Using a business line of credit or credit card for your business has its own advantages and disadvantages when it relates to business financing. You need to become familiar with three differences between a business line of credit and credit cards.
The first major difference is the credit limits. Most credit cards will go as high as $20,000. However, very few small businesses can obtain one credit card with a limit of $20,000. On an average most credit card limits are from $3,000 to $10,000. Business lines of credit limits are much higher ranging from $10,000 to $200,000 or more. The credit limits is one major difference.
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Some business owners have personal or business credit cards that are used for their business. Whether you have a personal or business credit card, these will report to your personal credit bureaus. A business line of credit may not report to your personal credit bureau and provides credit history for your business. If you are trying to build business credit, a personal credit card will not help you. It will help you build your personal credit scores, but not your business creditworthiness.
With a credit card as you pay the balance, the credit becomes available to spend again. You are only required to pay interest on your balance and not the principal balance. While this may seem convenient, it is not because if you don’t repay back the principal balance you will not have funds available for future use. Credit cards may have access to features such as rewards programs, purchase protection, travel insurance, and other perks based on your payments.
A business line of credit is somewhat like a credit card and a traditional loan. Some business lines of credit require only interest payments, while others require principal and interest payment. These are hybrid payment solutions. Limits are usually much higher than a credit card. Bank business lines of credit may allow you to make monthly payments while alternative business lines of credit may require you to make weekly payments. Business lines of credit don’t offer cash reward programs. Business lines of credit may give you interest incentives or may allow you to increase limits much higher based on your payment history.
Credit cards often come with higher interest rates than business lines of credit. You may get an introductory rate with a credit card with 0%, but sooner or later that rate may end up being as high as 30%. A business line of credit can have an interest rate as low as 6%. There are major differences in the cost of capital.
Credit cards also have limitations on cash advances. A credit card may only be good to swipe a card. If you need cash, you may only be able to obtain anywhere from 10% to 30% of the credit limit. With a business line of credit there are no restrictions on the funds you access. A line of credit, on the other hand, is ideal for those times when you need to access a large amount of cash fast. If credit cards place a, 20% limitation on the cash advance and you have a credit limit of $10,000, you can only withdraw $2,000. If you have business line of credit with a, $10,000 limit, you can withdraw the $10,000 at once.
As a tip of advice having credit cards and a business line of credit are two good options. If you can have both you should use both. In the end, the choice about which type of financing is a better choice for you. Also, you will need both to build credit. To obtain business credit, your personal credit is important. By using both credit cards and a business line of credit you can build both personal and business credit at the same time. Just don’t overleverage yourself. Make sure you can afford to make payments. Never utilize the maximum amount. Try to utilize 40% to 80% of the credit limits available to you.