Should You Use a Business Line of Credit or Credit Card?
As a business owner, you know how vital cash flow is, and you may need to tap into credit frequently. Whether it’s covering inventory, making payroll, or everyday expenses, many businesses rely on credit. But what type of credit should you have - a credit card or a business line of credit? While both are viable options when your business needs to keep its cash flow moving, there are pros and cons of each.
Business Credit Cards
When it comes to obtaining credit as a business owner, credit cards are typically the easiest route to go in terms of applying. Plus, just as in your personal life, there are many perks to using credit cards when it comes to managing your business.
Flexibility and convenience
Help with organizing your expenses
Keep your personal and business expenses separate
Ease of organizing expenses for taxes
Ability to have multiple employee cards under one account
However, while business credit cards offer a slew of benefits and are accepted at most places, there are some limitations.
Cannot use to cover payroll
Some vendors do not accept credit cards
Higher interest rates (depending on credit score)
Not accepted by all billers (for example: lease payments)
When it comes to managing everyday expenses, credit cards are extremely valuable to business owners. But it’s important to note lenders may use your personal credit score and history to qualify you for a business credit card if you’re a small business owner. So, maintaining a good personal credit score should always be a top priority.
Business Line of Credit
A business line of credit functions similar to a credit card in that you’re approved for a specific amount. You can draw on these funds as you need them. Once you pay back the borrowed funds, you can draw on them again.
While this type of loan may function similar to a credit card, there are many benefits business owners can take advantage of to keep their businesses growing.
Only pay interest on what you borrow
Pay vendors that don’t accept credit cards
Lower interest rates than most credit cards
Can use to cover payroll & lease payments
Higher loan amounts than credit cards
A business line of credit is a great way to fill the gaps in areas where credit cards cannot – such as making payroll or lease payments. However, there are also limitations that come with this type of loan.
Your business may be used as collateral
Interest begins accruing immediately
There may be additional fees involved
Depending upon the size of the loan, many lenders may require collateral on a business line of credit. For some small businesses just starting out, that may not be an option. As a result, personal assets may be used instead. This aspect of a line of credit makes it more difficult for new businesses – especially those with limited collateral available.
The Bottom Line
At the end of the day, the best option for you and your business may be a combination of both. Using them for different aspects of your business can help to keep everything running smoothly. While a line of credit can save you money with lower interest rates and allow you to borrow larger amounts of money, a credit card offers a higher level of convenience for everyday expenses.
We Can Help!
Having access to credit can be a vital component to running a business. Whether you’re considering a credit card or a line of credit for your business, we have options available.
Please stop by any of our convenient branch locations, visit our website, or call 540-389-0244 to learn more about the various products we offer designed to help your business grow.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.