Business Line of Credit vs. Credit Card
Katherine Fan is writer and editor with experience covering personal finance, healthcare, insurance and points and miles travel for a number of media outlets including The Points Guy, CreditCards.com, ValuePenguin and Business Insider in addition to LendingTree. She splits her time between Austin, New York City and Taipei.
Credit cards and business lines of credit are both flexible forms of funding that offer access to revolving credit lines, but the two products differ in how you pay interest and the time windows in which you’re able to draw funds.
Deciding whether a business line of credit or a credit card is the best option for your business depends on how you plan to use the money. Here are some things to consider when deciding:
Business LOC vs credit card: Side-by-side comparison
Here’s a quick look at how a business line of credit (LOC) and a business credit card stack up against each other:
| Line of credit | Credit card | |
|---|---|---|
| Best for | Larger purchases or revolving balances | Building business credit or smaller purchases |
| What is it? | Flexible funding that works well for short-term business cash flow | A credit card tailored for business purchases |
| Origination fee | Varies from $0 to around 0.5% of the line amount | None |
| Annual fee | Varies from $0 to a few hundred dollars | Varies from $0 to a few hundred dollars |
| Draw fee | Varies based on lender; charged each time you draw money | None |
| Cash advance fee | Varies by lender; some lenders may charge fees for certain types of cash advances, like using a wire transfer, while others have no cash advance fees | Depends on the card; typical cash advance fees range from 3% to 5% with a $5 to $10 minimum, whichever is more |
| Late fee | Up to 5% of the missed repayment | Up to $40 or more |
| Interest charged | Monthly, on amount borrowed | Monthly, based on statement balance |
| Interest rate | Varies based on lender — typically less than a business credit card | Varies based on lender — typically higher than a business line of credit |
| Term length | Varies — from 6 months to several years | Generally no set term |
| Qualifications based on | Might include:
|
|
| Time to funding | Generally as soon as the line is approved, which may be immediately or after a few days | Upon receipt of the credit card |
How does a business line of credit work?
A business line of credit (LOC) is a flexible form of funding that works well for short-term, cash flow business expenses such as payroll or inventory. Unlike a small business term loan (where you receive a lump sum of money up front and then pay the funds back in regular installments), an LOC is a type of revolving financing where you only pay interest on the amount you borrow. You can access your LOC for the duration of your draw period — a period of time during which you can withdraw available funds up to your draw limit (the limit of your LOC). You can borrow funds up to your draw limit, repay what you’ve borrowed and draw from the LOC again.
Lines of credit can be secured or unsecured. A secured business line of credit can typically offer a higher draw limit, depending on the collateral you’re willing to put up in order to guarantee your loan repayment. An unsecured business line of credit doesn’t require collateral backing, but may still require you to meet certain conditions or terms.
Below are some features of lines of credit and examples of rates and terms you may encounter (actual amounts and rates will ultimately depend on the lender and your business profile):
Fees
- Origination fee: $0 to 0.5% of your line amount over $250,000
- Annual fee: $0 to $175
- Draw fee: Up to 2% of the amount withdrawn
- Late fee: Up to 5% of the past-due amount
Interest
With an LOC, you’ll only pay interest on the amount you borrow, not your entire credit limit. Interest rates can range from 4% up to 80% or higher; these will depend on the amount and terms you choose as well as your personal credit profile and the lender you work with.
Term length
Lines of credit are typically issued for set lengths of time, such as 12 or 24 months. Some LOCs can be extended for as long as five years, while other credit lines have shorter time frames, such as 12 to 24 weeks. It is common for business lines of credit to be renewed regularly, e.g., annually.
Credit limits
Your lender determines how much credit to extend your business based on your credit score, business history and financials. If you put up collateral to back your LOC, you could secure a higher draw limit.
How to qualify
As a general rule, lenders consider the following requirements and qualifications when evaluating applicants seeking a business LOC:
- Credit score: Both your personal and business credit score both matter for business loans in most situations.
- Time in business: Unless you specifically apply for a startup LOC, most online lenders may look for your company to be in business for a minimum of six months to a year, while brick-and-mortar banks may require as many as two years in business to qualify.
- Business plan: Your business plan tells lenders about the service or product you offer, breaks down your operating costs and shows how you plan to make a profit and repay the amount you owe.
Depending on the amount you’re requesting, lenders may require more detail into your cash flow, bank statements, accounts receivables and other indicators of financial stability before approving your LOC.
Traditional banks may be more strict on requirements than alternative lenders, which include online financiers. Online lenders may fund loans more quickly than traditional banks typically do and may also be more lenient on required qualifications. However, they may also have higher fees, rates and terms than traditional lenders.
