over time, this can save money on interest charges.
Cons of Using a Business Line of Credit
There are also some potential drawbacks to using a business line of credit.
Potential for Abuse
If you're not careful, you can quickly find yourself in over your head when using a line of credit without planning ahead. It's essential to only use a business line of credit when you really need it. Additionally, make sure that you always have a plan for repaying the loan.
In some cases, using a business line of credit can result in paying higher interest rates. It might happen if you’re seeking a higher credit limit. As mentioned above, however, the interest rates are usually lower than those on business credit cards.
Pros to Using a Business Credit Card
In some situations, using a business credit card offers advantages.
Many business credit cards, such as a Chase line of credit, come with rewards programs that give you points for every dollar you spend. Redeem these points for cash back, travel, or merchandise.
No Personal Guarantee (in Some Cases)
Another advantage of using a business credit card is that sometimes there’s no personal guarantee required. Unlike a personal line of credit loan, you're not personally responsible if the business can't pay the balance. Keep in mind that these types of business credit cards aren’t easy to find. Most business cards do require you to personally guarantee the debt.
Builds Credit History
What is a credit line on a credit card? Similar to a bank credit line, a business credit card account will help you build your company's credit history. Again, this can help you borrow larger amounts of money in the future.
Cons of Using a Business Credit Card
Here are some potential drawbacks to using a business credit card.
Business credit cards usually have higher interest rates than other types of credit products. This can make it expensive to carry a balance on your card from month to month.
Many business credit cards have annual fees, ranging from $50 to $500 or more.
Balance Transfer Fees
If you transfer a balance from one credit card to another, you will usually incur a fee.
Benefits of Having Both a Business Credit Card & a Line of Credit
Let's take a look at why having both a business credit card and a line of credit can be beneficial.
One of the most significant advantages of having both a business credit card and a line of credit is that it gives you flexibility in how you manage your cash flow.
For a line of credit example, let's say you have a large project that’s going to cost $20,000. You can use your business’s Bank of America line of credit to finance the project and then make payments over time. Alternatively, you could put the entire purchase on your business credit card and also pay off the balance over time.
Another advantage of having both a business credit card and a line of credit is that it can help you build your corporate credit history. When you make timely payments on both your business credit card and your line of credit, it will help to improve your company's credit score. Use a business line of credit calculator to track how much you will owe and determine which plans offer the best interest rates.
Additionally, using both types of loans can help you save money on your business expenses. For instance, you might use a rewards business credit card to save money on things like travel and office supplies. Alternatively, you might finance a building addition with your line of credit because of a more favorable interest rate.
There are both advantages and disadvantages to using a business line of credit or credit card.
Ultimately, deciding between a business line of credit vs credit card depends on your specific needs and financial situation. Your credit score also plays a big part in the decision. For example, you may need options for the best business loan with bad credit.
Or, you might feel confused about what your current credit score will allow you to do with these types of loan options. Take time to apply now so we can advise you about the option that best fits your situation.
About the Author, Madison Taylor
Madison Taylor is the Brand Ambassador at ROK Financial. She is responsible for raising brand awareness and business relationships with business owners across the country. Madison loves that she plays a small role in getting Business Back To Business Through Simple Business Financing and looks forward to hearing what you think about the blogs she creates! Madison has been working in the financial space for six years, and loves it! When she is not at work, you will find her at home learning a new recipe to test out on her family or going on new adventures with her friends.