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Business Line of Credit vs. Credit Card: Which One is Better?

Jun 10, 2022 • 8 min read
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      As a small business owner, you know the value of flexibility. Circumstances can change rapidly, for better or worse—a few days of bad weather or a positive Instagram post from a popular influencer can have huge impacts on a small business’ cash flow. In many cases, business is seasonal—companies need to prepare for a busy season while experiencing a slow season, meaning they need funds that aren’t flowing in as revenue. This is why many turn to business lines of credit.

      Business lines of credit are very flexible and don’t carry the stringent application requirements like some other forms of financing, like term loans. However, they can provide as much as $500,000 with interest rates as low as 8% as of May 2022.

      How Does a Business Line of Credit Work?

      A business line of credit is a financing method that allows businesses to access money as expenses arise.

      They are more similar to a business credit card than to a business line of credit because you don’t receive a lump disbursement all at once that requires monthly repayment.

      If you access funds through a business line of credit, interest accrues on any balance that is not paid down through repayments. As you pay down the balance, the amount of credit available to use increases.

      Limits on a business line of credit are set by a lender. Lines of credit are typically renewed over time, assuming the borrower’s creditworthiness remains in good standing.

      Business lines of credit can be secured or unsecured. Secured lines of credit, meaning the business puts up cash or assets as collateral in case of default, are not as common as unsecured lines of credit, where no collateral is required. If you want to access a large line of credit, as in greater than $100,000, a borrower might want you to put up collateral in a secured line of credit arrangement.

      Business Line of Credit Pros

      • Revolving access to credit, usually without the need for collateral
      • Credit limits often higher than with credit cards
      • Interest rates typically lower than credit cards

      Business Line of Credit Risks

      • Repayment terms might not be as good as other financing methods, like term loans
      • Approval processing time is usually longer than with credit cards
      • Credit cards are more likely to offer 0% APR introductory terms than business lines of credit

      How Does a Business Credit Card Work?

      Assuming you are one of the 191 million Americans who have at least one credit card, you can probably understand business credit cards—they are credit cards created for businesses.

      Going a little deeper, a credit card is more than just a plastic rectangle. The card represents an agreement between the credit card company and a borrower. The borrower purchases goods and services from vendors using funds made available by the financier. As per the terms agreed to by both parties, the borrower then pays back these funds over time—typically with interest if a balance is not paid down within one repayment period.

      Business credit cards are usually unsecured, meaning the borrower does not have to offer collateral as part of the agreement.

      Business Credit Card Pros

      • Approval period for credit card usually takes less than 24 hours, often just minutes
      • Credit cards are usually unsecured and don’t require collateral
      • Many credit cards have introductory offers or allow users to accrue points and cash back

      Business Credit Card Risks

      • Credit cards typically have higher interest rate terms than many other forms of small business financing
      • Credit cards often have lower credit limits than business lines of credit
      • Some bills, like rent, cannot be paid via credit card, but can be paid from a line of credit

      Business Line of Credit vs. Credit Card: The Difference

      Business credit cards are good for everyday one-off expenses like office supplies and travel expenses. Business lines of credit are good for larger or recurring expenses, like rent or bills from vendors. Many of these types of expenses won’t accept credit cards but will accept funds from a line of credit.

      Business lines of credit usually have maximum credit levels that are much larger than credit cards, so they are better for bigger purchases.

      Approval for a business line of credit often takes longer than with credit cards, sometimes 1 or 2 weeks. In some situations, credit card applications can be approved nearly instantaneously.

      Interest rates for lines of credit tend to be lower than for credit cards. As of May 2022, interest rates for lines of credit can be as low as 8%. Interest rates for credit cards are often between 10% and 20%, although many have introductory offers with 0% APR.

      Imagine a yoga studio that is usually slow leading up to the holiday season but expects a large increase in class size after New Year’s resolutions to get fit and meditate more. With a business line of credit, the studio can buy equipment, rent larger spaces, and hire more teachers during the slow time so they are ready for the crowds on January 2. 

      On the other hand, the yoga studio might want to take on expenses as they come—perhaps it realizes a week in that it needs more yoga mats. The studio can use a business credit card to take care of this expense.        

      Business Line of Credit vs. Credit Card: Which One Works Best for You?

      Choosing between a business line of credit and a credit card will depend on how much credit you need, how fast you need it, and for what expenses. For some industries that are seasonal and require large inflows of capital, like construction and healthcare, a business line of credit can be ideal. For others, like restaurant and trucking companies, you might have a lot of one-off smaller expenses like pots and pans or fuel. A business credit card might be best here.

      Either way, you can see all your small business loan options at Lendio , which works with top financiers to show you options in minutes.  

      FAQs

      What’s the difference between a business line of credit and a credit card?

      Business lines of credit and credit cards both allow for revolving access to credit, but a business line of credit usually has higher limits and lower interest rates.  

      Is a line of credit a good idea for a small business?

      A line of credit is a great idea for small businesses, especially ones that experience seasonal variances.

      Does a business credit line affect personal credit?

      A business credit line can impact personal credit because financiers will pull your personal credit report during the application process.

      What credit score do you need for a business line of credit?

      You generally need a credit score of 560 or higher.

      What is the easiest line of credit to get?

      The easiest line of credit is an unsecured line of credit—you can see all the options available to you at Lendio.

      Is it better to use a personal line of credit or credit card for your business?

      It is never a good idea to mix personal and business expenses—you can easily misuse funds and run into accounting and tax issues. 

       

      Disclaimer: The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter. 

      About the author
      Barry Eitel

      Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.

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