Small Business Line of Credit vs. Business Credit Card: Which Is Better for You?

Business credit cards and lines of credit are two of the most common types of financing used by small businesses. If you need to decide between using one or the other, you’ll want to consider the pros and cons to determine which one is more suited to your business.

We put a spotlight on how both options could be beneficial, as well as discussing what some of the potential drawbacks could be.

What is a small business line of credit and how does it work?

Opening a small business line of credit allows you to access an ongoing source of funds whenever you need. Once you are approved, the lender will set a credit limit and you can withdraw the cash, repay what you’ve used, and go back to borrow from the credit source again.

You will only have to pay interest on the money you withdraw, which makes it ideal for covering short-term expenses, managing cash flow or for dealing with any unexpected circumstances that affect your business.

What are the pros of a small business line of credit?

Opening a small business line of credit can help by offering:

• Flexibility: You can access the funds and use them as and when you need. Provided the repayments are maintained, the line of credit will remain open and accessible to support your business when you need financial support or want to invest to grow.

• Larger funds: Short-term financing isn’t generally able to offer access to the same level of funds as a line of credit. There are secured and unsecured business lines of credit, with the former potentially offering a larger amount depending on the value of the asset.

• Competitive interest rates: You may be able to get a lower rate of interest on your line of credit compared to other forms of finance. This could help you to save money in the long-term, especially if you intend to quickly repay any funds you have withdrawn.

Before you open a line of credit, set out a budget to review your income and outgoing expenses to get a better understanding of what you can afford each month.

What are the cons of a small business line of credit?

There are some additional factors to consider as part of your decision, such as:

• Added fees: Some lines of credit come with extra loan fees attached, which can increase the overall cost. This can include things like annual fees, origination fees, draw fees, annual fees, late payment and early repayment fees. Always check the terms of your deal before agreeing to go ahead.

• Shorter repayment terms: Certain lenders set a draw period which places a limit on when you can withdraw funds from the line of credit. Once this ends, it could turn into a loan, and you will need to repay the rest over a fixed period. Again, check this detail before you enter into an agreement.

• Risk of debt cycle: With a line of credit, you can withdraw multiple times up to your credit limit, which could create a cycle of debt if you lose track of how much you owe. Always plan and budget for the money you are taking out so always know where you stand with the repayments.

If you have an adverse credit history, you may still be able to open a line of credit. However, it is usually helpful to check your credit status before you apply.

What is a business credit card and how does it work?

A business credit card is a payment card that allows company owners or authorized employees to pay for business-related purchases. They work in a similar way to personal credit cards, offering an alternative method of managing your expenses, which can also help with cash flow.

If used responsibly, the card can help to boost your business credit rating. Keeping up with the repayments will show lenders that you can successfully manage debt and improve your chances of obtaining credit in the future.

What are the pros of a business credit card?

There are several benefits that come with using a business credit card, including:

• Managing your cash flow: A business credit card eases pressure off using cash, allowing you to cover expenses and pay for purchases without diminishing physical reserves. This can be beneficial during quiet periods, especially if your business is seasonal.

• Boosting your credit rating: If you are a startup with a limited credit history or if you have a less-than-perfect score, using a business credit card can help. Improving your credit score can not only help you get more credit in the future, but it may also incentivize suppliers and investors.

• Separating personal and business expenses: The line between personal and business finance can sometimes blur for small businesses. Using a card makes it easier to keep them separate, so there is less confusion when it comes to filing your company accounts.

Depending on your business credit rating, lenders will usually offer higher credit limits compared to personal credit cards.

What are the cons of a business credit card?

There are some disadvantages that can come with using a business credit card, such as:

• Higher rates of interest: Unlike personal credit cards, lenders will usually apply a higher rate of interest to a business credit card. If you carry a balance from month to month, this can make the repayments more expensive over time.

• Additional fees: It’s important to be aware of the terms and conditions before you use a business credit card. Some lenders may charge high annual fees, especially those that offer lots of rewards and perks, so take this into consideration when doing your research.

• Damaging your credit score: If you exceed your credit limit or fall behind on repayments, this could have an adverse effect on your credit score. Depending on severity and regularity, this can make it harder to get credit again in the future.

Keep a close eye on your business credit card transactions to avoid building up unmanageable debt that can affect the financial health of your business.

Final thoughts

There are advantages and disadvantages to opening a business line of credit and taking out a business credit card. Depending on their needs, some businesses find it beneficial to have access to both, which gives them greater financial flexibility. Before you start your application, take the time to do your research and speak with lenders to understand what they can offer and the proposed benefits. Compare credit limits, interest rates and fees against your business goals to see how they fit in with your financial strategy.