When financing your business, two popular options often come to mind: a business line of credit and a business credit card. Many business owners use one or both financial tools, but deciding which is right for your business can be confusing.
In this guide, we’ll help you understand the differences between a business line of credit vs credit card and provide insights to help you decide which option—or a combination of options—might be the best fit for your business.
What is a Business Line of Credit?
A business line of credit is a flexible financing option that allows businesses to borrow money up to a certain limit. Unlike a traditional loan, which requires a lump sum upfront, a line of credit lets you draw funds as needed, up to the approved credit limit. This makes it a great tool for managing cash flow and covering unexpected expenses.
Here’s how it works:
- Your lender approves the maximum amount you can borrow.
- You can withdraw any amount up to your limit whenever you need it.
- As you repay what you borrow, those funds become available to borrow again. You only need to pay the interest on the amount you actually use, not the entire credit limit.
Pros and Cons of Business Line of Credit
A small business line of credit can be a valuable resource for many businesses, but it is important to weigh the following pros and cons to see if it aligns with your strategy.
Pros:
Flexibility
You can draw funds whenever you need them and repay at your own pace. This is ideal for businesses with fluctuating cash flow needs or unexpected expenses.
Interest Savings
Unlike a traditional bank loan, where you pay interest on the entire loan amount, with a line of credit, you only pay interest on the funds you actually use. Thus, you save money in the long run.
Manage Cash Flow
A line of credit can help you manage short-term cash flow gaps, such as covering payroll during a slow season or paying for urgent repairs or inventory restocks.
Cons:
Unpredictable Costs
Interest rates on business lines of credit can vary based on market conditions and your creditworthiness, leading to unexpected increases in your borrowing costs.
Qualification Requirements
Securing a business line of credit can take time and effort, particularly for new businesses or those with less established credit histories. Lenders typically require strong financials and a good credit score.
Fees
Additional costs can be associated with a business line of credit, such as annual maintenance fees, draw fees each time funds are accessed, and potentially higher interest rates compared to traditional loans.
What is a Business Credit Card?
A business credit card is a financial tool specifically designed for business expenses. It functions similarly to a personal credit card but comes with features and benefits tailored to meet the needs of business owners. Business credit cards can be used for various purposes, such as purchasing office supplies, covering travel expenses, and managing cash flow.
How does a business credit card work?
- Your business credit card will have a set credit limit, the maximum amount you can spend using the card.
- You can use the card to purchase up to your credit limit. You receive a statement showing your transactions and the total amount owed each month.
- You are required to make at least the minimum payment each month, but you can choose to pay off the entire balance to avoid interest charges.
- If you carry a balance from month to month, interest will be charged on the remaining amount.
- Many business credit cards offer rewards programs, such as cashback, points, travel miles, and other perks like travel insurance and purchase protection.
Pros and Cons of a Business Credit Card
Like any financial product, business credit cards have their advantages and disadvantages. Here’s what you need to know:
Pros:
Convenience
Business credit cards offer a simple way to pay for expenses without carrying cash or writing checks.
Expense Tracking
They provide detailed statements that help you keep track of your business spending and simplify bookkeeping.
Rewards and Perks
Many cards offer rewards programs that give you cashback, points, or travel miles for your spending. Additional perks may include travel insurance, purchase protection, and extended warranties.
Build Business Credit
Using a business credit card responsibly can help build your business credit score, which can be beneficial for securing future financing.
Cons:
High-Interest Rates
Business credit cards often have higher interest rates than other financing options. Carrying a balance can lead to significant interest costs.
Debt Risk
It’s easy to overspend with a credit card, which can lead to accumulating credit card debt that might be challenging to repay.
Fees
Some business credit cards come with annual fees, late payment fees, and other charges that can add up if you’re not careful.
Impact on Personal Credit
Many business credit cards require a personal guarantee, meaning your personal credit can be affected if your business fails to make payments.
A business credit card can be a valuable tool for managing your business finances, providing convenience, rewards, and a way to build business credit. However, it’s important to use it wisely and be aware of the potential downsides to ensure it benefits your business without leading to unnecessary debt.
