Does Your Business Need a Line of Credit or Credit Card?

Whether you’re the owner of a large or a small business, running your company requires making smart financial decisions that support your company’s growth and stability.

One important choice you may face is whether your business needs a line of credit or a credit card to manage its finances. Understanding these financial tools is key to maintaining cash flow, managing expenses and seizing opportunities as they arise.

 

What is a Business Credit Card?

A business credit card is a credit card designed to help companies manage their routine expenditures efficiently. While a business credit card works much like a personal credit card, it is specifically designed to meet the unique demands of a business.

Business credit cards can only be used for business needs and not for personal, family or household purposes. They typically offer higher credit limits to accommodate larger expenses, rewards programs customized to business-related purchases and expense tracking features that can simplify financial management for businesses.

Business credit cards can be ideal for covering short-term costs, such as office supplies, travel and minor equipment purchases. They also provide a convenient way to separate personal and business expenses, helping to simplify accounting and tax preparation.

 

What is a Business Line of Credit?

A business line of credit is a flexible financing option that allows companies to borrow money as needed, up to a predetermined limit. Unlike a loan that provides a lump sum of money, a line of credit provides access to funds that can be used repeatedly, as long as you don't exceed the credit limit. Once a business pays back the money they've used from a line of credit, those funds are available for them to use once again as needed.

This makes it a valuable resource for managing cash flow, covering unexpected expenses or funding short-term projects. Importantly, businesses only pay interest on the amount they actually use, so it can be a cost-effective solution for fluctuating financial needs.

The Difference Between Secured & Unsecured Lines of Credit

When choosing a business line of credit, you’ll encounter two main types: secured and unsecured. A secured line of credit requires collateral, such as business assets or inventory, to back the borrowed funds. This collateral reduces the risk for the lender, often resulting in a lower interest rate and higher credit limit. 

On the other hand, an unsecured line of credit does not require collateral, making it a more accessible option for businesses without substantial assets. However, unsecured lines typically come with higher interest rates and lower credit limits due to the increased risk for the lender.

 

When You Might Choose a Business Credit Card 

A business credit card is a good option for managing day-to-day expenses while enjoying added benefits.

Here are a few reasons why you might choose a business credit card:

• Track Separate Transactions: A business credit card makes it easier to track and categorize your business expenses, keeping them separate from personal transactions. This simplifies bookkeeping and can help simplify filing taxes.
• Earn Rewards: Some business credit cards offer rewards programs that let you earn points, cash back or travel miles on purchases. These rewards can be reinvested into your business, providing additional value for everyday spending.
• Built-in Perks: Business credit cards often come with extra perks such as purchase protection, extended warranties and travel insurance. These benefits can save your business money and provide peace of mind.
• Employees Can Have Cards: With a business credit card, you can issue cards to your employees, allowing them to make purchases on behalf of the company. 

Why You May Choose a Business Line of Credit

A business line of credit can be ideal for companies that need flexible access to funds for larger or unexpected expenses.

Reasons to consider a business line of credit include:

• When the business needs money quickly: A line of credit provides immediate access to funds when your business needs to cover unexpected expenses or take advantage of a timely opportunity.
• Obtain larger credit limits: Business lines of credit often offer higher limits than credit cards, making them great for covering large expenses or managing larger cash flow needs.
• Credit cards can't purchase what the business needs: Some business purchases, like large equipment or bulk inventory, may exceed the limits of a credit card or require payment methods other than credit. A line of credit can provide the necessary funds to complete these larger transactions.

Differences Between a Business Line of Credit & a Business Credit Card

When deciding between a business line of credit and a business credit card, it's important to understand the differences between the two options. Each has its own set of features, pros and cons that can impact your business in different ways. The following table outlines the main differences to help you make an informed decision: 

Aspect	Business Line of Credit	Business Credit Card
Interest-Free Grace Periods	There are no interest-free grace periods.	Often includes interest-free grace periods on purchases.
Rewards	There are typically no rewards.	Often comes with rewards programs for business spending.
Fees	Possible annual fees.	Possible annual fees.
Usage Restrictions	May only be used for certain purchases (like an equipment loan).	Can be used for a wide variety of purchases where credit cards are accepted.

 

Is It Better to Get a Business Line of Credit or a Business Credit Card?

Choosing between a business line of credit and a business credit card will depend on your immediate business needs. If your business requires flexible access to funds for larger expenses or ongoing projects, a line of credit may be the better option. On the other hand, if you need a convenient way to manage daily expenses, track transactions and earn rewards, a business credit card might be more suitable. 

Each option serves different purposes, so it's important to evaluate what aligns best with your financial goals and operational requirements. However, you don't have to pick between the two. Having a business line of credit and a business credit card can give you a diverse set of financing options for your company.

If you're uncertain about which options to use and when to use them, working with the business bankers at City National Bank can help you understand your options.