Both lines of credit and borrowing money on your credit cards can be effective ways to finance small business operations. Both are revolving, and charge interest only on outstanding balances. And both have predetermined borrowing limits. However, there are big differences in terms of cost, convenience, and risk.
The major difference is that credit lines usually have lower interest rates and higher available limits. Commercial lines of credit are therefore more cost-effective than credit cards. But that’s not to say that credit cards don’t have advantages — especially in terms of convenience.
Instead of asking your bank to transfer funds from your credit line to your checking account — to write a check for office supplies, for example — you can just whip out your plastic and charge it. Another credit card plus is record-keeping. Monthly statements are a handy way to track expenses for general record-keeping and tax purposes.
Credit cards also frequently come with perks like air miles, travel insurance, warranty extensions, and discounts on rental cars, hotels, and gas. If these extras are valuable to you and your company, credit cards make a lot of sense.
Additionally, credit cards offer grace periods on purchases, usually 25 days. That means you can avoid interest charges altogether if you pay your balance in full each month.
Fortunately, credit lines and credit cards aren’t mutually exclusive. You will certainly want to obtain at least one credit card for business expenses. But you may also want a line of credit for larger purchases and to draw upon during periods of irregular cash flow.
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Building good business credit is the key to financial health. Without it, you’ll have a hard time opening a trade account at a supplier like Office Depot or receiving a business credit card or traditional bank loan. But all that changes once you’ve established a solid credit rating. Get started now.
STEP 1: GET YOUR PERSONAL CREDIT IN ORDER
Without good personal credit, it is very difficult to establish good business credit. Why? Because until your business becomes established, lenders will look closely at your personal character and trustworthiness before extending credit to your new company. You need to think about getting your personal credit in tip-top condition even before starting your business.
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Why is business credit so important? It’s the main way companies evaluate whether they want to do business with you – and on what terms. Companies rely on your creditworthiness to make critical decisions, including whether:
- to sell to you
- to lend you money
- to lease the equipment you need to grow your business
- to help you carry more inventory
- to give you favorable financing rates and terms
To qualify for business credit, you must first complete several basic steps. First, name your business and incorporate it. Most states have made incorporating simple enough that you can probably do it yourself.
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