Line of Credit vs. Business Credit Card

What is the difference between a business credit card, loan, and line of credit? Owning a small business often comes with the occasional need for extra cash, whether that be to initially start the company, keep the company running, or grow and pursue new opportunities. Then comes the question – what is the best option for obtaining this extra funding? Credit card, business loan, a line of credit? Ask mom and dad?

If you have family hook-ups like that, more power to you! If not, here are the pros and cons for that extra dough you need as quickly as possible.

Business Credit Card

This is considered a revolving loan, in that you can spend up to the limit, pay it back, and can spend it again.

PROS

All that is often required for approval is your company’s federal tax ID and a good personal credit score, so it’s fairly easy to qualify and provides fast funding. Picking the right one will also pay out rewards, and allow 0% interest for a certain period of time, without requiring collateral.

CONS

These often come with a high, variable APR after that 0% grace period, possibly extra fees, and it might ask for a personal guarantee.

Small Business Loan

Depending on who you borrow from, the details can vary.

Bank Loan

PROS

When borrowing from a bank, the APR may be lower with fewer fees, a longer repayment time, and a larger loan potential.

CONS

There will be a longer wait time for funding, with a more rigorous approval process, requiring healthy financial records with good revenue and profitability, good personal or business credit, and may require collateral and/or a personal guarantee.

Private Loan

PROS

Better approval rate – many businesses in the business of giving loans often approve more frequently because they do not have other sources of income like banks have. There is also a much quicker approval and funding period, eg. WCM can fund in as little as five business days.

CONS

Interest rates are often steeper than banks because of their more expensive funding sources (private investors).

Business Line of Credit

A line of credit for small business (or large) is also a revolving loan. According to research done on the effect of spending using a credit card vs cash, consumers are often less guarded with a credit card and spend more, and in some cases, they’re willing to spend twice as much on something as they would be with cash. A line of credit is like cash and may promote healthier spending decisions. There is also more flexibility here, as you’re able to write checks and take cash out, whereas with a credit card there are limitations to the cash available to you. With WCM there are no application, maintenance, access or other fees, minimal documentation, approval in as fast as 48 hours, and you can possibly have your line of credit as soon as five business days.

Business Credit Card

Business Loan through banks

Private Small Business Loan

Line of Credit

Mom & Dad

Loan TypeRevolving loanTerm loanTerm loanRevolving loanVisit-us-regularly-forever loan
ProsEasy to qualify, rewards, 0% interest for short period, fast fundingLower interest rates, longer repayment terms, larger loan sizeEasier to qualify, fast fundingTax-deductible interest, minimal documentation, fast funding, helps build credit scoreDepending on the family, little to no monetary interest, no credit score influence
ConsHigh-interest rate after intro period, extra fees possibleDifficult to be approved, delayed funding, collateral likely requiredHigher interest ratesOften have many fees for maintenance and withdrawalsRegularly share progress, with business and personal life at weekly Friday night dinner
Best For…Ongoing working capitalRefinancing debt, large investmentsRefinancing debt, large investmentsWorking capital, short-term investmentsAnything, as long as you like your parents!

 

Summary

Each type of loan has it’s ideal use, from ongoing working capital access to one-time large purchases. A healthy combination of a few of these is what your business will probably utilize over the years. If you’re at a cross road between choosing private vs bank: if you need money quickly and over the short term, you’ll be more likely and more quickly approved through a private institution, and a difference of 4% in interest cost is not much when looking at the grand scheme of growing your business.
If you’d like to see if you’ll be approved for a line of credit or a small business loan, feel free to fill out our simple form and we’ll be in touch shortly!

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