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Updated: 28 August 2024
Having sufficient capital is often a top-level requirement for growth and maintaining healthy operations. Whether you’re looking to invest in new inventory, pay everyday expenses or simply cover a temporary cash flow gap, an influx of funds can go a long way.
Two popular financing instruments are business credit cards and lines of credit. While they share some similarities in providing access to capital on revolving terms, there are distinct differences to consider based on your particular needs and spending habits.
Here, we take a closer look at how business credit cards and lines of credit compare when it comes to financing growth.
A business credit card operates much like a consumer credit card, but with more premium rewards and higher credit limits. Businesses can put expenses and capital outlays on the card, then pay off the balance later according to the card’s billing cycle and interest rate terms.
Using business credit cards can offer a range of advantages for your company, from rewards to improved cash flow.
Most business credit card issuers incentivise putting expenses on the card by offering enticing rewards programs.
Cashback is a popular option, allowing you to earn a percentage back on every penny spent. For example, the Funding Circle Cashback business credit card provides an industry-leading 2% cashback for the first 6 months, up to £2,000 cashback. Then, you’ll get 1% unlimited cashback after that.
Rewards may also come in the form of travel points, discounts on business services and other perks. These rewards represent found revenue for simply charging your operational expenditures to the card.
Another advantage of using a dedicated business credit card is the ability to build your company’s official credit profile and history. Demonstrating responsible repayment habits over time typically means future loan applications and other financing needs can become much easier.
Quality business credit cards will offer a generous interest-free grace period (sometimes 40-plus days) to pay off new charges before interest applies. This added flexibility on your payables can go a long way in smoothing out cash flow hiccups.
Additionally, being able to revolve a balance from month to month provides a financing cushion if your operating capital falls short temporarily. Just be mindful of interest charges on revolving balances.
While business credit cards have their upsides, they also come with some potential considerations:
Because business credit cards represent a line of unsecured debt for the issuer, the qualification standards tend to be more stringent than personal cards. Even if you have excellent personal credit, factors like business revenue, time in operation and financial health will likely be scrutinised.
No matter how high the stated limit, you’ll still be bound by a maximum credit cap with a traditional card. Once you hit that limit, you won’t be able to continue financing growth through that account. Fortunately, with the Funding Circle, your business can borrow up to £250,000 with our business credit cards—a healthy limit for supporting your company’s expansion and operational needs.
For purchases not paid off during the grace period, interest finance charges can add up quickly depending on the annual percentage rate (APR). Using cards strictly for financing and revolving balances long-term can end up being more costly.
A business line of credit gives you access to a pool of capital from a lender that you can use as needed, up to the credit limit, on a revolving basis. Much like a business credit card, you’ll only pay interest on the amount drawn at any given time with most lines of credit. With FlexiPay, however, it’s a simple flat fee on each transaction, with rates starting from 3.9%.
Access to substantial funds can be helpful for many businesses, providing flexibility and the ability to capitalise on opportunities.
One of the chief advantages of lines of credit is their typically higher capital limits compared to credit cards. Accessing a line of credit that’s six figures can open up far more financing firepower for investments, working capital needs or major growth initiatives.
With a line of credit like FlexiPay, you can transfer funds directly from your card to suppliers or pay bills online. This direct access to capital provides immense flexibility when cash flow is tight or spontaneous growth opportunities arise.
Many lines of credit allow you to customise your repayment schedule based on your cash flow situation, rather than enforcing strict billing periods. FlexiPay offers repayment windows of 1, 3, 6, 9 or 12, to give you ultimate flexibility.
Business lines of credit are often promoted specifically for financing growth. Lenders expect the capital to go towards investing in future income-producing activities or addressing temporary working capital deficits—not just for ongoing operational expenses.
Like any financing vehicle, a line of credit also comes with some potential considerations.
Because lines of credit represent a higher-risk unsecured debt product for lenders, their annual interest rates may exceed those on credit cards, especially for subprime borrowers. Unless, of course, you have a FlexiPay account, which doesn’t charge interest. Instead, you pay a small fee on each transaction.
In addition to interest charges, lines of credit can also come with various annual fees, maintenance fees, draw fees and other expenses you’ll want to scope out. With FlexiPay, however, there’s no annual fee, and you only pay a small fee per transaction.
Some lenders require lines of credit above a certain limit to come with personal guarantees from the business owners. This holds you individually responsible for repaying any outstanding balances if the business defaults.
Lenders can revoke access to your line of credit if they become concerned about inability to repay, even if you haven’t defaulted. This is a risk of having access to revolving debt instruments.
Chances are, a combination of business credit cards and lines of credit provide the optimal boost for financing growth while maintaining operational liquidity. Credit cards are ideal for everyday expenses and building a credit footprint, with their generous rewards programs paying you for your usual spending habits.
Lines of credit, on the other hand, may allow direct injections of capital for larger investments and growth initiatives, with more flexible repayment scheduling. Together, these financing solutions can enable you to grow strategically while reserving steady cash flow.
Of course, the right option for you depends on factors like your creditworthiness and anticipated financing needs, as well as business stage and existing cash flow cycles. But viewing business credit cards and lines of credit as complementary resources gives you the most flexibility in charting your growth trajectory.
No matter which financing avenue you choose, managing capital responsibly while avoiding debt overload should always be a top priority. With discipline and a solid plan for generating returns, taking advantage of accessible business financing can open up a world of growth opportunities tomorrow.
Find out more about our FlexiPay and Cashback business credit cards to see how they can support your financial strategy, enhance purchasing power and provide the flexibility you need to achieve your business goals.
28/08/24: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.
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