You may think a business line of credit and a business credit card are the same. They are both revolving credit products with similar names. But, owing to some key differences, they are not interchangeable, and the wrong one may not meet your needs.
Think of these tools like spatulas. They have similar names but serve different purposes. You wouldn’t use a rubber scraper to flip burgers. Similarly, a business credit card may not be the best way to make large purchases. Picking the right type of credit aligns your financing with the way your business operates.
Understanding the basics of both financing options, their key differences, and when each is most useful ensures you choose a credit card or business line of credit when it’s right for you.
Credit Card Basics
A business credit card largely works like your personal one. You have a set credit limit, and you can spend up to that limit. When you repay the balance, you can use the funds again. You’ll receive a monthly statement, and interest accrues on the remaining balance if you don’t pay in full.
Many business cards offer cashback, travel miles, or points on your purchases. These perks can reduce expenses or create additional value for your business. Plus, using a card responsibly helps you build business credit when your providers report to business credit bureaus.
Business Line of Credit Basics
When you have a business line of credit, you can draw funds up to your fixed credit limit into your business bank account. You pay interest on the amount you borrow and can pay it back over time. Once repaid, that credit becomes available again.
Lines of credit typically offer lower interest rates than credit cards, especially if you provide collateral. However, as a product intended for larger funding amounts, they have more complex application processes, including financial documentation, tax returns, and bank statements.
Key Differences
The purposes of a business line of credit and a business credit card are fundamentally different. In general, credit cards are best for frequent, smaller expenses, while lines of credit fit occasional, larger funding needs.
Here’s how they compare in key areas:
Access to Funds
Credit cards are faster and easier for point-of-sale or online purchases. Some offer cash advance options to withdraw cash from ATMs or provider-issued checks. Lines of credit require you to transfer funds into your business bank account before you can use them.
Credit Limit
Both products set a limit based on your application, but business lines of credit usually offer larger amounts. A card’s credit limit typically ranges from $5,000 to $50,000, while a line of credit can provide access to up to $500,000.
Repayment Structure
Credit cards have minimum monthly payments and high interest rates. An unpaid balance can quickly balloon. Lines of credit allow flexible repayment, such as monthly or weekly payments, to fit your revenue.
Application Process
Credit cards usually have a quicker, more straightforward application process. Lines of credit require deeper financial vetting, though requirements vary depending on the lender. You can apply for either credit product online.
Terms and Conditions
Credit card providers list the terms in the fine print, and you accept those conditions when you submit your application. It is your responsibility to study them. On the other hand, lenders usually review the terms for your business line of credit with you after they approve you and before you sign.
Impact on Credit
Both products can raise your business credit score when you use them responsibly. However, credit cards that report your monthly activity help you build your credit history faster.
Rewards and Perks
Many cards offer points, miles, or cash back. Lines of credit typically don’t have rewards, but may provide better interest rates. Both credit products may offer interest-only payments or interest-free periods.
When to Use a Business Credit Card
Business credit cards are the tool for you if you’re ordering supplies, paying for digital services, or covering travel costs. You’ll benefit from fast approval and potential rewards. Be sure to pay the balance in full to avoid high-interest costs.
Say you own a small landscaping business. Your revenue comes in monthly or quarterly during the busy season, but you spend a couple of hundred dollars on small necessities weekly. A business cash advance credit card would allow you to buy gas for your machines, gloves and safety glasses for your team, and seasonal plants for your clients now, paying off the balance as clients pay their invoices.
When to Use a Business Line of Credit
A business line of credit is more like a safety net than a daily tool. You don’t pay for unused credit until you draw on the funds. Then you have a cushion to handle irregular cash flow or unexpected expenses while making regular repayments. When you repay the funds, you restore that safety net.
Maybe you’re the owner of a breakfast diner in a tourist spot. Your regular customers provide some income during the off-season, but you rely on the influx of revenue from visitors to continue running your business. A restaurant line of credit protects your diner. You access funds when you have a slow month or broken equipment, but don’t pay anything until you draw on the credit line.
Choosing the Right Tool
Choosing between a business credit card and a business line of credit is about understanding how each tool fits into your business model. You may use both—a credit card for day-to-day purchases and a line of credit for larger financial needs. Combining them is like stocking your kitchen with multiple kinds of spatulas so you always have the right tool at hand.
Whether you use a business line of credit, credit card, or both, choosing the right credit product for the appropriate situation will help you avoid frustration and empower your business to take the next steps.
