Comparing Small Business Credit Cards to Lines of Credit
When opening a small business, you need some money to help you get started. This capital might be used to purchase inventory, rent office space or start advertising. Regardless of how the money is initially used, it is going to be needed. Most people do not have the cash themselves to start a business, so the options available are to get small business credit cards or open lines of credit. Understanding the differences and similarities between these two can help you decide which option is best for you and the start of your business.
Small Business Credit Card
A small business credit card is similar to any other credit card. You have to apply for it, your credit score is evaluated and then you can be approved for a certain amount of credit. Using a small business credit card is beneficial because you can make purchases immediately with it. However, if you need cash, the credit card does not typically provide that. There are instances in which you may be able to get cash advances with your credit card, but high fees will often be applied.
Lines of Credit
A line of credit is more commonly used when cash is needed. After applying for a line of credit, the funds become available to you within a few business days. You can transfer the funds to your bank account and begin using it immediately. Since it is cash that is given in these types of loans, people are usually more thoughtful with how it is spent versus using a credit card. This type of credit is useful for paying wages to new employees or purchasing inventory prior to an expected busy season.
Both a small business credit card and a line of credit are revolving loans. This means that you can spend up to a certain amount. When you have repaid the amount you have spent, then that amount again becomes available for you to spend. One thing to be careful of, is that credit cards only require a small monthly payment in paying off the credit. Because of this, it can take years to pay off a relatively small amount. Lines of credit on the other hand, require higher monthly payments to encourage paying off the loan in a timely manner.
Both small business credit cards and lines of credit can provide you the funds needed for your small business venture. However, one may be a better fit for you and it is important to understand the differences.