When to Use a Business Credit Card vs. Business Line of Credit
The expanding world of business financing means more lending options for small business owners and greater accessibility. However, sometimes it can be tricky to determine which option is best — especially when comparing business credit cards and business lines of credit, which on the surface seem very similar.
Despite how alike they may seem, these two funding facilities are uniquely suited to meet different business needs. With this guide, we’ll take the guesswork out of it and help you understand when to use a business credit card vs. a business line of credit.
Tips on When to Use a Business Credit Card vs. Business Line of Credit
Business credit cards and business lines of credit are both forms of revolving credit. Each has a credit limit and an interest rate, and when you pay them back on time, they can help you build business credit history.
However, these financing options aren’t interchangeable. Depending on your business needs, sometimes one is a better option than the other.
Let’s look at some of the best ways to use each one.
Best Ways to Use a Business Credit Card
A business credit card works best to autopay subscriptions, cover budgeted expenses, maximize reward points, or pay bills as a startup.
Autopaying for Subscriptions
Subscriptions can include monthly or annual fees for software, quarterly office supply deliveries, or even industry publications. These types of expenses are easy to plan for since they recur on a regular basis at the same price.
When you set up autopay with a credit card, you don’t have to worry about missing payment due dates and disrupting your service. However, make sure to audit your subscriptions from time to time. Autopay puts expenses out of sight and out of mind, which can lead to businesses paying for subscriptions they no longer need or use.
Covering Budgeted Business Expenses
A portion of your business spending is likely budgeted in advance. For example, you know you owe $1,000 to your bookkeeper each month, and the annual fee for your professional organization membership is due each June. Use a credit card to cover these planned expenses that already appear as line items in your budget.
Since you’ve already planned for these costs, you’ll have the money on hand to pay off your credit card in full each month and avoid interest charges.
Maximizing Rewards Programs
Some business credit cards offer perks like cashback or short-term interest-free periods (also known as 0% introductory APR offers). These rewards can be beneficial when they’re used strategically. However, if the allure of the perks leads to overspending or the inability to pay your monthly balance, you may end up paying more in interest than you’re gaining in cash back.
Paying Bills as a Startup
For a new business with hefty startup costs, you’ll likely need a term loan to get going. But for a business that doesn’t need a large capital injection to get off the ground, opening a business checking account and a credit card can help you get started.
Plus, by strategically using and managing your credit card, you can build up your credit profile to make it easier for you to get other business financing in the future.
Best Ways to Use a Business Line of Credit
A business line of credit works best to make large purchases, cover unexpected costs, pay in installments, and bridge cash flow gaps.
Making Large Business Purchases
The average credit limit for a business credit card is $56,100, according to Experian data. However, you can usually get a higher credit limit with a business line of credit. For example, with Backd, $50,000 is the starting point, and you could be approved for up to $750,000. This makes it an ideal facility for larger purchases.
Covering Unexpected Expenses
A business line of credit is a great safety net. When the unexpected happens, you may not be able to cover the expenses that come along with it. With a business line of credit available, you have a flexible cash reserve at the ready.
For example, you’re manufacturing a large custom order when a machine goes down. You need to bring in a replacement part (or maybe even a replacement machine) so you can meet your delivery deadline. With a business line of credit, you can quickly withdraw funds to cover the cost, allowing you to limit business downtime and prevent a poor customer experience.
Paying in Installments
Let’s say you need to make a purchase, but the vendor doesn’t offer payment plans beyond net-30 terms. You can create your own installment plan instead.
Withdraw the amount you need from your business line of credit to cover the cost upfront, and then make use of the flexible repayment terms that come with your credit line. Your vendor gets their payment on time and in full, and you get a little extra wiggle room. It’s a win-win.
Bridging Cash Flow Gaps
Cash flow gaps are a natural part of a business. Perhaps your product or service experiences dips in sales due to seasonality, or you may need to invest in inventory to fulfill future orders. A business line of credit can help you navigate these situations.
For example, business may be slow in the late summer and early fall before skyrocketing around the holidays. You know the money is just around the corner, but you won’t have it in hand until November and December. The funds from a business line of credit can help you cover operating expenses and stock up for your busy season. Then, when your revenue picks back up at the end of the year, you can repay and reload the balance.
Can You Use a Business Credit Card and a Business Line of Credit Together?
While it’s common to compare a business credit card vs. a business line of credit, you can also use them together. Having both on hand will allow you to match the right type of financing to each of your expenses and needs.
Also, since business credit cards tend to have higher interest rates, you may choose to use a business line of credit as a refinancing tool if your credit card balance stretches beyond your budget.
Let’s say you have a credit card balance of $15,000, which includes $5,000 in budgeted expenses and $10,000 in unplanned charges. You have the cash on hand to pay for budgeted expenses, but you’re unable to pay for the remaining $10,000.
To limit the amount of interest that will accrue, you can withdraw $10,000 from your business line of credit to pay off the credit card balance. You’ll then be able to pay it back in weekly installments at a lower interest rate.
Match Your Financing to Your Business Need
The best financing facility is the one that meets your business needs. Use a business credit card to pay for subscriptions and budgeted expenses or to build credit so you can be approved for other lending options in the future. Plus, if you use your credit card properly, you might be able to benefit from a rewards program. Meanwhile, a business line of credit works well to cover unexpected or large expenses, bridge cash flow gaps, or create an installment payment plan for yourself.
Because of their different use cases, you don’t have to choose one or the other. Both business credit cards and business lines of credit can be part of your wider financing and cash flow management strategy.
Backd is an online lender that offers business lines of credit with competitive terms and simple eligibility requirements:
$100,000 monthly revenue
650+ credit score
Established business credit history
Based in the U.S. with a brick-and-mortar address
Been in business for two years
Apply now and receive a funding offer within as little as 6 hours.
