As a business owner, one of your most valuable tools is access to credit. And like any job, you’ll be much better off when you select the right tool for your needs. Two of the most popular ways that a business can access credit is through a small business line of credit and a small business credit card. Take a look at how each type of credit works.
Business Line of Credit
You can apply for a small business line of credit from your local bank or from an online provider. A line of credit can be unsecured, or it can be secured by a lien on your assets or another financial instrument such as a certificate of deposit. Once established, you can draw from this line of credit by making a direct deposit to your checking account, or by using a debit card linked to the account. Your minimum monthly payment will be for interest charges only, which will be based on your average daily balance. You are free to pay off your balance and borrow again as often as you’d like.
The best time to use a business line of credit
Business lines of credit can be the best tool for the job when you need to make payments to suppliers who won’t accept credit cards, or who impose additional fees for credit card use. A business line of credit can also be used to pay existing bills by check or by cash, or when you simply don’t have a sufficient line of credit on your business credit cards.
- Ability to write checks to pay billers that don’t accept credit cards.
- Interest-only payments.
- No cash advance fees.
- Helps to build a credit history for your business.
- No interest-free grace period.
- Smaller lines of credit for new businesses.
- No rewards or benefits.
- May require collateral.
A small business line of credit may have an opening fee of $150 or more. Some also have annual renewal fees or monthly maintenance fees. Interest will accrue only when you make purchases, generally about 8% to 35%, depending on the provider.
You can qualify for a small business line of credit based on your personal credit, or you can use your personal credit along with your company’s income, provided it has been in business for over two years.
How to qualify
You can apply online or at your local bank. If using your business income or collateral, you will have to provide documentation.
Business Credit Card
A small business credit card will work almost exactly like a personal credit card does. You will use your personal credit to qualify, and it will represent an unsecured loan. As with your personal credit cards, you can avoid interest charges by paying your statement balances in full, giving you as long as 55 days of interest-free float on your charges (your 30-day statement period plus a grace period of up to 25 days; however, check with your issuer for specifics on your due date and grace period). Otherwise, you will incur interest charges on your average daily balance.
And just like your personal cards, you can receive rewards for your business spending in the form of points, miles, and cash back. In fact, a business credit card is more likely to offer bonus rewards for the types of purchases that businesses tend to make most, such as those from office supply stores, telecommunications service providers, and advertisers. Business credit cards can also offer a range of purchase protection and travel insurance benefits that can be valuable.
Best times to use a small business credit card
A small business credit card is an entirely different type of financial instrument than a line of credit, but there can be many advantages to using them. First, many business owners use their credit cards to earn valuable travel rewards or cash back. These rewards are considered a refund on a purchase and are not taxable income.
Also, business travelers can be protected by polices such as trip delay and cancellation insurance as well as lost luggage insurance, so long as they purchase their tickets with the business card. When making equipment purchases, you business credit card could offer you damage and theft protection, extended warranty coverage, and even a price protection policy that can refund the difference if your purchase goes on sale later. And when you are able to pay your entire statement balance in full each month, you can receive the equivalent of an interest-free, short-term line of credit.
- Easy application process.
- Earn valuable rewards.
- Receive travel insurance and purchase protection benefits.
- The option to have an interest-free grace period.
- Cash advances are very expensive.
- Not all billers accept credit cards.
- Relies on your personal credit, not your company’s.
Some business credit cards have no annual fee, while premium reward cards can have fees of up to $450. Most cards have annual fees of $95 or less.
You must have good or excellent credit to obtain a small business credit card.
How to qualify
You can apply for a small business credit card online in just a few minutes.
More answers to pressing questions
This article was originally written on November 23, 2016 and updated on October 21, 2020.