Businesses need money to operate. If operations don’t generate enough money at the right time, entrepreneurs can turn to outside financing. The main types of short-term financing for small business are the small business credit card and the small business line of credit. They are different financial products serving different needs.
Do you need to build credit? Are you looking for short-term funding to cover expenses for supplies and inventory? Do you need to borrow only a few thousand dollars? If so, you want a small business credit card. If you have credit, need to borrow ten thousand dollars or more, and need funding for the expenses associated with a particular project or with payroll, you should consider a business line of credit.
Small business credit cards function much like consumer credit cards: the issuing bank lets you use it for purchases. In exchange, you pay interest on any outstanding balances, and you may have an annual fee, too. Many credit cards have a grace period, which is the amount of time you have to pay before interest accrues, and some offer such rewards as cash back, airline miles, and discounts. The catch is that interest can accumulate quickly if you can’t pay off the balance, and a credit card may not be accepted to pay all of your expenses. These are very good for purchases of supplies and inventory, less useful for utilities and rent payments. Most companies that offer consumer credit cards also have business credit cards, so you can start your search with the card company you already use.
For covering larger expenses or those that need to be satisfied with money in the bank (payroll is one obvious item in that category), a small business line of credit may be a better alternative. These are short-term loans issued by banks and designed expressly to cover working capital needs. They are often known as revolving lines of credit because you can borrow and repay funds at the same time. The bank may charge a fee to establish and maintain a line of credit, and it will charge interest on the outstanding balance.
A line of credit can be tapped through a check or money transfer; many banks structure them as overdraft loans on an existing bank account. These aren’t for picking up a round of drinks for customers at a trade show, but rather for larger projects such as an expansion program or inventory purchases. Lines of credit have more flexibility than a credit card, but they are most effective for a business that already has some scale. Lines of credit are also useful for managing payroll if a business’s cash collection cycle doesn’t match the frequency of pay.
Credit cards require a monthly payment. The full balance does not need to be paid, but interest will accrue on any part of the balance that is not paid off. Some lines of credit call for a monthly payment, but not all do. The bank will charge interest, though. With both, check to see a minimum payment is calculated.
In general, a line of credit will allow you to borrow a larger amount of money at a lower interest rate than a credit card, in part because some lines of credit are backed by the Small Business Administration (https://www.sba.gov/content/caplines). However, their larger size means that the smallest of businesses may not qualify. Some businesses would not have a good use for the amount of credit offered.
Most business owners will find that a dedicated business credit card is a good way to cover short-term financing needs and build a corporate credit rating. Even a single-employee, part-time microbusiness can benefit from a credit card to handle purchases of office supplies, subscriptions, and entertainment. As the business expands, credit cards may be available for other employees. Rewards programs can be used to help cover business travel or future purchases.
This isn’t an either-or decision. Rather, it involves figuring out what your business needs now. A smaller business can use a credit card to cover expenses and build credit, and then turn to a line of credit as the business needs grow. With either, it pays to shop around for the combination of rates, fees, and rewards that lead to the lowest total cost for your business.
