Business Line of Credit vs. Credit Card: Which is Better for Your Business?

Small business term loans are great for purchasing major assets or funding long-term working capital needs. But when you need quick and affordable financing for short term uses, a business line of credit or business credit card are a better fit.

What are the benefits of a business line of credit vs. credit card? Explore the pros and cons of each with the insights below!

Differences between a business line of credit vs. credit card

Business lines of credit and business credit cards are practical options when you need quick financing to cover your expenses. You can usually apply online and access the funds quickly once you’re approved. Your approval time can range from a few minutes to a couple of weeks, depending on the option and the lender. Here are some of the differences between the two.

Business credit cards

A business credit card is an easier starting point than a line of credit if you don’t have extensive or excellent credit history. Credit card interest rates can be very high depending on your individual situation.

Banks and other financial institutions issue business credit cards on their own and they may also partner with a company to offer rewards like travel miles, cash back, or points toward future purchases.

Your lender can set a reasonable credit limit, and as you build and improve your business credit, you can request credit-limit increases. Established businesses with positive cash flow, profitability, excellent credit scores, and several years in business often have higher limits on their credit cards.

Ideally, you’ll want to use your business credit card only for purchases that you can pay off in full each month. This way, you don’t run the risk of carrying a balance and paying interest on your purchases, which can add up quickly if you’re not careful.

Business line of credit

If you have a good personal credit history, some business credit, and/or several years of business financials showing that you’re breaking even, your lender may offer you a business line of credit. A line of credit is like a credit card in that you can use any amount up to your borrowing limit, but you only pay interest on the money that you’ve used each month.

Lines of credit often have a 12-month term and need to be renewed every year. At the end of your term, you’ll pay the remaining balance in full.

Because lines of credit are available to businesses with stronger credit, the interest rates can be much lower than credit cards. They also have quick applications and once you’re approved, you can usually access the funds within a matter of days.

Which one is a better fit for your business?

If your business makes frequent, lower-cost purchases on a monthly basis, a business credit card can be helpful. It alleviates your immediate need for cash for purchases and emergency expenses and you may gain additional benefits like purchase rewards, travel miles, or cash back. Even in small amounts, these benefits add up over time.

If your business is seasonal, needs to make occasional significant inventory purchases, or has other larger, short term needs, then you may want to establish a line of credit with your bank or other lender. A line of credit can give you additional flexibility with lower interest rates than credit cards.

When business owners are comparing a business line of credit vs. credit card, they’ll usually explore business credit card options first (considering both the terms and card benefits). After you’ve started building your business’s credit history with a credit card that you pay off in full, every month, ask for a meeting with your lender to learn about establishing a business line of credit, too.

How to get a business credit card or business line of credit

The best time to apply for a business credit card or a line of credit is before you need one. When you don’t feel the financial pressure to make a quick decision, you’ll have more options and be able to find= the best terms for your business.

Plus, the sooner you get a line of credit or credit card, the sooner you can begin building your business’s credit. It can also give you a short-term financial safety net to cover emergencies and take on opportunities.

Review your situation with your accountant or financial manager to figure out if one option is better for you. Just like personal credit cards, if you don’t need them you don’t have to use them, but it’s good to have it available just in case.

For business credit cards, you can often apply online or in person at your bank. Although it may take up to 10 days to get the physical card, some creditors will let you start using your account immediately, even before the physical card arrives.

You can also apply for lines of credit online or in person at your bank or another institution, such as a credit union or Community Development Financial Institution (CDFI). You’ll typically get a decision in about two to three business days, with the line of credit available within one to three weeks of approval. For lines of credit, you might receive a debit card, paper checks or both and you can use them as soon as you receive them.

When would a term loan be a better option?

There are certain situations when a term loan is necessary, advantageous, or advisable. For example, if you’re buying a business or commercial property, purchasing expensive equipment, or you need to fund ongoing working capital needs, your lender will likely recommend a term loan.

Many businesses use a combination of financing to reach their goals and keep moving forward.

Here’s how a brewery might use term loans, lines of credit, and credit cards to finance different business needs and opportunities:

  • When the brewery owner finds the perfect space to host their patrons and produce their beers, they can use a term loan with a fixed interest rate and longer repayment term (such as an SBA 504 loan or an SBA 7(a) loan) to purchase the commercial property or build-out a leased space. Production and bottling equipment is another high-ticket item that is better financed with a longer term loan too.
  • As the brewery grows and expands, a business line of credit can support working capital and inventory needs, and even give the business flexibility to hire extra help for the busy season.
  • They can then keep a business credit card open to pay monthly bills and earn rewards, as long as the balance is paid off every month.

Pursuit offers business lines of credit and business loan options

Pursuit is here to help small business owners like you get the financing needed to grow your business. We have more than 15 loan options and a business line of credit to meet your business needs and achieve your entrepreneurial dream. Contact us today to learn how we can work together to make your business vision a reality.

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