Which is more attractive to you: giving up control of your business or taking on some debt?
If you’re hell-bent on maintaining 100% ownership of your business, you likely view debt-financing as the lesser of two evils. After all, taking on the smallest bit of debt today, and paying it off within a reasonable timeframe, is less expensive in the long-run. Not only do you get to run your business on your terms, you don’t have to pay out dividends or cater to the whims of fussy stakeholders.
The main differences between a line of credit vs a credit card
A line of credit (LOC) is a flexible form of a loan. It’s a defined amount of money you can access as needed, in order to pay business expenses within a fixed time frame. Like many other forms of financing, interest is charged as soon as you use the funds. Lines of credit come with varied repayment schedules and interest rates-though on average interest rates, or APR (annual percentage rates)-are lower compared to credit cards.
LOCs allow instant access to funds and are a great option for freelancers, consultants, and those with irregular monthly income. Much like a loan, you have to walk into a physical bank (maybe dressed in your best) and apply for a line of credit. In comparison to a loan, however, LOCs have lower interest and APR rates. Many LOCs are unsecured, so they don’t require collateral to get funding. They can negatively impact your credit score if you default, so make sure to repay whichever form of credit you decide to take on.
For founders, lines of credit may not be the best credit source. For one, LOCs aren’t tax deductible. So if you take one, it’s worth paying off the “loan” ASAP, rather than keeping it as a revolving way to access funds for repeat purchases. And if you have little or no credit history, it’s harder to be approved for an LOC.
Business credit cards are quite similar to a personal card. The key difference is you use them for purchases on business expenses only. Business credit cards can be used by a group of people, like your executive team, to make payments on software, equipment, operations, and more. Like your personal credit card, a business card also includes annual fees and interest rates that come into effect as soon as you activate and use it.
Much like a LOC, you can access the funds when you need, and there’s a limit to how much you can spend. On the other hand, business credit cards are much easier to access. Instead of having to go into a physical bank, business cards can be applied for and approved online within a very short time frame, then mailed directly to your office. If your credit history is less than perfect, you can even apply for a secured card to negate the risk of defaulting on your payments.
Probably the biggest perk to a business credit card are the rewards. You can get cash back, airline or hotel rewards, and use your rewards for business trips, conferences, trade shows, and other events.
While business credit cards may seem like the best option, they are not without their drawbacks. Credit cards can open the door to security risks, for instance; employees may abuse spending privileges and fraudulent activity is more likely to occur than with a line of credit.
Line of credit vs. a credit card-which is better for business?
No form of funding is inherently bad: it depends on how it’s used. Both a LOC and credit card can impact your credit score. LOCs can be more difficult to access and if not repaid quickly, can end up costing the account holder more money in the long run. Credit cards are much easier to obtain, even with little to no credit history.
Overall, credit cards are the more flexible option for business owners, although they do come with an added need for vigilance against fraud and misuse. Before deciding between a line of credit or business credit card, consider how fast you need financing. If you have the time to pursue an LOC, it may be well worth your while to form a stronger relationship with your bank. If you feel confident your credit card will be used appropriately by your executives, its speed and ease make it the way to go!
Originally published at https://clear.co.