Line of Credit vs Credit Card: Which Is Better? -Credilinq

Small businesses across the world rely on a variety of credit instruments to ensure their businesses run smoothly. Among these, the two most common are a business credit card and a business line of credit. As new entrepreneurs, both of them might appear to be identical at first glance; however, in reality, both of them have significant differences in structure and utility.  

In today’s blog post, we will take a closer look at both these credit instruments and share their complete information with you, such that it becomes easier to choose between them the next time you are looking for credit.

What Is a Business Credit Card?

A business credit card, as the name suggests, is a credit card issued to an organization in contrast to its commercial counterpart, which is reserved for individuals.  

In most cases, an organization needs to apply for this from their existing banking partner, as having an existing relationship eases the approval process.  

To get approved, businesses need to have a sound credit history and generally do not need to pledge any collateral, although there are exceptions where the bank might request one.  

As of date, only banks and registered financial institutions can offer business credit cards to organizations in most countries.

What Is a Business Line of Credit?

Second, in line, is a business line of credit. Simply put, a line of credit is a revolving loan that is offered to a business by either a banking or a non-banking financial institution.  

As compared to a business credit card which generally arrives with a fixed limit, a line of credit usually arrives with a greater amount of flexibility, meaning once you start making your repayments on time, your total credit limit will be increased very quickly.  

This higher credit limit ensures that businesses can rely on this tool when you need to finance large purchases. Along with this, another difference in comparison to a business credit card is the fact that a credit line empowers the business owner to directly cash the credit line to their bank account, whereas there are only a limited number of places that accepts a credit card.  

For example, if a business needs cash to make vendor payments or release employee payroll, a credit line would be much better-suited thanks to its utility and versatility as compared to a credit card.

When Should You Use a Business Credit Card?

Now that you have a clear understanding of a business credit card, here are some use cases for the same.

1. Regular Business Expenses

The first use case where a business credit card is ideal is for regular business expenses, for example – office supplies, stationeries, and travel.  

Since these are routine purchases of small amounts, which need to be tracked for seeking reimbursement, it is better to pay via a business credit card rather than by cheque or cash. The reason being most modern accounting software lets you easily upload your business credit card transactions and along with this, business credit cards available in the market today mostly arrive with an expense management suite of their own.

2. Strengthening Your Businesses Credit History

The second instance where a business credit card will be best suited is to steadily build your organization’s credit history. Building your credit history is crucial as it will allow your business to easily borrow in the future and do so at attractive interest rates.  

Along with this, businesses that have a strong credit history often reap the benefit of the founder not having to pledge personal collateral and credit history to finance the business’s operations.  

While there are several ways to build and strengthen your business’s credit history, the easiest is to apply for a business credit card, use it to meet small regular expenses, and pay the bill in full. This will ensure that your business can easily borrow in the future based on its ability and not from its shareholders.

When Should You Use a Line of Credit?

Although a business credit card will help you strengthen your business credit history, there are certain areas where it will fall short. You will need to leverage your business credit line in such scenarios. Two such examples are shared below.

1. Credit Cards Are Not Accepted

Often you will need to make payments at places or to individuals who don’t accept a business credit card. 

A good example of this is when you need to make payments to your vendors, or you have to pay your employees. As for both transactions, you need to transfer the amount directly from your bank account; it is advisable that you take advantage of your line of credit instead of your business credit card. 

Choosing the former will not only make the process easier but also ensure you don’t burn a hole in your pocket by incurring high interest and credit processing charges.

2. Financing Large Purchases

In most cases, banks offer businesses a line of credit with higher limits ranging between $10,000 to $250,000.  

 Having such a high credit limit makes it easier for you to finance a large purchase. All you need to do is withdraw the required amount from your credit line and further use the amount to complete the purchase. This will ensure two things – first, you only pay for the amount you use and not your entire credit limit, and second, you don’t incur high charges such as processing fees, interest rates, etc.

Understand the Cost of Borrowing

Although a business credit card and a line of credit might appear similar, there is a significant difference in their charges.  

For instance, most banks offer businesses with a good credit history a line of credit that is affordable in terms of interest rates and charges. On the other hand, most business credit cards are infamous for charging upwards of 20% APR for purchases and an additional premium for cash advances. The only significant benefit of a business credit card is that most banks wave off the annual fees when you reach a spending milestone; however, the lender will charge you an annual maintenance fee for your credit line.

Takeaway – Which Is Better for Your Business?

Now that you have a clear understanding between both a business credit card and a credit line, along with their use cases, it is clear that each can be best utilized for particular scenarios.  

For example, if you want to finance regular business expenses, it is better to opt for a business credit card, whereas if you want to finance large transactions, a credit line might be better suited.

If you are looking to instantly access capital to either finance your immediate spending, like marketing and vendor payments, or larger expenses, such as employee payroll and inventory restocking, reach out to CrediLinq.ai. We have designed two specific lending instruments, especially for SMEs like you – Recurring Revenue Financing and PayLater Direct which will let you instantly access up to SGD$ 300,000 capital. Get in touch with us to know more.