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Business Line of Credit vs. Business Credit Cards vs. Merchant Cash Advance

As a business owner there will come a time when working capital is needed. Whether you are adding a new location, need to pay staff during the off season, or need to purchase additional inventory, you are probably considering several different financing options. In the below article, we will discuss the differences as well as the pros and cons of business lines of credit, business credit cards, and merchant cash advances.


What is the Difference Between a Business Credit Card and a Business Line of Credit?


Essentially, credit cards and lines of credit are similar in that they give business owners the ability to cover expenses when needed. Both products only charge interest on what you use, rather than your total credit limit, but the main difference is the way that the interest is structured.


Lines of credit typically have lower interest rates and better amortization schedules. They give you the ability to instantly access cash as needed to cover expenses and manage working capital. Credit cards are primarily transactional, meaning you can only use them to make purchases. And while it is possible to borrow cash using a credit card it can be very expensive.


What is a Business Line of Credit?


A business line of credit functions much like a credit card but is better suited for small business owners as you can easily withdraw cash without steep cash advance fees that credit cards carry. Business lines of credit are also better for tax purposes as you can write off interest.


A business line of credit gives you access to cash whenever you need it as opposed to a term loan which provides one lump sum of cash upfront. A business line of credit allows you to borrow cash from your established credit limit as needed and only pay interest on what you borrow. Because a business line of credit is a revolving line of credit, the more of your balance you pay down, the more cash there is available to continue borrowing. There are no restrictions on how you use the funds so you can use them to bridge cash flow gaps during seasonal slumps or expand your operations.


Pros of a Business Line of Credit

  • Flexible borrowing - you can borrow as much or as little as you need up to your limit

  • Only pay interest on what you borrow

  • Helps builds credit score

  • Provides access to instant cash flow

Cons of a Business Line of Credit

  • Requires a good credit score

  • Typically have high upfront fees

  • Can negatively affect your credit score if you default


What is a Business Credit Card?


A business credit card has all the same functionality of a personal credit card, however they are issued to a business owner and typically have higher credit limits and lower interest rates. If you already have a business credit card, it can be a good way to get working capital for your business. However, if you have bad credit, you may not be able to qualify for a new business credit card


Pros of a Business Credit Card

  • Can earn rewards such as cash back

  • Can help build your credit score

  • Can get a lower APR if you have good credit

  • You decide how much to pay each month

Cons of a Business Credit Card

  • Rates are variable

  • Come with high interest rates if you only make the minimum payments

  • Repayment is less flexible, compared to a merchant cash advance

  • Can negatively affect your credit score

Remember, business credit cards are a good option only if you already have established credit.


What is a Merchant Cash Advance?


A merchant cash advance is different than business lines of credit as it is not a loan. Instead, a merchant cash advance allows a business to receive an advance based on their future credit card sales. The advance is repaid daily or weekly in the form of a small percentage of the total credit card sales. Because a merchant cash advance is repaid based on future sales, repayment can fluctuate with your business results. If business is slow, your balance will decrease at a slower rate. However, if business is doing well you can quickly pay off the advance.


Pros of a Merchant Cash Advance

  • Flexible repayment based on your sales volume

  • Funding is delivered quickly

  • Does not require a high credit score, and in most cases your credit score is not required

Cons of a Merchant Cash Advance

  • Some merchant cash advance companies have high fees

  • Bankruptcy may preclude application for a merchant cash advance

  • Factor rates may be high


What is the Best Way to Get Cash Now?


If you are considering getting a business credit card or a business line of credit you should review the different fees associated with each. Remember, some credit cards have steep interest rates and high annual fees. And while credit lines can be useful, they can also be risky. However, if you need more flexibility a merchant cash advance might be the best option especially if your credit score is below average.


Before you commit to any type of alternative financing, it’s critical to do your due diligent. It is always best to consult with a professional to review and discuss your options.


If you think your business could benefit from any alternative funding source, consider applying through ACR Funding. We have years of experience in providing alternative funding solutions for businesses of all types. We offer approvals within 24 hours and do not charge an application fee. Contact one of our representatives today to learn more about our services.