Business Credit Card or Lines of Credit?
If you own a small business you probably look at different forms of finance to help improve the operations of your business. When most people start a business they either finance it themselves or attain a traditional small business loan. These types of finance allow for meticulous planning, and traditionally have low interest rates. But at the same time, they can take a considerable amount of time to process and are often secured against your business or its assets. For this reason, many business owners turn to revolving credit to help mediate unexpected costs or events. In this article, we will overview revolving credit and its two most popular forms: business credit cards and business lines of credit. The purpose of this post is to help you better understand if these forms of finance are a good fit for your small business.
What is Revolving Credit?
Revolving credit is a unique form of finance that is provided by both banks and specialty lenders. With traditional forms of credit, you are typically extended a loan that has set conditions – you pay back the loan over a fixed period of time (term) at a specific interest rate. With revolving credit, you’re extended a certain amount of money (limit) and you only have to pay back the money within that limit that you use. In addition, you only pay interest on the money that you use. The term ‘revolving’ comes from the notion that the money you use can be used again as soon as you pay off the debt. For example, if you have a $10,000 limit and you spend $4,000, your new limit will be $6,000. But if you pay back the $4,000 that you borrowed, your limit will immediately return to $10,000 again. Two popular forms of revolving credit are credit cards and lines of credit. While these forms of credit can be attained personally, they can also be acquired by a business. Business credit cards and business lines of credit will be what we are focusing on today
The Advantages and Disadvantages of Business Lines of Credit
A business line of credit is an account you have with a lender which you can withdraw upon if you need capital. If you never access the account then you never have to pay anything back, nor do you have to pay any interest. Many businesses use it as a ‘slush fund’ in case something is to go wrong or an emergency appears. Lenders will provide you with a set limit from which you can withdraw. Business lines of credit come with their own set of advantages and disadvantages, some of which are outlined below:
- Access to Capital – Having a business line of credit set up means that you don’t have to fill out any application forms to get access to capital. Plenty of businesses apply for a line of credit in advance just in case they end up needing money in the future – it’s an awesome safety net to have.
- Access to Cash – Unlike some forms of revolving credit, a line of credit typically gives you access to cash, whereas business credit cards don’t. Cash is able to be withdrawn without penalty fees or service charges with a business line of credit. In addition, you can typically write checks or transfer money as well.
- Flexibility – Unlike traditional forms of finance and credit cards, business lines of credit typically have flexible payment terms, meaning you don’t have to pay a bill every month. This can be good for companies who have varying business cycles or seasonal gaps in cash flow.
- Don’t Pay for What You Don’t Use – Unlike a traditional loan, you don’t have to pay interest on money you don’t end up using. For this reason, you don’t have to plan for what the line of credit will be used for in advance.
- High Interest Rates – You don’t have to pay interest on the money you don’t access, but you will pay high interest rates on the money that you do use. Because a business line of credit is typically unsecured, interest rates can be substantially higher than those of traditional loans. For this reason, it’s good to use traditional loans for long term finance.
- No Attached Card Facility – Most business lines of credit don’t have a debit or credit card attached to them, meaning you will have to pay by check, transfer, or cash.
The Advantages and Disadvantages of Business Credit Cards
Business credit cards are another popular form of revolving credit that businesses use to attain finance. You apply for a business credit card through a bank and they will determine what your credit limit is. If you never use the card, you will never have to pay interest on the limit, although you may have to pay a small annual feel. Below are the advantages and disadvantages of using business credit cards:
- Don’t Pay What You Don’t Use – Like a business line of credit, you only pay for the money you use.
- Rewards – Many business credit cards have rewards for spending, such as cash back or frequent flyer miles – this can be an extra incentive for using business credit cards
- Employee Cards – You can give your employees business credit cards which can be used to purchase goods for your business. This is a flexible way to allow your employees to spend business money for business items. Many companies give their employees cards to entertain clients or purchase materials.
- Easy Payment Facility – Most vendors accept credit card as payment, it can be much easier to do and keep track of than paying for things in cash or check.
- Expensive to Access Cash – Getting cash advances on a credit card can be expensive as there are many fees and charges associated with it
- High Interest Rates – Like any revolving credit, credit cards have high interest rates and should not be used to make large, long-term purchases – such as an expensive piece of machinery.
Choosing between a business credit card and a business line of credit can be tough. You need to have decent credit history to acquire either, as they are unsecured forms of debt. If you have a large number of employees that often need money to spend, a business credit card is your best option. In addition, if you plan on paying your bill in full, a business credit card can give your business some serious rewards. But if you need access to cash, and don’t want to pay large fees, you best bet is a business line of credit.
Anne is a Senior Author for SBL. She began her career as an independent consultant for local businesses after graduating with a BA in Management. Since that time, she’s expanded to writing as well as consulting to spread helpful knowledge to small business owners across the country.