Challenges and entrepreneurs are not strangers. When the most unexpected circumstances occur, an entrepreneur’s best bet is to have access to additional working capital.

Fortunately, there are two ways they can get fast cash: a business credit card and small business line of credit. These types of business loans can help them get a firm hold of their financing needs which can help them weather pressing issues.

A line of credit (LOC) and a credit card are two forms of business financing that provides a lot of perks for businesses. Once your application is approved, lenders will let you borrow money and only pay back what you owe plus the interest. Business LOCs and credit cards offer a great degree of flexibility, giving entrepreneurs the freedom of using the funds in a way and manner that suits them best.

Although a line of credit and credit card works similarly, they do have some differences between them. So, how do you know which one best fits your company’s current needs?

Here are some tips that will help you decide:

How a Business Credit Card Works

When you get a business credit card, you will be provided with a card you can use to pay for specific business purchases. You simply give your credit card to the vendor and they will swipe it in a machine and the amount will be reflected on your account. You can then repay the principal plus the interest on the amount you borrowed.

With credit cards, the entrepreneurs are given a maximum credit limit. For instance, if the creditor sets a $10,000 limit, you can make purchases, including interest up to that amount. So, even if your combined purchases didn’t reach the limit, the interest can use up available credit.

Credit card companies usually require the applicant’s personal credit history as one of the basic requirements. It is an unsecured loan so you may have to present a good credit rating. Like personal credit cards, you also have a chance to earn points and other perks which you can use as discounts or convert into travel miles, whichever suits your company best.

Best Uses for Business Credit Cards

Business credit cards, on the other hand, are the easiest financing solution for both start-up and established businesses. When used responsibly, this can lead to significant ROIs. Here are some of the uses of business credit cards:

• Helps in building a credit background for start-up companies
• Finances important business equipment or supply purchases
• Pays for employees’ business expenses
• Earns rewards which can be useful for the business

How Line of Credit (LOC) Works

When compared to a traditional bank loan, a line of credit provides borrowers with greater flexibility. Unlike other business loans where you receive a lump sum of money upfront, a line of credit works by giving you the freedom to choose how much money you want to borrow. Typically, lenders will open a line of credit and assign a credit limit which is similar to getting a credit card.

With a line of credit, you’re given access to a specific amount of money, and then you can take out what you need, whenever you need it. Once you’ve repaid your balance and your credit limit is restored, you can then borrow the money again if you need it.

The lending company will be the ones to establish the terms for your loan after they have performed a thorough assessment of your financial documents. This will include the credit limit, interest rates, amount of payments, and period for the payments.

With a line of credit, you have the choice of applying for a secured or unsecured one. The former may require a guarantee, such as cash deposits. With an unsecured line of credit, you may face higher interest rates and a lesser credit limit.

Best Uses for Lines of Credit

As with credit cards, line of credit also provides you with the cash you need to pay for specific business expenses. The difference is, instead of products and services, you get cash upfront. Here are some important uses for a business line of credit:

• Helps build credit scores for start-up companies
• Pay suppliers who don’t accept credit card payments
• Funding business investments like real estate or building renovations
• Pay existing payables during times when a company faces cash flow issues

Business Credit Card vs. Small Business Line of Credit: Which one is Right for Your Current Needs?

Business credit cards and lines of credit are good financing options that offer many benefits to businesses. However, these types of loans are only useful depending on the current needs of your company.

Business credit cards are usually used for one-time purchases such as office equipment and are not suitable for large investments. A small business line of credit, on the other hand, can offer you a revolving line in which you can withdraw cash whenever needed, such as office repairs and renovations.

There are also some instances where business owners will benefit from both credit cards and lines of credit.

When this is the case, entrepreneurs should apply for both. Although it carries a risk, using these financing options responsibly can lead to greater cash flow stability.

This, in turn, can contribute to the future success of a business.