Pros and cons of a line of credit
| Pros | Cons |
|---|---|
Higher credit limits Lower interest rates than credit card APRs Repeated access to funds upon repayment | May require weekly repayments Fast-funding lenders may charge higher interest Easy access may cause overspending |
How does a business credit card work?
A business credit card is another type of revolving credit line. However, business credit cards differ from a business line of credit in several ways. Credit cards often carry higher interest rates than LOCs do; in addition, some purchases or payments, like leasing fees, can’t be charged to a credit card.
Below are some common examples of business credit card features (again, your business profile will ultimately determine the rates and terms you’re eligible for):
Fees
- Annual fee: $0 to $695
- Late or returned payment fee: Varies; may be up to $40 or 2.99% of any past due amount, whichever is greater
- Cash advance fee: Varies; may be $5 to $15 or 3% to 5% of the transaction total, whichever is greater.
Interest
The annual percentage rate (APR) on a business credit card can typically range from 13% to 25%, on average. However, some cards offer an introductory 0% APR, which lets you use your card interest-free for a certain time period (often up to 18 months). Just be careful to put aside enough to pay your balance in full before the end of the introductory term to avoid hefty interest charges.
Credit limits
Your credit limit will be determined by the lender based on your credit score, business history and cash flow, among other criteria. If you build a consistent history of responsible card usage, you may be able to request a credit limit increase after some time.
How to qualify
Credit card issuers look at many of the same qualifying factors that LOC lenders do, including your credit score, time in business and history of incoming revenue and financial management. You’ll have the highest chance of approval if you have a good or excellent credit score of 670 or higher, but exact requirements will vary by provider. Consider getting prequalified ahead of time to get an idea of what you’re eligible for.
You may be able to apply online and be approved in minutes, but in some cases you’d need to wait a week or two for the issuer to make a decision on your application.
Pros and cons of a business credit card
| Pros | Cons |
|---|---|
Ability to earn rewards on everyday spending Easy to use for recurring payments Helps build business credit | May increase the temptation to spend too much Carrying a balance will incur hefty interest Low credit limit if you don’t have strong credit |
When to use a business credit card vs. a business line of credit
A business credit card is best for everyday or recurring expenses, buying technology or other items that could benefit from purchase protection or other business purchases that you can pay in full each month.
Consider a business credit card:
To build business credit
When you use your business credit card and pay the balance in full each billing period, you’re building a history of responsible credit use. This will not only help improve your credit, it will also help your business to qualify for additional financing in the future.
To earn rewards or cash back
A business credit card can help you earn additional benefits on your spend, as cash back or another type of reward. Just make sure to pay off your balance every month, otherwise the interest on your card could cancel out the value of your rewards.
To make everyday purchases
A credit card makes simple transactions easy to fund and track, especially for recurring charges on autopay. Some cards even offer bonus rewards on purchases in common business categories, such as electronics or office supplies.
For purchase protection or trip insurance
Some credit cards offer benefits that will repair or replace stolen or damaged purchases, while others will cover expenses you incur if you’re delayed while traveling for work.
If you can pay your balance in full each month
Interest rates on credit cards can exceed 20% APR on many business credit cards, so try to avoid carrying a balance on cards that don’t offer a 0% intro APR.
Consider a business line of credit:
To pay for a purchase that doesn’t accept credit cards
Some types of business expenses can’t be paid with credit cards. This can include payroll, vendor services or leases.
When making a larger purchase
If you need to make an expensive purchase for the business, the cost may exceed the spending limit on your credit card. However, you may be able to secure a higher credit limit on a business LOC that would allow you to make your purchase.
If you need a cash advance to cover existing expenses
If you’re anticipating incoming funds, such as client payments, a business LOC can help you pay existing bills — your payroll or mortgage, for example — while you wait for your funds to come in.
Learn more about using a business line of credit working capital loan to have flexible access to cash when you need it.
If you can put up collateral for a larger credit limit
If you’re willing to leverage your commercial real estate or business equipment as a guarantee for repayment, you may be able to secure significantly higher amounts of credit with an LOC than you would with a business credit card. Be aware, however, that a lender can repossess the collateral if you fail to repay your debt.
If you plan on carrying a balance
A business LOC usually comes with a lower interest rate than a credit card, so it’s the better option if you’re unable to pay off your balance in full each month.
How quickly will I receive my funds after approval?
With a business credit card, it’s typical that you have full access to your credit limit when you receive your card. Some issuers may even provide you with an instant credit card number that would allow you to use your card as soon as you’re approved. Credit card issuers are required by law to either approve or deny you within 30 days, though in most cases a decision comes much sooner.
The story is the same with business lines of credit — many lines of credit are approved immediately, especially if you are applying online. If your application requires human approval, it may take a few days or weeks. You may be able to speed up the process by calling customer service, speaking to the lender and providing them with any documentation or information they require. Once your LOC is approved, you typically will have access to your funds within a few days, if not sooner.