Chosing between a line of credit and a credit card

Line of Credit or Credit Card: Right for Your Business?

10+ min read • Jan 20, 2020 • Joe Kukura

Any small business owner can think of something they’d like to spend money on right now, but they just don’t have the cash available. Unfortunately, not just anyone can walk into a bank and get a loan. Many solid businesses still may not qualify for a traditional bank loan or may just not have the time or bandwidth to complete the challenging application processes that many lending institutions require.  

There are a couple of simpler ways to borrow the funds that your business may need. If your business can’t or doesn’t want to take out a loan, then consider business credit cards or a business line of credit. 

What is the Difference Between a Line of Credit and a Credit Card?

Understanding the difference between a line of credit and a credit card can help you make the right decisions on interest rates and ensure you have enough available money to cover the costs of whatever you need the extra capital for in the first place.

Credit cards can offer nice rewards programs. Lines of credit have more generous lending terms and generally involve lower interest rates. Both can offer a flexible infusion of cash, anywhere from $1,000 to $100,000. They’re similar financial products, and both will charge interest on however much you owe. 

But there are advantages and disadvantages to both products, and the better option between the two depends on your business’s situation. Do you need more cash for everyday operating expenses? Or are you more interested in a one-time, major purchase? How much interest can you afford to pay? These are a few of the factors you’ll want to consider if you’re deciding between a line of credit or a business credit card.  

Line of Credit

A line of credit is a specific amount of money that a lender has agreed to make available for you to withdraw at will, and the amount of available credit is generally more than what you might get with a credit card. A line of credit is analogous to a loan, but you might not take the whole amount in one lump sum. It’s just a set of funds that’s available for you to access but capped at a finite amount that you cannot go over. 

A line of credit works slightly different from a loan, though the approval process is similar. But a loan arrives all at once and you start paying interest right away—on highly-structured repayment terms. 

A line of credit differs from a business loan in that it’s a far more flexible “repay as you go” arrangement. You only repay what you’ve withdrawn, and you only pay interest on whatever you still owe. Once you repay that amount, your available credit goes back to its original total. You’re not required to use the entire sum of your line of credit, but it’s there and available to you.

Let’s say you took out a line of credit to put in a sprinkler system. Maybe your estimate on the project was $25,000, so to be on the safe side, you took out a line of credit for $30,000. But if the project ended up costing less than expected—say, under $20,000—you are not on the hook for the full $30,000. You only use as you choose, and you don’t pay any interest on the line of credit money that you did not spend. 

And yes, you will be charged interest on a line of credit, though it is generally a substantially lower rate than credit cards.

Why Get a Line of Credit

There are many reasons to get a line of credit for your business. Generally, a line of credit is good for important big-ticket purchases or investments. These expenses could be a large maintenance project or repair cost, an expansion, the cost of a specialized permit, or a unique, one-time cost or opportunity your business may encounter.

A line of credit is better for costs that are too much to put on a credit card but not large enough for a structured loan from a lending institution. Consider a line of credit if one of these situations applies to your business:

  • Your business needs a substantial infusion of money
  • You prefer the lowest interest rate possible 
  • You are willing to offer collateral
  • You may need to delay repayment in full

You’ll generally have to provide proof of income to get a line of credit, often in the form of your latest tax return or W-2 form. Expect a little more due diligence from the lending institution than you’d get when applying for a credit card. 

For instance, most lending institutions will require that you’ve been in business for at least 6 months before approving a line of credit. They’re also likely to approve your line of credit only if your business makes an annual revenue of $50,000 or more. If your business does not meet either of those requirements, a business credit card is probably your better option. 

But if you have an established business with solid revenue, you may want to look out for a revolving line of credit. Instead of working as a one-time loan, a revolving line of credit is sort of a “permanent loan.” You can spend the entire amount, and as you repay, those funds become available to your line of credit again.

A line of credit is issued for a specific cash total up anywhere from a few thousand dollars to as much as $100,000. Moreover, you can get a line of credit for a specific amount if you’re taking it out for a purchase that has a known cost.

If you need access to those funds as soon as possible, you can even apply for a line of credit online.

Interest on a Line of Credit

A big advantage to a line of credit is that you only pay interest on the amount you’ve currently withdrawn. But that also means that if you do use it all, and quickly, you’ll be paying more significant interest costs. 

You’ll also still be charged an Annual Percentage Rate (APR) from the lending institution. We’ve seen APRs as low as 13–15%, but they’re often much higher.

Collateral for a Line of Credit

One significant downside to a line of credit is that you may be asked to put up collateral—your car, house, or some business property. That’s not a decision to take lightly, considering the possible loss of whatever assets you use.

A line of credit can be secured or unsecured with collateral, and unsecured is the less risky option. But an unsecured loan will require having better, longer credit history. With a secured loan, the lender can seize your assets—not just your business assets, but your personal assets, too.

Your Business’s Credit Score

This scenario is where your business credit comes into play. Your business can have a credit score, just like an individual has a personal credit score. Your business may already have been issued a credit score, so you’ll want to check our guide on how to find your business’s credit score.  

Realize that the terms of a line of credit will be very much dependent on your business’s credit history and perceived creditworthiness. If there’s anything quick and easy you can identify to do that will enhance your credit rating, those steps might lead to a substantially better rate, which might pay real dividends in the long run.

