Business Line of Credit vs. Credit Card: How to Choose
If you need quick access to funds for your business, you may be curious about the differences between a business credit card and a business line of credit.
They are both flexible forms of funding with 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. Both can be helpful to your business needs, but knowing when to use a business line of credit vs credit card will depend on several factors.
How does a business line of credit work?
A business line of credit 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), a line of credit is a type of revolving financing where you only pay interest on the amount you borrow. You can access your line of credit 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 line of credit). You can borrow up to your draw limit every time you repay what you owe.
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):
- 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- Draw fee: Up to 2% of the amount withdrawn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
With a line of credit, you’ll only pay interest on the amount you borrow, not your entire credit limit. Interest rates for lines of credit 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.
Lines of credit are typically issued for set lengths of time, such as 12 or 24 months. Some lines of credit can be extended for as long as five years, while other credit lines have shorter time frames, such as 12 to 24 weeks.
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 line of credit, you could even secure a higher draw limit on the amount you can borrow.
How to qualify
As a general rule, lenders consider the following requirements and qualifications when evaluating applicants seeking a business line of credit:
- 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 line of credit, 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 draw limit 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 line of credit.
Traditional banks may be more strict on requirements than alternative lenders, which include online financiers. Online lenders often fund loans more quickly than traditional banks do, and may 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
|Higher credit limits
|May require weekly repayments
|Lower interest rates than credit card APRs
|Fast funding lenders may charge high interest
|Repeated access to capital upon repayment
|Easy access may cause overspending
How does a business credit card work?
A business credit card is another type of revolving credit line where you pay off what you owe. However, business credit cards differ from a business line of credit in several ways. Credit cards often carry higher interest rates than lines of credit do; in addition, some purchases or payments, like leasing, can’t be charged to a 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):
- Annual fee: $0 to $695
- Late or returned payment fee: Up to $40 or 2.99% of any past due amount, whichever is greater
- Cash advance fee: Up to $15 or 5% of the transaction total, whichever is greater.
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 off your full balance at the end of the introductory term to avoid hefty interest charges.
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 with time.
How to qualify
Credit card issuers look at many of the same qualifying factors that line of credit lenders do. To get a high credit limit on the best card for your business, you’ll want an excellent personal credit score over 650, at least one year in business and a strong history of incoming revenue and financial management. 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
|Ability to earn rewards on everyday spending.
|May increase the temptation to spend too much.
|Easy to use for recurring payments.
|Carrying a balance will incur hefty interest.
|Helps build business credit.
|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 financial costs that you can pay off in full each month.
|Use a business credit card when ...
|You want to build business credit. When you use your business credit and pay the charge off, you’re building a history of responsible credit use. This will not only help improve your credit, it’ll also enable your business to qualify for additional financing in the future.
|You want 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 be mindful that you should try to pay off your balance every month — accruing interest on your card could potentially negate the balance of the rewards you've earned.
|You want to make an everyday purchase. A credit card makes simple transactions easy to track and fund, especially for recurring charges on autopay. Some cards even offer bonus rewards on common business categories, like utilities and office supplies.
|You want to take advantage of 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.
|You can pay your balance in full each month. Interest rates 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.
A business line of credit is helpful when you need to purchase inventory or expand your business, or if there’s a necessary expense that can’t be charged to a credit card.
|Use a business line of credit when …
|You’re paying 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.
|You want to make 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 far higher credit limit on a business line of credit that would allow you to make your purchase. (If, however, you’re looking for a large or longer-term purchase, such as real estate, a term loan might be a better option.)
|You need a cash advance to cover existing expenses. If you’re anticipating incoming funds, such as client payments, a business line of credit can help you pay off existing bills — your payroll or mortgage, for example — while you wait for your funds to come in.
|You’re able to 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 than you would with a business credit card.
|You need to carry a balance. A business line of credit 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.
What’s the difference between a credit card and a line of credit?
Credit cards typically have higher interest rates compared to lines of credit, although there may be some exceptions. In addition, some purchases or payments can’t be charged to a credit card.
Furthermore, lines of credit can offer higher borrowing limits than you’d find on most credit cards. As a result, though, securing a line of credit can take longer and require more paperwork than applying for a business card, which could be approved in minutes in some cases.
What credit score do you need for a business line of credit?
As a general rule, business owners may only need a minimum personal credit score of 600 in order to be approved for a business line of credit.
How quickly will I receive my funds after approval for each product?
In both cases, you’ll usually be able to access your funds within a few business days at most, and sooner in some cases. Some lenders can make the credit instantly available as soon as you’re approved for a line of credit, while some credit card issuers may offer immediate access to your new card upon approval.