Credit Card vs Line of Credit: Which is Better for Small Business Owners?

As many of us heard from our parents and other mentors, borrowing money from a financial institution comes with responsibility and should be taken seriously. Managing how you pay back that money impacts your credit score: hopefully for the better, but repayment issues can lower that score.

The same applies to a business. Most small businesses, specifically, rely on outside money to nurture growth and two regular forms of this helpful funding are a line of credit and a credit card, respectively. 

According to Investopedia, a line of credit is a “borrowing limit that can be tapped into at any time. The borrower can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit.” A line of credit is different from what’s called a “conventional” loan where you borrow a certain amount and pay it back in fixed installments.

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On the other hand, a credit card lets you make purchases that you pay back at least a minimum amount (but, as you likely know, you can pay more than that, including the full balance). 

Depending on the borrower's qualifications and credit scores, both the line of credit and the credit cards can either be secured or unsecured debt; learn more about the definitions of these types in this article here.

What qualifications do you need to apply for a credit card or a line of credit?

Applying for a Credit Card

To qualify for a business credit card, there are the financial and legal requirements you need to meet. Here are the basic requirements for applying for a credit card:

  • You should have a source of income and report total annual income
  • Be able to detail how long your business has operated and the number of employees
  • You should know your annual business revenue and how much you spend each month
  • The applicant must have a positive personal credit score and make a personal guarantee on the money borrowed
  • You need to have a legal business name and a social security number
  • Have at least 21 years old or 18 years with a parent's permission
  • Your business needs to have a registered legal name, contact information, and chosen industry type
  • The business also needs to be established as a legal entity or legal structure, like an LLC, corporation, partnership, government, nonprofit, or sole proprietorship (freelancer)
  • You need a federal tax ID, or an EIN (employer identification number)

And here are the steps to applying for a business credit card, according to the financial gurus at Nerdwallet:

  1. Explore your options and decide which business credit card is right for you.
  2. Check your credit score to determine what cards you’ll likely qualify for.
  3. Prepare the necessary business credit card requirements and fill out an application.
  4. Submit your application and wait for the approval.
  5. Activate your card and use it responsibly.

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Line of credit

To qualify for a line of credit:

  • You should have a time of at least three months at minimum in business.
  • To qualify, you also need to show proof of business revenue.

How do you apply for a credit card and line of credit?

The first step in a credit card application is to find a fitting credit card for your needs. After selecting a suitable credit card for you, you provide details about your income, personal information, and information about authorized users. The personal information may be your name, date of birth, housing situation, social security number, time at current residence, and your housing situation.

Applying the line of credit is almost similar to that of a credit line, though they mainly consider your credit scores.

How applying for LOC affects your credit score

Your credit reports may face a hard inquiry from the lender. As a result, your credit scores may be temporarily lowered.

Making frequent late payments also lowers your health credit card.

Also, if you use a tiny portion of the amount available or fail to use your available credit, it may improve your credit scores. It may lower your rate of credit utilization.

Comparing the pros and cons of credit card vs line of credit

  • A credit card is usually higher and comes with lower credit limits than line of credit.
  • LOC deal in cash only, while credit cards charge fees for cash advances and high APRs.
  • Lines of credit are unsecured, hence they often require to be secured, while credit cards are always unsecured.
  • Lines of credit do not offer rewards programs that are provided by credit cards.

Best practices for making payments

With the current financial crisis, it is not easy to manage monthly repayments. For you to efficiently plan and strategize your loan repayments, you have the following tips for you:

  • Create a budget
  • Consolidate your loans
  • Setting up a direct debit
  • Keep the refinancing option open
  • Keep checking the balance on your account
  • For monthly payments, choose the proper account

Alternatives to credit

If the line of credit and credit card are not a good option for you, you can explore other borrowing alternatives. They include:

  • Rent what you need
  • Looking for a direct payment plan
  • Working on saving
  • Finding community resources

You realize that both the credit card and line of credit are almost similar types of revolving credit. They both approve you to receive up to a specific limit. 

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