As a small business owner, you do your best to be prepared for any situation. A late of shipment of inventory? You'll find a way to work with it. A last-minute sick employee? You'll find coverage.
As much as you wish you had an answer for every problem, there'll always be an inevitable issue that pops up that you can't solve with some creative logistics or the cash in your wallet (or even the full balance in your business bank account). When the unexpected occurs, being able to meet the challenge with fast cash or business credit can often be crucial to small business operations.
Two great tools for keeping your small business going, no matter what, are a business credit card and a business line of credit. But when do you use which?
Business Credit Card vs. Business Line of Credit: The Basics
What to Know About Business Credit Cards
In the US alone, business owners hold more than 13.9 million small business credit card accounts. And business owners like you rely on them a lot, with $430 billion in spending done on these cards each year--even with only two-third of business owners holding a card.
Many people know the benefits of personal credit cards, but what's the story with business credit cards? They help with:
- Spending power. Like a consumer credit card, most business credit cards offer a revolving line of credit with a set credit limit that allows you as a business owner to make purchases and withdraw cash for your operation. A business credit card can be a great way to immediately access capital and increase your business's purchasing power.
- Building business credit. Business credit cards help build your business credit score--which is different than your personal credit score, and crucial for you to access business financing down the line.
- Separating finances. As a business entity, it's important to keep your business and personal finances separate. This distinction not only helps with accounting, but also provides important protection for your personal assets if you've set yourself up as an LLC or corporation.
- Perks and rewards. You can pick a business credit card that will specifically help your business--whether you want to earn travel rewards, cash back, lower your APR, etc. Choosing the right card means you're not just spending--you're earning, too.
What to Know About Business Lines of Credit
When you hear "business loan," you generally think of term loans--a lump sum of cash that you apply for through a lender. A business line of credit is actually a business loan, too, even though it looks and functions a bit more like a business card.
What's similar to a term loan process is that you apply for a business line of credit through a lender, who'll approve you for a certain amount. But the parts that look more like a credit cards? That's mostly everything else. Instead of receiving the whole sum in your bank account immediately, you only draw on the loan as needed. And only accrue interest on the amount you've actually withdrawn, too.
Plus, after using all or some of the funds within your credit limit, you can pay back the borrowed amount immediately or through a predetermined repayment schedule. When you've repaid your line of credit, the financing becomes available to you again with the same terms--this is what's called a "revolving" line of credit.
There are two main types of business lines of credit:
A secured business line of credit is backed by physical or financial collateral, such as your inventory or your accounts receivable.
An unsecured business line of credit is backed only by your personal guarantee.
As a flexible and fast financing option, a business line of credit can help not only in emergencies, but also in the day-to-day management of your business, such as purchasing extra inventory and supplies, maintaining payroll, or increasing your working capital.
When to Use a Business Credit Card vs. a Business Line of Credit
Now that you know the fundamental differences between the two products, what are the situations in which you call upon one versus the other?
Use a Business Credit Card When...
You want to spend without interest. There are good options for 0% introductory APR cards availableand some even up to 15 months. If you think you can make a purchase and pay it off in that introductory period, that's basically a free-money loan.
You want to earn rewards when you spend. Sometimes you have to spend more than you want--but you can earn travel rewards, cash back, or other perks on a business credit card if you have to lay out the money.
You need to build your credit. If you need to work to build your business credit, a business credit card is an excellent idea. Paying off your bills on time can only make your profile stronger--and make you a better candidate for a business loan in the future.
You need to spend quickly. Although business lines of credit are excellent products, one drawback they have is that there can be a delay for the money you want to be available to spend in your bank account (even though it's yours to use). A business credit card lets you spend wherever your card is accepted.
Use a Business Line of Credit When...
You need to make a big purchase. For the most part, credit limits on business lines of credit are higher than business credit cards. Although it's true that some credit cards--charge cards, specifically--don't have pre-set spending limits, most do, and they don't go as high as lines of credit. Especially for the most qualified borrowers.
You need to carry a balance. Business lines of credit generally carry lower interest rates if you aren't in a position to pay off your debt right away.
You need to get a cash advance. Credit cards charge much higher fees for cash advances than business lines of credit.
Which Should You Have for Your Small Business?
Both a business credit card and a business line of credit are definitely useful for small business owners. But both are not equally useful in the same situations. You should think of business credit cards as ideal for point-of-sale transactions, rather than huge investments or cash-flow patches, which are more for lines of credit.
If you're a business owner who's regularly purchasing inventory that's selling through, for instance, opt for a business credit card. That way, you can build your credit and earn rewards in situations where you're sure you'll be able to make your monthly payments on that credit card every time.
But say a pipe bursts in your storefront and you have to pay for costly repairs. If you're not sure how or when you'll be able to pay for these repairs, a business line of credit will be a huge help. Even in a less dire situation--say you want to invest in soundproofing for your restaurant--a business line of credit can be useful to have on hand for immediate cash withdrawal and gradual repayment.
Because both business credit cards and business lines of credit are so advantageous in different situations that many small business owners choose to have both. As a small business owner, you're sometimes required to perform feats of financial gymnastics. So, both business credit cards and business lines of credit are great tools to help keep the well-oiled machine of your small business running smoothly.