As a small business owner, sometimes you need to brush up on the different financing options available at your disposal. With so many options available, it can be difficult to distinguish the differences and make the right decision on which option is right for you when financially planning for your business. Of all the options, business lines of credit and business credit cards stand out from the rest. The biggest question is: What is the difference between a business line of credit vs business credit cards?
Business Line Of Credit
How does a business line of credit work? A business line of credit is a flexible business funding solution. Small business line of credit lenders, such as a bank or financial firm, can provide you with capped access to funds to use as you see fit for your business, and you only pay interest on the amount that you use. The line of credit is revolving, allowing merchants to draw funds as needed and replenish them with payments. Instead of withdrawing funds, you can use the card directly on business expenses such as materials, inventory, and travel. You will have access to capital for your business growth as you need it. Lines of credit generally start between 1% and 30%, depending on what your business is approved for when you apply with flexible repayment schedules available.
- Flexible access, businesses can withdraw funds as needed up to the limit
- Interest on only the amount borrowed, don’t pay interest on funds you don’t use
- Revolving Credit, what you pay towards your line of credit & those funds will become available for use
- Flexible repayment
Business Credit Card
Business credit cards work similarly to personal ones, offering small business funding. You get a card that you can use to make purchases with a monthly payment required. Instead of withdrawing funds, you can use the card directly on business expenses such as materials, inventory, and travel. Funding for restaurants, retail stores, and businesses that make smaller purchases can be managed effectively using business credit cards. Business credit cards on average have APR’s of 14.22% – 22.19%.
- With flexible access, merchants can spend funds on everyday expenses
- accepted nearly everywhere for purchases
- Cashback, rewards, and other perks
- Easily review and record transactions
- Allows additional users so that your employees can have a card
Distinguishing Between the Two
While both a small business revolving line of credit and a business credit card offer access to funds, they differ significantly in terms of their primary purposes and usage.
Line of Credit: Typically used for managing short-term expenses, cash flow fluctuations, and growth opportunities.
Credit Card: Suited for everyday purchases and often used for smaller, routine transactions.
Interest and Payments:
Line of Credit: Interest accrues on the amount borrowed, and businesses have more flexibility in repayment schedules.
Credit Card: Monthly payments are required based on the outstanding balance, often with varying interest rates.
Line of Credit: Offers more flexibility in terms of accessing larger sums and repayment structures.
Credit Card: Convenient for everyday transactions but might have lower credit limits compared to lines of credit.
Choosing the Right Fit for Your Business
Deciding between a business line of credit and a business credit card boils down to understanding your financial needs. If your business is seeking funds for short-term expenses, sudden opportunities, or managing cash flow fluctuations, a line of credit might be more suitable. On the other hand, if you are looking for convenience in daily transactions, managing routine expenses, or earning rewards, a business credit card could be the better choice.
In conclusion, both tools—business lines of credit and business credit cards—serve a great purpose for businesses. Understanding their differences and aligning them with your business’s financial goals and needs allows you to make informed decisions about which option is best for your business.