If your business credit score is 560 or higher, you’re probably in good shape for getting a line of credit. 

If your business’s credit is perhaps a little less-than-outstanding, consider how to grow your business with a line of credit. Stick to some strategies on how to improve your business credit, and avoid common business credit mistakes that can hurt your credit rating.

If you do think a line of credit may be the best approach for growing your business, check out our 15-minute application today.

But you should only take a line of credit if you’re confident about adequate incoming revenue or some manner of available funds. If this is just a matter of meeting regular, everyday financial needs, you should consider a credit card rather than taking on more significant debt.

Business Credit Cards

You’re already familiar with credit cards—those plastic cards that you swipe. Business credit cards work the same way but are meant for business spending. They’re issued by the same companies whose credit cards you’re familiar with using, like VISA, MasterCard, American Express, or Discover. 

A business credit card is better suited for spending more money on everyday business purchases. It’s a far more modest commitment and a better option for businesses that may not be able to qualify for a line of credit or a business loan. Business credit cards could offer as much as $500,000 credit line, though available credit lines could be offered at as little as $1,000. 

You will pay interest on whatever charges you make on your business credit card, and your interest rate can vary anywhere from 8% to 24%. This rate can depend on your business’s perceived creditworthiness or simply which lending institution issued your card. In that respect, it may pay to shop around before applying.

You also have the option of a charge card, which charges no interest at all. But charge cards require full payment, every month, with no exceptions.

Why Get a Business Credit Card

We’ve listed some of the top reasons to get a business credit card below:

  • The card and the funds arrive quickly, often within 7 business days  
  • You think you can take on manageable short-term debt
  • You need to make purchases for an upturn in a business cycle
  • You might benefit from a rewards program
  • You can control employee spending or may be interested in “package deals” where you can issue cards to your employees

You can use a business credit card for anything you want from a vehicle to business travel to a bowl of holiday candy. A business credit card is a great way to keep your business and personal finances separate, and your online and monthly statements can essentially handle much of your bookkeeping for you.  

Yes, you can swipe your business credit card at any ATM to withdraw cash, though this technically counts as a cash advance. Unless you use an ATM that’s specifically connected to the lending institution that issued you the card, those cash advances are going to cost you additional fees. Cash advances are also likely to be applied to your APR, sometimes in the double-digit percentage rates. 

How to Get a Business Credit Card

The process of getting a small business credit card involves much less thorough documentation during your application. You can often apply online or via the mail. 

You’ve probably received a few of these credit card mailing offers before. Realize that those mail-in offers may not be your best available option, so take a look at our guide to choosing the best business credit card.

Small business credit card requirements are not very demanding—you merely have to run a business, have an Employee Identification Number (EIN), and qualify for the card. You will likely be asked about your revenue stream and specifically how much you’re making, but your business isn’t required to be profitable. Overall, this process is far simpler and less invasive than applying for a business line of credit.  

The flip side of this simplicity is that there’s a lot more fine print on credit card offers, so be sure to read your agreements carefully to avoid any unexpected costs or surprises.

Business Credit Card Rewards

We mentioned business credit card rewards programs earlier, a factor that could create significant payoffs and freebies for certain types of businesses. These rewards are just like the personal rewards programs that you may already have on your personal credit card or those you see advertised on TV. 

For every dollar you spend, you earn points redeemable for travel or free items or a percentage of that purchase returned to you in the form of future discounts or gift cards. 

A business owner is in a particularly strong spot with these business credit card reward programs. After all, the cards are in your name, and the benefits and rewards all go to you.

Several business card brands also offer business travel reward programs that promise future savings on flights, hotels, rental cars, or other travel costs.

A line of credit will not come with any of these kinds of reward programs. 

Business Credit Card Interest

You will be paying an APR on a business credit card, and it’s likely to be a higher rate than on a line of credit. According to our business credit card comparison, you’ll be paying anywhere from 13.99% to 23.99% in annual interest any year you carry a balance.

And the introductory offers of “0% APR” can be misleading. We’ve seen 0% APR cards where that 0% period ends after just 9 months and doesn’t even apply for a full year. After the introductory period, your APR may shoot to a rate of well over 20%.  

On top of interest kicking in, you’ll also pay an annual fee in many cases. A Lendio analysis of this year’s best business credit cards found annual fees anywhere between $95 and $595, even from the most reputable credit card brands. However, a number of these cards legitimately offer no annual fees, so a little bit of research could pay off in the hundreds or thousands of dollars a year. 

We’ve got a thorough set of business credit card reviews to help you make that important decision.

Do Your Due Diligence Before Taking Out Credit 

It’s important to compare options carefully before applying for a business line of credit or a business credit card. Both of these are going to impact your business’s credit, for better or worse. Your payment history, including any late payments or nonpayments, is all going to be reported to a credit bureau. Think about the strengths and weaknesses of your business, as well as these business credit products, before you seek credit offers or sign on any dotted lines.

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Joe Kukura

Joe Kukura is a San Francisco freelance writer whose work also appears in SF Weekly and SFist. He’s written financial advice for NerdWallet, tech industry analysis for the Daily Dot, sports content for NBC Bay Area, and good, old-fashioned clickbait for Thrillist.