Business Line of Credit vs Business Credit Card
Choosing between a business line of credit and a business credit card can be challenging because they serve different purposes and offer distinct benefits. Knowing how both options differ from one another can help you make an informed decision that best suits your business needs.
| Feature | Business Line of Credit | Business Credit Card |
|---|---|---|
| Access to Funds | Draw funds as needed, repay and reuse | Make purchases up to credit limit |
| Flexibility | Ideal for larger, ongoing expenses | Best for everyday expenses |
| Interest Rates | Variable rates, generally lower | Higher rates, can be fixed or variable |
| Fees | Annual, draw, and origination fees are possible | Annual, late payment, and transaction fees |
| Repayment Terms | Interest-only payments during the draw period | Monthly minimum payments |
| Credit Building | Builds business credit, no personal guarantee | Builds business credit, often requires a personal guarantee |
| Rewards and Perks | Typically no rewards or perks | Rewards programs and additional perks |
Access to Funds
Business Line of Credit: Provides access to a set amount of funds you can draw from as needed. You only pay interest on the amount you borrow, and as you repay the borrowed funds, your credit limit is restored, allowing you to borrow again.
Business Credit Card: This card offers a revolving line of credit, similar to a personal credit card. You can make purchases up to your credit limit, but you must make at least the minimum payment each month. Interest is charged on any unpaid balance.
Flexibility
Business Line of Credit: This line of credit is ideal for managing cash flow fluctuations and covering unexpected expenses. It offers greater flexibility for larger, ongoing expenses.
Business Credit Card: Best suited for everyday business expenses, such as office supplies, travel, and entertainment. It provides convenience for smaller, frequent purchases.
Interest Rates
Business Line of Credit: Typically has variable interest rates that can change based on market conditions. Interest rates are usually lower than credit card rates, but they fluctuate.
Business Credit Card: Often comes with higher interest rates, which can be fixed or variable. Carrying a balance can lead to significant interest charges over time.
Fees
Business Line of Credit: May include annual maintenance fees, draw fees each time you access funds, and possible origination fees when setting up the line of credit.
Business Credit Card: Can have annual fees, late payment fees, foreign transaction fees, and other charges. Some cards may also offer no annual fee options.
Repayment Terms
Business Line of Credit: Allows you to make interest-only payments during the draw period, with principal repayments required later. This can offer more flexible repayment terms.
Business Credit Card: Revolving credit lines require monthly minimum payments, but you can choose to pay off the entire balance to avoid interest charges. There is no set repayment period.
Credit Building
Business Line of Credit: If used responsibly, this can help build your business credit profile. Lenders report your payment history to business credit bureaus.
Business Credit Cards also help build business credit and often require a personal guarantee, meaning your personal credit can be affected by your business’s payment behavior.
Rewards and Perks
Business Line of Credit: Generally does not offer rewards programs or additional perks.
Business Credit Cards often come with rewards programs, such as cashback, points, or travel miles, and additional perks like travel insurance, purchase protection, and extended warranties.
How to Choose Between a Business Line of Credit vs a Credit Card
Deciding between a business line of credit and a business credit card depends on your business needs, financial situation, and how you plan to use the funds. Here’s a guide to help you determine which option is best for you.
When Should You Get a Business Line of Credit?
A business line of credit is an excellent choice if your business experiences fluctuating cash flow or you need access to funds for larger, ongoing expenses. Here are some scenarios where a business line of credit might be the better option:
Managing Cash Flow
If your business has seasonal fluctuations or irregular income, a line of credit can help you cover expenses during slower periods and repay the funds when the business picks up.
Covering Unexpected Expenses
A line of credit helps handle emergencies or unexpected costs, such as equipment repairs or sudden inventory needs.
Flexible Funding
If you need flexible funding for various purposes, such as marketing campaigns, payroll, or project-based work, a line of credit allows you to draw funds as needed and repay them over time.
Larger Business Expenses
For significant expenditures that don’t fit neatly into a single purchase, a line of credit allows you to borrow what you need without the constraints of a lump-sum loan.
When Should You Get a Business Credit Card?
A business credit card is a great tool for managing everyday expenses and smaller, frequent purchases. Here are some situations where a business credit card might be the right choice:
Everyday Business Expenses
Use a business credit card for routine expenses like office supplies, travel, meals, and other operational costs. This keeps your personal and business expenses separate and organized.
Rewards and Perks
If you want to earn rewards such as cashback, points, or travel miles, a business credit card with a good rewards program can be very beneficial. These rewards can offset some of your business costs.
Expense Tracking
Business credit cards provide detailed statements, making tracking and categorizing expenses easier, and simplifying bookkeeping and financial reporting.
Short-Term Financing
If you need to make a purchase and plan to pay it off quickly, a business credit card offers a convenient way to finance short-term needs without incurring significant interest charges, as long as you pay off the balance in full each month.
