If your business needs money, you may consider a business loan. It makes sense and there are many options out there. But what if you don’t want the hassle of an actual loan? What if you need something a bit more flexible or not as hard to obtain?
Consider a business line of credit or credit card. Both options offer flexible financing and easier qualification guidelines. Check out which option may be right for you below.
Aren’t a Line of Credit and Credit Card the Same Thing?
A line of credit and credit card sound the same, don’t they? They both offer lines of credit that you can use as you need. But they operate a little differently.
A credit card is unsecured and typically has a low maximum. You don’t have to put up collateral, which is why lenders keep the maximum credit limit low. They also typically charge higher interest rates than you’d find on a line of credit. However, credit cards often have rewards that you can earn just for using the card.
A line of credit is similar to a business loan. You apply for it through a bank and have to prove that you are a good risk. You’ll provide income documentation, proof of your business structure, business license, credit score, and ability to repay the loan. Lines of credit have lower interest rates but offer much higher maximum limits.
How Business Credit Cards Work
You apply for a business credit card just like you apply for a personal credit card. You may secure a credit line from $1,000 – $500,000 depending on your credit score and business history. You secure a business credit card from the same networks as your personal cards including Visa, MasterCard, Discover, and American Express.
Business credit cards are great for everyday purchases or for businesses that don’t qualify for a line of credit. Credit card interest rates are often much higher than line of credit rates with average cards ranging from 8% – 24%. Just like a business loan, your interest rate and credit limit are determined by your credit history and business model.
In addition to the higher interest charges, business credit cards often charge an annual fee. That fee can range from $95 to as much as $595 each year. You’ll need to figure that expense into your budget and determine if it’s worth the cost.
The Upside to Business Credit Cards
Business credit cards do have the distinct benefit over credit lines – the rewards. If the rewards are great enough, it may be worth paying the higher rates and/or the annual fee. The rewards on business credit cards are often similar to those offered on personal cards, including travel miles, cash back, or gift cards.
It’s often easier to get a business credit card too. While credit card companies do ask for information about your business and income, they don’t do a lot of due diligence. In other words, you don’t have to provide a lot of paperwork and wait for underwriting. Most notably, your business doesn’t have to be profitable as it does with a line of credit. Each network has its own minimum credit score requirements and other factors they look for, but if you are an established business with an EIN, you may be eligible.
Is a Business Credit Card the Right Choice?
Business credit cards certainly have their benefits, especially if you’re in a hurry to use the funds. Most businesses can get a credit card within 7 business days allowing them to make fast purchases, which can help turn your business around. Business credit cards are great for managing spending, especially if you have to give employees the ability to spend business funds. It’s also a great way to manage business travel without having the hassle of dealing with expense reports and separating personal finances from business.
How a Business Line of Credit Works
A line of credit is a credit line, much like a credit card. You have access to the line, but don’t have to withdraw the funds until you need them. It’s like a loan, but with the ability to draw on it rather than receiving the funds in one lump sum.
Like a credit card, you pay interest only on the funds you withdraw. For example, if you have a $500,000 credit line and you only withdraw $1,000, you only pay interest on that $1,000, not the entire $500,000. You must pay the interest plus a portion of the principal borrowed according to your minimum payment. Once you pay back the principal (some or all of it), it’s there to reuse.
In order to get a credit line, the bank will do a little more underwriting than with a credit card. You’ll provide income documentation, proof of your business’s history, and proof of your company’s revenue. Most lenders require at least $50,000 annual revenue and six months in business.
One area of grave concern with a business credit line is your credit score. Your business’s credit history determines how much money you can borrow as well as the APR you receive. Typically a credit score of 560 is all that is needed, but obviously, a higher credit score will get you better terms.
If you have a credit score on the lower end, be prepared to provide the lender with compensating factors – or factors that make up for the lower credit score. A high revenue stream or long-standing established business are two ways to make up for the risk, encouraging lenders to give you the loan.
Is a Business Credit Line the Right Choice?
Most businesses use a credit line for large purchases or investments in their business. For example, remodeling your building or buying a large piece of equipment are great ways to use a business line of credit. They are also great for ongoing or repetitive costs that are too much for a credit card but don’t necessarily need a full-blown business loan.
Credit lines often have much lower interest rates than business credit cards, which makes it a better choice for those large balances that might be outstanding for a while. However, you typically need to put up collateral in order to get the lower rates, so you have to be willing to do that. Collateral can be your house, car, or a piece of your business, such as property or equipment. Secured lines of credit typically have lower interest rates because the lender’s risk of loss is minimized.
How to Get a Business Credit Card
Getting a business credit card is just like getting a personal credit card. You complete an application online or send it in via mail. You must supply your EIN, amount of revenue, and a few personal questions – that’s it. It’s fairly easy and you should have an answer instantly if you apply online. If you are declined, you will receive a letter in the mail within a few business days stating the reasons.
How to Get a Line of Credit
You get a line of credit by applying directly with a bank. You can choose a bank in person or online. You’ll complete an application and sign a disclosure allowing the bank to pull your credit. You’ll also provide:
- Personal and business income documentation
- Proof of your collateral
- Personal and business bank statements
The process takes longer since you have to go through underwriting. The underwriter may use the information you provided or ask for further documentation depending on the situation. It can take from a few days to a few weeks to complete.
Before you choose a business credit card or business credit line, consider your options. Weigh the pros and cons of each and look at the APRs. Know the total cost of each option based on how long you think you’ll have an outstanding balance. Think about how lenders will look at your risk level and determine if there’s anything you should fix before you apply for either the card or the line of credit.
