Cost vs. Convenience: Should you use a credit card or a line of credit to grow your business?

July 07, 2016

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Everyone is busy these days, and business owners can be especially short on time. Between managing all the hundreds of activities required every day to manage a successful business, finding a few minutes to look critically at any individual aspect can be a challenge.

That’s why when a credit card offer shows up, especially in a pivotal moment when they need some extra money to help the business move forward, many business owners choose to take that opportunity. The convenience and ready access to funds may seem ideal, but relying on credit cards to grow a business can really hurt in the long run.

One reason for this should be familiar to anyone with an understanding of credit cards: interest rates. With double-digit rates on many credit cards, the fees alone can quickly drown a growing business. A line of credit, on the other hand, is much better for your bottom line, as it will come with significantly lower interest rates.

Even if a business owner chooses to use credit cards in the short term, there is a high likelihood that a line of credit will become necessary if the business grows and becomes successful. When applying for a line of credit, a history of depending on credit cards can indicate to your banker that your business is in trouble. It shows that you have insufficient working capital, and it’s an indicator that you’re taking the easy route instead of developing good accounting habits.

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That’s because many bankers know that relying on credit cards can develop or mask poor financial habits. Because a credit card application doesn't require several years’ worth of financial records, business owners who choose that option aren't incentivized to be diligent about wise record-keeping. An unwise business owner can quickly become dependent on credit cards to keep the business afloat and never develop the financial discipline that a line of credit would require.

If you can maintain strong financial habits over the course of a few years of doing business, you stand a much better chance of getting a line of credit from your bank when you need it. But keeping timely and complete financial records isn’t just necessary when applying for a line of credit; it’s wise for a host of reasons. Bad financial habits cause the downfall of more businesses than anything else.

It’s important to know where all your money is so that you can keep your company running smoothly and efficiently with no major hiccups. When the time comes to prepare tax returns, if you’ve kept your records up to date, the bulk of the work is already done. Like breathing, these accounting activities should be automatic and integral to a wise business owner’s daily behavior.

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In short: while a credit card is convenient at the moment, if you have developed the good record-keeping habits any business owner should have, you can borrow money for about a third the cost with a line of credit. As an added benefit, working with your bank to secure a line of credit will result in a closer and more supportive banking relationship.

Some of the best candidates for a line of credit are businesses with a sales cycle including inventory and accounts receivable. A manufacturer who requires raw materials to create their product or a construction company, for instance, would be great fits. A line of credit would allow them to purchase the necessary materials or pay employees before the product is ready for sale.

A line of credit can also be beneficial for businesses with a seasonal cash crunch. This includes retailers whose business picks up during the holiday season, or professional firms (such as CPAs and attorneys) who see one specific time of year with high accounts receivable. Access to capital allows this type of business to pay employees and continue running smoothly while awaiting payment from customers.  

In either case, business owners who have maintained strong records and can show a minimum of three years of financial information and tax returns are more likely to secure a line of credit. Taking the time to establish accounting habits from the outset of your business will help your day-to-day operations run optimally and will set you up for success when you need a line of credit to help you reach the next level.

If you’d like to learn more about how a line of credit can benefit your business, please feel free to reach out to us to learn more.

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Topics: Bank Products

Ed Lette

Business Bank of Texas

Ed Lette is a Founder of Business Bank of Texas. Serving as a licensed CPA since 1983, Ed’s extensive experience in the banking industry has led him to become the founding president of four national bank charters including Business Bank of Texas, N.A., and the chief financial officer of five national banks during his 45 year career. Ed serves as director of the Texas Bankers Association District 4, chairman of the Executive Advisory Council to the School of Business at Texas Lutheran University, and is a life member of the Texas Association of Business.
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