Business Credit Cards vs. Lines of Credit - Which is Best for Your Small Business?

Whether you’re a startup or an established company, you may find yourself in need of short-term funds sooner or later to cover a variety of business expenses. Whether you need extra working capital for bridging cash flow gaps or covering day-to-day expenses, utilizing short-term small business financing is a great option to run and grow your business efficiently.

The two most sought-after ways to get capital to meet your short-term financial needs are small business credit cards and lines of credit. But which is best for your type of small business? When do you use which? And how to qualify and apply for each of these financing options? These are some of the many important questions we’ll touch on in this article.

Business Lines of Credit

Business lines of credit are an example of revolving credit. Unlike traditional bank loans, you have the flexibility to borrow a fixed limit of funds that you can use whenever you need it. The best thing about a line of credit that you’ve to pay interest on the amount only you’ve used. And once you repay the used credit plus interest, the total amount will be available again.

These loans can be secured or unsecured by a lien on your assets or other business assets such as real estate, inventory, and more. Both traditional banks and alternative lenders provide lines of credit to small businesses. Though you must have strong revenue and an established business credit profile to become eligible for the mid or long-term lines of credit, while lenders are willing to offer short-term lines to even startups and businesses lacking collateral and good credit score.

Features of Business Lines of Credit

• Loan Amount - $10K - 1M
• Loan Term - 3 Months - 18 Monhts
• Interest Rate - 7%-25%
• Time to Fund - 24-48 Hours
• Fees - Opening fee, annual renewal fee, and monthly maintenance fee

Uses of Business Lines of Credit

• Finance day-to-day expenses and cover working capital gaps
• Hiring new employees
• Purchasing inventory and equipment
• Making payroll
• Using for seasonal expenses, expanding business location, and investments

Qualification Requirements for Business Lines of Credit

Although qualification criteria for business lines of credit vary from lender to lender, here are some of the common requirements your small business needs to fulfil.

• Must have a business history of at least 1 year
• Must have good annual revenue and profitable business
• May have to put collateral for the larger amount such as accounts receivable, machinery, inventory, real estate, etc
• Need to provide a guarantee if you’re an independent small business owner
• A minimum credit score of 650

Business Credit Cards

A business credit card is an ideal unsecured small business funding solution to cover a variety of your small business expenses. With a business credit card, a monthly spending limit has been set by credit card issuers and you can spend as much as you need up until that limit and then pay it later (usually every month).

Whether you’re running a corporation, working as a sole proprietor, or an LLC owner, freelance gig, or side hustle, almost every type of business can apply for a business credit card. Besides, if you’re an aspiring entrepreneur who has just started his new venture and don’t have a credit history, you can still apply. You don’t need to have a perfect credit score or put collateral to get a business credit card. Moreover, the loan approval process is much easier and faster than many small business financing products.

Features of Business Credit Cards

• Loan Amount -$50,000 or more
• Loan Term - Up to 55-60 days interest-free
• Interest Rate - 13.24% - 19.24% Variable
• Time to Fund - 24-48 Hours

Uses of Business Credit Cards

• Purchase equipment, inventory, and supplies
• Mitigating cash flow issues
• Cover various day-to-day and other operative business expenses

Qualification Requirements for Business Lines of Credit

Depending on the specific cards and lenders, you’ll likely need, if not all of the following.

• Enter the full legal business name for businesses and your name in case of a freelancer or a sole proprietor.
• Business address and phone number
• Business history
• Number of employees
• Federal tax identification number
• Estimated monthly expenses
• Personal credit history and guarantee

Business Lines of Credit vs. Credit Cards - Which is Better?

Well, it totally depends on your specific business financial needs and budget. If you need access to large amounts with lower interest rates and a flexible payment plan, then a line of credit could be your ideal small business financing option

However, if you want special discounts, rewards, cashback, and offers and are able to pay your entire credit in full each month, then it will make more sense to apply and secure a business credit card for your business’ financial needs.

No matter whether you’re securing a business line of credit or credit card, it’s always a smart idea to apply through an online funding marketplace. It will help you find and compare a variety of these small business loans offers from multiple lenders so you can choose one that best fits your current financial needs and budget.