Two popular short-term small business financing options are business credit cards and lines of credits. This guide will review the advantages and disadvantages of both funding sources to help you decide which business loan is best for your company.
Most business owners use business credit cards and credit lines to pay for working capital needs such as general office expenses, supplies, materials, and inventory. Here I will compare small business credit cards vs line of credit and demonstrate why having both financing sources is the best solution for growing companies.
I recommend Kabbage.com for small business lines of credit up to $150,000 because it is free to apply and set up your line of credit, you are required to use funds and when then if you do choose to draw funds you only pay for the amount you use.
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What is a Business Line of Credit?
This flexible type of financing option is usually issued by a bank or other lender. It allows the small business to borrow funds, only as and when they are needed, from the available line of credit. You are charged interest only on the money you used, even though you have access and are pre-approved for the total amount of the credit line. Once your company borrows money from the line of credit it is to be repaid in a specific time frame, detailed in your line of credit agreement. The repayment period is usually 6-12 months.
Think of a business line of credit as a type of business credit card, but without the actual plastic card. You will be approved for an amount of which you can access at any time. If you apply for a business line of credit you usually will get approved for a total credit amount of up to $150,000 to begin. Then you can draw, use, any amount you need – sort of like a business credit card.
Think of a business line of credit of like a fast business loan that’s on-demand cash when you need it.
There may be additional credit fees plus the stated interest rate charged on the money you borrow for your business such as:
- Origination fees – An upfront fee charged by lenders for processing your line of credit application and setting up your business credit line. The fees are a percentage of the total loan amount typically 1% – 5%
- Draw fee – This fee is charged each time you take money, borrow, from your established line of credit. The draw fee is added to the amount you must repay when you make the draw. Usually, this fee is 1%
- Annual service fee – If you keep your business credit line open but do not draw, nor borrow from it, the annual service fee is around 1%
That is why I like Kabbage business lines of credit because they do not charge any of the above fees. So if you are a smart entrepreneur and decide to apply and get a line of credit in place, but do not use it right away you save with Kabbage.com
When you use your total amount of the line of credit that amounts transform into a term business loan. With the standard repayment period of 6-12 months, you are charged a fixed fee monthly of 1-10%, which calculates to an APR (annual percentage rate) of 20-50%.
Most small businesses use their business line of credit monies for working capital where a business credit card would not suffice. These types of expenses include vendor bill payments, payroll, supplies, office rent and equipment payments. Companies in seasonal industries and those with unpredictable cash flows and those launching new initiatives find these flexible lines of credit very helpful. You can prequality online in minutes at Kabbage
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Many small businesses make use of their credit line to help their cash flow while they wait for their customers to pay their invoices, accounts receivable. Another option for small business financing is invoice factoring, in which a factor lender will advance you up to 80% of the total invoice before your customers had paid.
Business Credit Cards
As the name implies, a business credit card is a credit card that is attached to your business and is used exclusively to buy goods and services needed for your business activities. Just like your personal credit card, you can use any amount up to the credit limit, at any time. The total charges for a month are expected to be paid in full at the end of each month, otherwise, monthly interest rates will accrue until the balance is paid.
Most business credit cards have credit limits of $10,000 – $50,000. Yes, credit cards function like a credit line, you can borrow money as needed up to the total credit limit. But a business credit card does not have a predetermined length of time to repay loan amounts. Only a monthly minimum payment, typically 1-3% of the total due.
Open balances on business credits cards carry an APR – annual percentage rate of 21-25%.
Additionally, many small business credit cards also charge annual service fees. Annual service fees for business credit cards are sometimes $0 up to $500 per card or per account. The cards with the highest fees boost better rewards and cash back programs plus perks. As a smart business owner, you will want to determine if these extra perks are worth the additional annual fees or not. Some business owners use the rewards and cash back from all their employee credit cards for their personal benefit.
Also, some credit card issuers for businesses will charge you a fee for each employee credit card you get issued.
Revolving credit lines do not charge these fees. Another reason to consider opening a business line of credit for your working capital needs.
| Cash Advance | Access to Capital | Repayment Timetable | Fees and Reward Programs | |
|---|---|---|---|---|
| Business Line of Credit | Funds are deposited into your business checking account | Larger maximum credit limit than most credit cards. Common business line of credits up to $150,000 | Lines of credit are more like an installment loan with a predetermined repayment schedule of usually 6-12 months | Usually does not come with reward programs |
| Business Credit Cards | Most credit cards do not allow cash advances. Those business credit cards that do allow cash advances the amount is limited and their are costly fees charged. | Smaller credit limits on cards typically $10,000 - $50,000 | Minimum monthly payments, however many business credit cards require total balances to be paid within 30 days | Some business credit cards have generous reward and cash back programs - BUT they also have annual service fees. |
When a Business Line of Credit is Best
Most working capital needs for businesses are best served by a business line of credit. Primarily because of its ease of use for both cash advances and the ability to write checks for business expenses such as rent, payroll, equipment, supplies, vendor payments, utility bills and inventory.
If you are a prime borrower, with a credit score greater than 620, you can get a favorable APR that is lower than many business credit cards. Even if you are not a prime borrower, and have lower credit scores, a business line of credit could be your lower price option.
The situations when using a business line of credit makes financial sense:
- Your business needs cash advances and uses checks
Lines of credits are built for taking cash advances and writing checks to pay business bills -with no additional limits or fees. Many vendors and suppliers will not accept credit cards but will accept a check as payment. To pay working capital needs such as payroll, rent, leases, insurance, and utilities a line of credit works best.Most business credit cards offer no cash advances or limited advances with additional, sometimes costly, fees. Also, credit card cash advances are charged higher interest rates of your APR plus 7% or more! - You have a low personal credit score
The business line of credit minimum personal credit scores are substantially lower than those of business credit cards. It is common to get approved for a large business line of credit with a low credit score of 550 or less. Compare that with most business credit cards that require a minimum personal credit score of 640 or better.
Some business owners may consider a secured business credit card, however, the credit score requirements are similar. Also, many of these secured corporate cards do not have extra benefits such as cash back programs, rewards, and balance transfers. - Your business borrowing needs fluctuate
All businesses have sales cycles and unknowns and line of credits were conceived to work with those variables. These flexible types of loans are great for seasonal industries and those companies who are undertaking expansion and launching new product lines.
If you have been in business for a year or more, and that includes part-time and sideline gigs too, and have a credit score above 525 you may qualify for a business line of credit from Kabbage. No cost to apply nor obligation to use the funds if you are approved. Prequalify online for up to $150,000
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