Every business, regardless of its scale or industry, has to contend with cash flow problems once in a while. When you’re cash-strapped but need to finance an urgent expenditure on short notice, such as inventory restocking, your only option may be to seek a business loan.
Fortunately, there are numerous credit facilities you can explore. These include business lines of credit and credit cards.
Although sometimes used interchangeably, a business line of credit is quite distinct from a credit card. This article shall explore both options with a view to spelling out the fundamental differences between these two popular business financing options.
Introducing a Business Line Of Credit
Most business line of credit vs credit card comparisons outlines clear benefits and drawbacks of either loan type. It’s imperative to understand the core distinctions between the two, especially if they’re the only business financing options at your disposal.
Now, a business line of credit (BLOC) is a revolving fund that allows you to borrow money as frequently as you need it within a set limit. You then repay the loaned amount according to the lending terms, just as you would with a traditional business loan.
Introducing a Credit Card
A credit card is a payment card that allows its holders to borrow money for specific purposes.
Most credit card holders utilize the borrowed funds to finance certain purchases. However, a card user may also avail the loan through cash withdrawals.
Credit cards are typically issued by banks and independent financial services companies. Holders can only utilize the card to purchase goods and services from merchants that accept credit card payments.
How Does A Business Line Of Credit Work?
A business line of credit is a flexible business financing option intended primarily to enhance access to funds. This business loan lets you borrow against a predefined limit to cover unexpected or day-to-day business expenses.
The defining feature of business lines of credit is their revolving nature. In other words, your credit line automatically replenishes when you settle your outstanding loan, allowing you to borrow again.
How Does A Credit Card Work?
Credit cards allow the cardholders to borrow money against a defined limit. The holder essentially borrows whenever they pay with their credit cards.
For instance, if your credit card has a limit of $1,000 and you happen to pay for groceries worth $100 using the card, you’ve essentially borrowed $100 against your limit.
You may choose to repay the $100 before borrowing again. Alternatively, you could borrow the remainder ($900) and make a one-off payment or repay the loan over a given duration.
Differences Between a Business Line Of Credit and a Credit Card
1. Credit Limit
Lenders use various metrics to determine your borrowing limit. Notable ones include your (or your company’s) creditworthiness and financial health.
But all other factors are held constant: business lines of credit usually have higher credit limits than credit cards. A BLOC may allow you to borrow up to $250,000, while the standard maximum limit for most credit cards is $30,000
2. Interest Rate
Business lines of credit usually charge variable interest rates. That means your total loan repayment amount could be higher or lower than initially computed, depending on the prevailing economic factors. On the other hand, credit cards typically charge fixed interest rates. Each amount borrowed against your credit limit attracts a distinct interest rate.
A business line of credit also offers flexible payment terms. Options include paying interest only during a certain period, after which you would then repay the principal + interest. For comparison, credit cards usually require a borrower to make certain minimum payments monthly. Failing to remit the monthly minimum payments may attract penalties.
One point of convergence between a business line of credit and a credit card is that both usually charge interest on the borrowed amount, not the remaining balance.
3. Fund Accessibility
A business line of credit provides more straightforward access to funds than a credit card due to a less rigorous preapproval process. Cash accessibility is one of the biggest selling points of exploring this business financing option. You can avail of BLOC funds via checks or bank transfers.
Credit cards allow you to access cash advances at partner tellers and ATMs. However, most lenders will only preapprove you for a credit card loan if you have an existing relationship with them and have no outstanding dues.
4. Suitability
A business line of credit is suitable for companies with higher spending needs, whether those are recurrent or emergency expenses. You can use a business line of credit repeatedly, staying within your credit limit and adhering to the lender’s terms.
A BLOC mainly caters to expenses that may affect your cash flow. These include inventory restocking, paying outstanding invoices, and settling employee wages.
On the other hand, credit cards are suitable for expenses like subscriptions, marketing services, and IT support.
It’s also worth noting that maxing out on a credit card might impact your credit score negatively. Consider credit cards only when you need to finance regular, predictable business expenses.
Wrap Up
Business lines of credit and credit cards are both credit instruments you can explore when your business is in dire straits. Both options are incredibly accessible, provide flexibility, and are typically uncollateralized. However, compared side by side, a business line of credit is the better option.