When small-business owners want to cut costs, they often focus on areas like marketing and inventory. But they too often ignore another major cost: the interest and fees associated with financing.
In many cases, your financing costs will involve either a small-business credit card or a line of credit. Both can be convenient, but choosing the right one could make a significant difference to your bottom line.
Putting It on Plastic
If your business requires a lot of travel, a card that provides cash-back incentives could be your best bet. Other cards designed for businesses offer discounts on purchases such as office supplies and Internet service. These bonus programs can not only save you money but give you inexpensive and creative ways to reward employees. For example, you can redeem points for a gift card and award it to an employee who has gone above and beyond.
Credit cards can also provide low-cost, immediate financing. For example, some have no annual fee and offers 0% APR for the first 12 months. Other cards that don’t have APR deals can still drive down financing costs. There are some that provide an unlimited 2% cash back on purchases.
In a hurry? In most cases opening a business card account is fast. If you need financing with as little paperwork as possible, a card might be your best option. Also, if you’re in the early stages of business ownership, other financing avenues may not be open to you yet. However, if you have a respectable credit score, a business credit card is easily in reach.
Finally, a credit card is a smart choice if your goal is to build strong credit for your business and to do so quickly. By showing you’ve used the card responsibly, you’ll be in a better position to earn larger loans at lower rates later.
The bottom line: If your business is new, and time is of the essence, go with a credit card.
Putting It on the Line
A line of credit is a popular choice for many companies because of its simplicity. Banks issuing a line will approve your business up to a certain amount. You can then draw on that money as needed. Expect to pay an interest rate ranging from 4.25% to 11.25%. The rate on a line of credit is almost always lower than that on a credit card.
A line of credit can come in two forms, secured or unsecured. A secured line of credit requires collateral. The bank wants to know that you have other assets in case you’re unable to repay the loan. A bank may also ask for a personal guarantee that requires the owner to pay off the line if the business fails.
With an unsecured line, you don't need to pledge any collateral. You will, however, have to prove that your business is in good financial shape. The bank may want to see balance sheets, debt-to-income ratios, and receivables, among other information.
Both secured and unsecured lines are most appropriate for a business that’s been operating for at least a few years. Pledging assets or proving economic viability is difficult if you’re still in start-up mode.
A cash advance on a credit card is similar to a line of credit to some extent. However, credit card issuers limit cash advances to a smaller amount than the total limit on your card. Plus, they charge additional cash advance fees, often ranging from 2% to 5%. A few cards offer discounts on these fees, but not many. Also, expect to pay a higher interest rate on an advance than on purchases you make with the card.
The bottom line: If you have an established business with a record of profitability, go with a line of credit.