Building Credit
Using a business credit card responsibly helps build your business credit profile, which can be advantageous when seeking larger financing options in the future.
Where Can You Get a Business Line of Credit or a Credit Card?
Finding the right financial institution to provide a business line of credit or a business credit card is crucial for securing the best terms and conditions. Here are some common places where you can obtain these financial products:
Banks
Major national and regional banks offer business lines of credit and business credit cards. They often provide a wide range of financial products and services, which can be advantageous if you prefer to keep all your banking needs under one roof. Examples include Wells Fargo, Bank of America, and Chase.
Smaller community banks may offer more personalized service and can be more flexible in their lending criteria. They are often more willing to work with small businesses to tailor products to specific needs.
Credit Unions
A credit union is a not-for-profit organizations that often offer competitive rates and lower fees than traditional banks. They may also offer business lines of credit and credit cards to their members.
Credit unions typically focus on serving local communities and can provide more personalized service and support for small businesses.
Online Lenders
Online lenders and financial technology companies like SMB Compass have become increasingly popular for their quick application processes and fast funding times. They often have less stringent qualification requirements compared to traditional banks.
Applying for a business line of credit or a credit card through an online lender can be done entirely online, making it convenient for busy business owners.
Small Business Administration (SBA)
The SBA offers various loan programs, including the SBA Express program, which can provide lines of credit to small businesses. These programs often come with favorable terms and lower interest rates. SBA loans are backed by the government, reducing the risk for lenders and making it easier for small businesses to qualify.
Financial Marketplaces
Online financial marketplaces allow you to compare different lenders and their offerings in one place. These platforms can help you find the best rates and terms for your business line of credit or credit card.
Business Credit Card Issuers
Many major credit card issuers, such as American Express, Capital One, and Citi, offer business credit cards with various rewards and benefits tailored to business needs. These issuers often provide specialized business credit cards with features like higher credit limits, rewards for business-related spending, and expense management tools.
Where Can You Get a Business Line of Credit or a Credit Card?
Finding the right financial institution to provide a business line of credit or a business credit card is crucial for securing the best terms and conditions. Here are some common places where you can obtain these financial products:
Term Loans
Term loans provide a lump sum of money upfront, which you repay over a set period with fixed or variable interest rates. These loans are ideal for significant investments like purchasing equipment, expanding operations, or renovating facilities. You repay the small business loan in regular installments, making it easier to plan your finances.
Equipment Financing
Equipment financing is designed to purchase machinery, vehicles, or other equipment. The equipment itself serves as collateral for the loan. This type of financing allows you to acquire necessary equipment without a large upfront cost, preserving your cash flow for other business needs.
Invoice Financing
Invoice financing, also known as accounts receivable financing, allows you to get an advance on your outstanding invoices. Instead of waiting 30, 60, or 90 days for invoice payments, you receive funds immediately, which can be crucial for managing day-to-day expenses. This can help improve your cash flow while waiting for customers to pay.
Merchant Cash Advances
A merchant cash advance provides a lump sum of cash in exchange for a percentage of your future credit card sales. It’s a quick way to get funding but often comes with high fees. Repayments are made through a portion of your daily credit card transactions, making it a flexible option if your sales are consistent.
Crowdfunding
Crowdfunding platforms like Kickstarter and Indiegogo allow you to raise funds from a large number of backers. This is a great option for launching new products or creative projects. Often, you can pre-sell products or offer incentives to attract backers, providing the funds needed to bring your project to life.
Grants and Government Programs
Grants are non-repayable funds provided by governments, non-profits, and other organizations. They are typically awarded based on specific criteria such as industry, location, or business purpose. Many grants are available for research and development, innovation, and community development projects.
Microloans
Microloans are small, short-term loans typically offered by non-profit organizations or community lenders. They are designed to help small businesses and startups that might not qualify for traditional loans. These loans often have lower interest rates and favorable terms to support new businesses.
The Bottom Line: Making the Decision
When deciding between a business line of credit and a business credit card, consider the specific needs of your business:
A business line of credit is often the better choice for managing cash flow, handling unexpected costs, and financing larger projects. A business credit card is ideal for everyday expenses, earning rewards, and simplifying expense tracking.
Businesses can often benefit from using a line of credit and a credit card. This combination allows you to leverage the strengths of each financial tool, providing comprehensive support for your business’s financial needs.
