Should You Pay For Business Expenses With A Line Of Credit Or A Credit Card?
Credit cards and lines of credit share many characteristics. Business owners may wonder how they differ at all, and whether it’s better to make your business purchases with one or the other.
In fact, there are a few key differences that can help businesses determine when to use one or the other to make your purchases.
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Similarities Between Lines Of Credit & Credit Cards
Credit cards are technically revolving lines of credit, though they aren’t often called that. As you pay off your balance, that credit becomes available to use again. Compared to business loans, lines of credit and credit cards are both convenient for small and recurring purchases.
In some cases, you may even be able to use your line of credit at the point of sale (like a credit or debit card) — this is more convenient and safe than carrying around a wad of cash.
Beyond those similarities, both credit cards and lines of credit accrue interest on any outstanding debt, not unlike business loans. You’ll also have an easier time qualifying for the best line of credit or credit card if you have a strong credit score.
Increasingly, credit cards have come to rely on rewards programs to entice business owners. Some banks that offer revolving credit in partnership with a credit card company like Visa or Mastercard do offer rewards programs to businesses, but those are still uncommon.
Differences Between Lines Of Credit & Credit Cards
The most obvious difference is that not all lines of credit are revolving credit. When a bank extends you a line of credit, it may be a one time offer. Usually, when a financial institution extends non-revolving credit it’s to cover a specific expense the borrower is seeking to fund. Unlike a loan, a line of credit gives the borrower some extra flexibility to negotiate with price with vendors.
The differences between revolving lines of credit and credit cards are a bit more subtle. For starters, a line of credit often comes with more fees than does a credit card. You may, for example, have to pay a monthly or annual fee to keep your line of credit open. While some credit cards (particularly business credit cards) do come with annual fees, it’s not hard to find ones that don’t. Some lines of credit will also charge a fee every time you make a withdrawal.
Though it will vary from case to case, you can also generally get a higher credit limit through a line of credit than with a credit card. Both credit cards and lines of credit come in secured (requiring collateral) and unsecured forms, though you’d only want to go the secured credit card route if poor credit keeps you from qualifying for a traditional card.
While both financial products usually feature monthly payments on your outstanding balance, some alternative lenders offering lines of credit may expect weekly or daily payments deducted from your business savings or checking account.
Note that it’s a lot easier to get a credit card than a line of credit, although getting an elite credit card can be challenging in its own right if your credit history isn’t great.
When To Use A Credit Card
So when should business owners use a credit card and when should they use a line of credit loan?
The biggest difference between a line of credit and a credit card is convenience. Credit cards are designed to make retail purchases easy. Most businesses these days are equipped to swipe your card (or read your chip) at the point of sale. With some rare exceptions, it’s not easy to apply for a term loan at the time of purchase. Even business owners with a line of credit in place may not have a way to directly use that money at the point of sale without first moving it to another account.
Credit cards are also more ubiquitous in this card-driven online market. Chances are you’ve regularly used your credit card on Amazon or to make utility payments. It’s just as easy to use your credit card for common expenses. In fact, credit card companies try to encourage you to do so through reward programs. The terms of these programs vary, but essentially they all return a small percentage of the money you spend on purchases to you in the form of statement credit, cash, gift certificates, or other products.
If you’re diligent about paying off your credit cards within your monthly grace period, you can avoid paying any interest or additional fees.
Another perk you’ll see with credit cards that you won’t often get with lines of credit are introductory offers like 0% APRs. If your card is still within that introductory window and you expect you’ll be paying your balance off over the course of several months, the credit card is a clear winner.
When To Use A Line Of Credit
One thing credit cards are really inefficient at is cash advances. Most credit cards will only allow cash advances up to a fraction of your credit limit. Even then you’ll usually incur very high-interest fees on that cash that are far higher than you’d get from most lenders.
Lines of credit, on the other hand, are convenient whenever you need to produce a good chunk of cash on short notice. You won’t incur premium fees for withdrawing that money and you won’t be limited to only a fraction of your credit limit. This can be especially useful if you need working capital to cover a broad range of business expenses beyond simple retail purchases and monthly bills.
A line of credit’s lower interest rates may also make it preferable when we’re talking about big ticket items you can’t pay off quickly. If you’re using your credit card optimally, you shouldn’t be paying any interest on it at all; you’ll be paying it off in full each month. If you can’t do that, a line of credit may often be cheaper over the long run and have more structured payments than you’d get with a credit card.
Credit cards and lines of credit can both provide additional financial heft for your business. Knowing when to use each one could make the difference between convenience and unnecessary debt for your business.
Are you ready for a business credit card? Our credit card comparison chart can get you started on finding the perfect card for you.
Think a line of credit is closer to what you need? Our line of credit comparison chart will help get you started.