The Loans Canada team sits down with Gary Schwartz of the Canadian Lenders Association to talk about open banking.
Business Borrowing: Line of Credit vs. Credit Cards
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All businesses, small or large, require a steady source a capital to build inventory and cover the costs of daily operations. As an entrepreneur it’s probably your number one goal to always have enough money to keep your business running smoothly. You are therefore left with a decision to make, what source of funding is most viable for you and your business? While this may seem like a difficult decision, understanding your options will allow you to make the best choice possible. A line of credit and a credit card are two of the most utilized lending options for small businesses. The operation of these two platforms, however, differs which is what you should keep in mind before adopting either. In this, we look at the parameters of the two platforms and how they impact your business.
Option 1: Credit Cards
Credit cards are arguably the quickest cash source for small businesses or any type of business for that matter. They’re typically easy to get and even easier to use, if your business needs any type office supplies, extra inventory or even equipment a credit card can provide the capital you need to purchase any of these. Depending on your business’s needs a credit card could be a great option or it could put your finances in danger, here are the pros and cons of using a credit card as a borrowing option for your business:
- The convenience of a credit card is undeniable. Most businesses or business owners are approved for a credit card whether they absolutely need one or not. This makes it extremely easy to simply charge any purchase, you as business owner, needs to make.
- Aside from the original approval process, there is no need to seek approval from a bank every time or need some extra capital. Your credit card is yours and therefore you can use it whenever you want, to purchase whatever need, no need to ask for approval.
- If efficiency is something you strive for then a credit card might be your best option for borrowing. With a credit card you can choose what you need then swipe your card, doesn’t get more efficient than that.
- Credit cards also often come with reward programs; this can make using a credit card lucrative depending on the perks of your program.
- While credit cards are easy and convenient to use, it’s also very easy to rack up a lot of debt using them. The availability of funds could make spending a little too convenient which could have detrimental effects on your business.
- Interest rates are often high on credit cards and if you happen to spend too much or miss a payment you could end up wasting a lot of money.
- Finally creating too much debt with your business’s credit card could put the future income of your business at risk as you’ll need to us your profit to settle your debts.
As with any type of borrowing there are pros and there are cons. A business credit card can be a great financial tool that you can use to build and grow your business; it just needs to be uses responsibly.
Option 2: Line of Credit
A line of credit is another great option for your business’s daily expenses and needs. It offers a flexible mode of borrowing so you can utilize the cash you need without the hassle of applying for a new loan every time you need to make a purchase. A line of credit offers a pre-set amount that you can spend at your own discretion as long as it is paid back. To help you decide if a line of credit is the best option for you and your business here are the pros and cons:
- Flexibility is probably the number one advantage of a line of credit. You’ll have a large amount of money at your disposal but you only have to spend what you need. You can spend your entire line of credit, pay it back and then spend it again. Or spend only a small percentage and simply use the remainder as an emergency fund.
- Lines of credit typically have low interest rates and the great thing is you’ll only be charged interest on the amount you spend. So if you have a $25,000 line of credit but only spend $5,000 you’ll only be charged interest on $5,000.
- A line of credit is particularly useful in a situation where you have a regular expense but the amount is always different. A line of credit will allow you to always be able to afford the expense without have to worry about bank account or credit card balances.
- Much like a credit card, one of the major downsides of having a large amount of credit available to you to spend is debt. While a line of credit is a great option to have as a business owner it can also be extremely easy to spend too much and then not be able to pay it back.
- There is no grace period when it comes to a line of credit. Once you’ve started to spend using your line of credit you’ll need to start repaying it right away.
A line of credit is an invaluable financial tool for all types of businesses, small or large. It can help you cover your business’s daily expense and cover any unexpected costs you might come across.
The Bottom Line
Like all business decisions, the borrowing option you chose to go with is completely up to you as the owner of the business. Both a credit card and a line of credit can help you grow your business, what you need to do is decide which option is the best choice for your unique situation.
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