Sooner or later, a big expense or a pile of bills lands just as cash runs short. What’s a business owner to do? Just put it on a personal credit card? That works, but it might not be the best option. It’s worth considering the advantages of a business credit card versus a business line of credit. Although both help you fill short-term cash flow needs, each of them comes with different pros and cons. A qualified financial professional can help assess whether either option fits your cash flow and repayment capacity.
As credit sources, though, each of them overlaps a bit with the other, so it helps to know the times when it might be more advantageous to choose one or the other. Here is how to make each one pay off for your company.
Business Credit Card
There are a few situations where it’s particularly valuable to have the right business credit card on hand.
A business credit card is often used for everyday spending. They’re convenient for a host of regular, routine purchases, from office supplies to travel costs. Many accounting software programs can import your card transactions automatically so you don’t have to retype them. That makes tracking expenses easy for you and your accountant. That also makes it easier to deduct these expenses for tax purposes.
Responsible use of a business credit card is also a good way to start building up a credit history for your business, which can help you qualify for a line of credit later if that becomes a better fit for your cash needs. Plenty of cards also come with rewards or perks that can be put back into the business. As unsecured debt, cards generally don’t require collateral to qualify, unlike secured credit lines.
A Line of Credit Is Really Valuable
A line of credit may be the better bet for purchases a card can’t cover, or where the balance owed would be over your card’s credit limit.
The biggest difference in using a line of credit is that it’s more like cash on hand. A line may cover costs that cannot be charged to a card, subject to its terms. That means payments for inventory and other supplies, as well as other vendor bills and expenses that are generally paid from operating cash. That includes payroll and leases. Whether operating cash or a line of credit fits those expenses depends on costs, cash flow and repayment capacity.
Lines of credit also tend to have much higher limits than cards, often above $250,000. When you’re facing an uncertain need, a line of credit may be the better fit. That’s when a project’s timing is unclear, or when cost estimates are tough to make. With a line of credit, you only tap what you need when you need it. And lines of credit often come with an array of ways to pay, including an account card, business checking, or mobile app.
A line of credit requires more work to get in place than a card. Approval for a line can take one to two weeks if everything a lender needs is all there. It helps to be ready to provide your company’s financial statements along with at least two years of business ownership. Lines of credit over $250,000 may require a blanket lien on your business assets or a certificate of deposit. Application timing and borrowing needs are worth discussing with a qualified financial professional.
Interest Can Start Accruing the Minute You Borrow
With a credit line, interest generally starts accruing the minute you borrow; with a credit card, it can start right away unless a grace period applies. Remember, that’s generally as soon as you withdraw cash from your line of credit, and as soon as you spend with a card if you carry a balance or take a cash advance. But whatever you repay becomes available for use again.
Credit lines also typically carry lower interest rates than business credit cards, so the credit line is likely to be cheaper to use. Credit cards can charge APRs of more than 20% on purchases and even more on cash advances. A credit line will likely carry an annual fee a card may not.
Paying careful attention to how to finance each business expense is key to covering them while saving money. It’s well worth the effort to talk to a banker you trust about the advantages of each credit source. Even if you’re not ready to borrow now, the help of a banker can give you strategies that will come in handy when the timing is right.
About Delancey Street
Delancey Street is a business debt settlement company that helps business owners negotiate with creditors. Our goal is simple: negotiate proposed settlement terms, subject to creditor agreement. Based out of New York, we review business finances and discuss settlement options. We tell you how it is; because your business and future is on the line.
