If you’re the owner of a small or medium-sized enterprise (SME), you may be looking for ways to manage your business expenses. Two popular options are business credit cards and lines of credit, which are both types of revolving credit. With revolving credit, you can spend up to a certain amount of money, repay the amount in full or part, and borrow again. However, there are key differences between a business credit card and a line of credit and how you might use them.
Keep reading to compare credit cards and lines of credit for smaller or medium-sized businesses so that you can choose the best financing strategy for your business.
Business credit cards
If you use a credit card to help cover your personal expenses, you’ll be familiar with how they work and the potential benefits. A business credit card is similar to a personal credit card in that you have flexible spending power, the option to pay your balance in full or only in part every month, and the ability to earn rewards and take advantage of cardmember perks.
Charge everyday expenses
A low-interest business credit card is one type of credit card you might use to conveniently manage your daily business expenses, from paying vendors to affording office supplies. For added value, consider credit cards with no annual fees and free tools to help you manage your finances. For example, a CIBC bizline® card could help you oversee your spending with an online dashboard that could help you create a customized monthly budget and stay on top of your cash flow, all with no annual fee for up to nine cards for your team.
Earn rewards
With a business credit card, you may be able to earn rewards like points, cash back and statement credits. You can collect these rewards as you use your card. Then, use your rewards to offset business travel expenses, get upgrades and discounts, and take advantage of perks like travel insurance and airport lounges while you’re on the road.
Lines of credit
Similar to a credit card, a line of credit has a credit limit against which you can borrow as much or as little as you need. The main difference is that there is also a limit on how long you can borrow for, called the draw period. You can keep withdrawing and repaying money during the draw period until it ends. Then, you’ll enter the repayment period, where you’ll repay your balance in monthly installments with interest. You can’t withdraw money during the repayment period.
Business lines of credit can be secured, meaning they require collateral, or unsecured. Because the collateral reduces the risk to the lender, secured lines of credit may offer higher borrowing amounts and lower interest rates.
Use for larger expenses
A line of credit typically has a higher credit limit than a credit card. If the amount of money you need to spend would max out your credit card, a business line of credit may be a better fit. You might use a line of credit for your SME to:
- Purchase inventory
- Cover payroll and operational expenses when cash flow fluctuates
- Act as a financial safety net during periods of economic uncertainty
Use flexibly
A line of credit can be a cost-effective way to extend your buying power when you’re not sure exactly how much money you’ll need. Unlike with a loan, where you receive a lump sum upfront and owe interest on the full amount, you only pay interest on the amount you borrow from a line of credit.
Use the right financing tools at the right time
Having access to credit doesn’t just increase your spending power now. Using credit wisely is an important way to strengthen your borrowing power in the future. That’s why it’s so important to choose the right credit solution for your needs.
There are different ways to use a business credit card and a line of credit, and you may decide to use both options for different purposes. A business credit card is a convenient way to pay for everyday expenses, but a line of credit might help your SME cover larger costs over a longer period of time.
Knowing how to use both of these financial tools could help you afford your business costs in the short term and expand and grow in the years ahead.
