Business lines of credit and credit cards have traditionally and effectively been used to finance small business operations. The similarities between these two types of financing are as follows:
Both, business lines of credit and credit cards are revolving
Both charge interest only on outstanding balances
Both have pre-determined borrowing limits
The primary difference between the two, however is that, credit lines tend to be more cost effective than credit cards by virtue of having lower interest rates and higher available limits. However, both methods of financing have their benefits and disadvantages and are not mutually exclusive. Along with a business line of credit you could also have one or more business credit cards especially for business expenses.
Benefits of a credit card as a financial instrument in small businesses:
Credit cards are very convenient as you can use it to charge all expenses instantly, unlike a credit line where you have to ask your bank to transfer funds to your checking account every time you need to make a purchase.
Record keeping is very easy as the bank will send you a statement regularly every month. It allows for you to check and track your expenses for tax purposes as well.
Moreover, with the increasing competition in the plastic industry, credit cards also come with perks like air miles, travel insurance, warranty extensions, and discounts on rental cars, hotels and gas. These benefits come in handy for a small business and help you to save costs.
Credit cards offer grace periods on purchases, which typically extend up to 25 days. Thus, if you are regular and pay your balances in full each month, you could avoid all unnecessary interest charges.
Benefits of a business line of credit:
A business credit line offers a maximum credit limit and flexible repayment schedule. Monies can be withdrawn by the customer up to the maximum limit, and the business credit line is replenished with regular, minimum payments.
With a business credit line, no new documents are required each time a credit advance is made.
In a business credit line you write yourself an advance, in effect, by using the home equity checks supplied by the lender or the bank.