Credit Card vs. Line of Credit: Which Is Right for You?

4 min read • Jan 12, 2020 • Rebecca Lake

When you need financing to cover small business expenses, you might be torn between opening a credit card or a line of credit. Both can help you make up cash flow shortfalls, and each one has its pros and cons. This guide can help you decide whether a business credit card or a business line of credit is the best financing solution. 

Business Credit Cards: How Do They Work?

A business credit card is a revolving line of credit. Your card issuer sets your credit limit. You make purchases against that limit, then make payments against the balance. As you pay down your balance, you free up more available credit for new purchases. 

Business credit cards and business charge cards aren’t exactly the same, though it’s easy to confuse them. With a business charge card, you may or may not have a set credit limit. If your card has no preset spending limit, your card issuer essentially decides how much purchasing power you have on a monthly basis. 

Charge cards typically require you to pay your balance in full each month; business credit cards allow you to carry a balance. The catch is that you may pay interest on the balance, whereas a charge card wouldn’t have interest charges. 

Business Credit Card Pros and Cons

Like any other small business financing option, business credit cards have advantages and disadvantages.

Here’s a rundown of the pros:

  • Easy to apply: Unlike a business loan, the application for a business credit card can take just a few minutes to complete. 
  • Easy to qualify: It’s possible to get a business credit card even if you haven’t launched your business yet.
  • No collateral: Unless you’re applying for a secured business credit card, you won’t need any collateral to qualify.
  • Quick approval: It’s possible to get approved for a business credit card in just a few minutes if you meet the card issuer’s requirements.
  • Flexible spending option: A business credit card can be used to cover a variety of business purchases, from office supplies to travel.
  • Rewards: Some business credit cards pay you back in the form of points, miles, or cash back on purchases. Those rewards could save your business money if you’re a regular spender.

And here are the cons to keep in mind.

  • Interest rates: Business credit cards can easily have double-digit interest rates, making it more expensive to carry a balance over time. 
  • Fees: If you’re angling for a premium business credit card, you may pay a steep annual fee to have it in your wallet. 
  • Lower credit limits: Generally, credit cards don’t offer as much purchasing power as a loan or line of credit. 
  • Acceptance: Not all business credit cards have universal acceptance, which can limit where you can use your card to make purchases or earn rewards.
  • Personal guarantee: You may have to sign a personal guarantee for a business credit card, which makes you personally liable for the debt.

What Is a Business Line of Credit?

A business line of credit is similar to a business credit card, with some differences. 

In terms of what they have in common, a business line of credit also provides a fixed credit limit. You can draw against your credit line and repay what you borrowed, with interest. Depending on how the line of credit is structured, it may or may not be a revolving line. If it’s not revolving, then you won’t free up more credit as you pay down your balance. 

Where business lines of credit diverge centers mostly on rewards and cost. Business lines of credit don’t come with reward programs the way business credit cards do. The upside, however, is that you may be able to qualify for a larger credit line and a lower interest rate if you have a solid credit score

In that sense, a business line of credit could save you more money if you’re paying less in interest. While you may not pay an annual fee for a business line of credit, you might have to pay an origination fee or monthly fee to maintain your account. 

Which One Is Right for Your Business? 

If you’re on the fence about whether to open a business credit card or line of credit, asking the right questions can help with your decision-making. Specifically, think about what your primary goal is for getting financing. If you want to earn rewards, then a business rewards card is the obvious choice. On the other hand, if you want to get the lowest rate possible, then you might have a better chance with a business line of credit. 

Also, consider your credit-building potential. A revolving business credit card could help you build a stronger business credit score if you’re maintaining a low balance and paying on time each month. A business line of credit could do the same but only if you have a revolving line, so it’s important to know what you’re getting before signing on the dotted line. 

Rebecca Lake

Rebecca Lake is a financial journalist covering small business, investing, and personal finance. Her work has appeared online at U.S. News and World Report, Investopedia, and The Balance. She also works with top banking and insurance brands, including Citibank, Ally, Discover Bank, and AIG.