Why A Business Line Of Credit Might Be Better Than Small Business Credit Cards
Accumulating expenses is common, and businesses typically require various funding sources. Two common funding sources in business banking are small business credit cards and a business line of credit.
While small business credit cards are generally better suited for everyday business purchases, a business line of credit may be better for flexible, short-term cash flow business expenses.
However, various advantages make a business line of credit more beneficial than small business credit cards. This guide discusses their definitions, benefits, and main differences.
Small Business Credit Cards Defined
Small business credit cards are suitable for everyday business spending. Many business credit cards offer chances to earn bonus points from reward programs based on eligible purchases plus interest-free days.
Unlike corporate credit cards for larger businesses, small business credit cards can help business owners manage daily operations. Similar to personal credit cards, these cards can provide cash advances also.
However, a small business credit card often has higher interest rates than a personal credit card due to how business credit card debt is unsecured, causing a larger risk to a credit card provider.
Despite the higher interest rate, small business credit cards usually also have higher credit limits than personal credit cards, allowing better business cash flow management for the business owner.
A business credit card typically provides various rewards and perks. The best business credit cards may give frequent flyer points and discounts, encouraging cardholders to earn rewards points.
When choosing between different small business credit cards, business owners may want to consider the following factors:
- Annual fee
- Interest rate
- Available rewards programs
- Credit limit
- Eligibility criteria
- Expense tracking features
- Included accounting software
- Business credit card liability
- Personal liability
- Whether the card provider has an Australian credit licence
- Potential interest-free period
The best business credit card for your needs can help streamline business-related expenses.
Small Business Credit Card Eligibility Requirements
When applying for a new business credit card, check the following typical requirements:
- Registered for goods and business tax (GST)
- Turnover of at least $75,000 per annum
- Have a registered business address in Australia
- 18 years old and above
- Australian citizen
- Registered ABN for at least 12 months
NOTE: Some card providers may have different requirements to set up your business credit card account.
Business Line Of Credit Defined
Similar to a business credit card, a business line of credit provides company owners with revolving funds. Moreover, a line of credit typically provides business owners with a credit amount up to a certain limit. They may withdraw funds from that credit line and only pay interest on the used amount.
The line of credit is renewable. Repaying funds refreshes the limit, like reaching the limit for personal cards.
There are two types of business lines of credit:
- Secured line of credit: A secured line of credit provides better loan terms and lower interest rates but requires collateral.
- Unsecured line of credit: An unsecured line of credit requires a good financial profile and credit history. However, the interest rates are typically higher since there’s not collateral attached to the credit facility.
Seasonal businesses may benefit from a line of credit as it will provide them with continuous funds to cover costs during off-season periods.
However, they typically cannot be used for long-term expense coverage. They may also incur costs like an annual fee and do not have interest-free days.
Business Line Of Credit Eligibility Requirements
Several requirements are needed to approve a business line of credit. Ensure you meet these typical requirements:
- Australian Business Number
- Bank statements
- Balance sheets
- Income statements
- The business is GST-registered
- The business has been operating for at least six months
- Australian citizen or permanent resident
Before compiling the above requirements, contact Australian credit providers to check whether they require other documents.
How They Differ
Business credit cards and lines of credit are beneficial for providing funding in various ways. However, understanding their differences can help business owners decide which option is best suited for their needs.
From varying credit limits to fees and other business perks, familiarising yourself with these comparisons might help you make better financial decisions.
Credit Limits
One of the main differences between a business credit card and a line of credit is the credit limit you can use for eligible business spending.
A business credit card has a fixed limit given by the card provider. You can use the card until that limit is reached, and exceeding it may incur penalties like an increased interest rate, potentially making it a business liability.
In contrast, a business line of credit has a revolving limit. You can use the given funds within the credit until its limit, repay the used amount, and redo the process. Unlike a card, you typically pay interest on the amount spent, not the entire credit limit.
With these limits, some owners may use a card for smaller expenses, while lines of credit are suitable for larger purchases and ongoing cash flow management.
Interest Rate Ranges
Since lines of credit may be either secured or unsecured, they generally have higher interest rates than a business credit card. However, this may increase or decrease depending on the card provider.
NOTE: A key advantage of business credit cards from some card providers is interest-free days, where the required interest decreases if you pay off your balances regularly during each statement period.
Associated Fees
Most business credit cards and corporate cards incur the following fees:
- Annual fees
- Foreign transaction fees
- Cash advance fees
- Balance transfer fee
A business line of credit generally has these included fees:
- Draw fees
- Annual fees
- Origination fee
- Interest on the borrowed amount
- Monthly payments based on the borrowed amount
Before getting either option, consider checking whether your business can handle the annual fee and other associated fees.
Rewards And Perks Offered
There are many rewards business credit cards offer that lines of credit do not.
Depending on your rewards points balance, they may offer travel insurance, discounts, and more. You can earn points for every dollar spent on business expenses with the card.
Premium business credit cards may have more chances for bonus points. Unlike business credit cards, lines of credit do not offer rewards or perks.
Conclusion
With their flexibility and revolving credit, business lines of credit can be advantageous for small businesses to manage cash flow.
Before getting a line of credit, consider the annual fee, interest rate, and eligible spending limits with your chosen lender.
If you are curious about financial resources on business loans, visit Lumi to discover loan options for your business.
If your business needs a line of credit, check out Lumi’s Game-Changing Line Of Credit. It’s the ultimate money-on-demand solution for your business’s cash flow needs. The best part? It provides full flexibility at zero risk, meaning you can spend as much or as little as needed and only pay for what you actually use. Compared to other lenders there are no additional or ongoing fees.
