Line of Credit vs. Credit Card: Which Is Right for You?
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What Is a Business Line of Credit?
Pros of a Business Line of Credit
Easy access to funds Compared to some other options, such as SBA loans, business lines of credit offer the borrower earlier access to money. Once you secure a line of credit, the money is basically on tap for you to withdraw and use as needed. You use (and pay interest on) only what you need A business line of credit is a good option for those who don’t have consistent costs to cover each season. If your expenses change from time to time, your withdrawals can reflect that. As long as you stay within your limit, you can use the funds at will Flexibility The funding is not purpose-specific. You are free to spend the funds for business purposes more or less as you see fit, so using the credit line can be a flexible way to address any of your business’s needs.
Cons of a Business Line of Credit
Low maximums The sum of money you have available to you with a line of credit may be less than you’d get with a small business loan — typically $10,000 to $1,000,000. A business line of credit may not provide enough capital for a large or expensive endeavor. Short terms A business line of credit also usually has shorter repayment terms than other options — typically three to 18 months. That means that if you withdraw a lot on your credit line, paying back what you borrowed can deplete your monthly funds quickly Variable payment amounts The payment amount can fluctuate from month to month based on how much you owe. In addition, some credit lines come with variable interest rates. As a result, you may not have a fixed payment amount to budget for. Impact on your personal credit Any missed payments may affect your personal credit history, especially if you’ve issued a personal guarantee to secure your business’s line of credit.
What Is a Business Credit Card?
Pros of a Business Credit Card
Rewards Unlike lines of credit, business credit cards may offer perks like sign-up bonuses and/or reward systems that give you things like airline miles for using your card. Relatively easy to get Since credit card issuers often target small businesses, the cards are typically easily accessible. You may not need a business credit history of even a profit minimum. The main requirement is your personal credit history. So, even in situations where you don’t qualify for a business loan, you might still have the option of a business credit card. Flexibility Like a line of credit and unlike many other forms of funding, a business credit card will let you use the funds for any business expense.
Cons of a Business Credit Card
High threshold for sign-up bonuses and/or rewards While the sign-up bonuses or cash back perks may be tempting, you usually have to spend a lot before you can earn them. Fees There may also be a complicated fee system tied to your card. Annual fees, transactional fees, and foreign currency purchasing fees can all be included in the card’s terms and conditions, depending on which card you choose. While lines of credit may also have fees, typically credit card fees are higher. High APRs In general, business credit cards tend to have higher annual percentage rates (APRs) than many other kinds of funding, including lines of credit. Payment problems could impact your personal credit score Business credit card issues will often report negative payment history to both the commercial and the consumer credit bureaus. If your business fails, the credit card company will likely view you as personally liable for unpaid debt, especially since many of them ask you for a personal guarantee.
Key Differences Between Line of Credit and Credit Card for Businesses
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