Both lines of credit and borrowing money on your credit cards can be effective ways to finance small business operations. Both are revolving and charge interest only on outstanding balances. And both have predetermined borrowing limits. But there are big differences in terms of cost, convenience and risk.
The major difference is that credit lines usually have lower interest rates and higher available limits. Commercial lines of credit are therefore more cost effective than credit cards. But that’s not to say that credit cards don’t have advantages-especially in terms of convenience.
Instead of asking your bank to transfer funds from your credit line to your checking account-to write a check for office supplies, for example-you can just whip out your plastic and charge it. Another credit card plus is record keeping. Monthly statements are a handy way to track expenses for general record keeping and tax purposes.
Credit cards also frequently come with perks like air miles, travel insurance, warranty extensions and discounts on rental cars, hotels and gas. If these extras are valuable to you and your company, credit cards make a lot of sense.
Credit cards also offer grace periods on purchases, usually 25 days. That means you can avoid interest charges altogether if you pay your balance in full each month.
Fortunately, credit lines and credit cards aren’t mutually exclusive. You will certainly want to obtain at least one credit card for business expenses. But you may also want a line of credit for larger purchases and to draw upon during periods of irregular cash flow.