When you’re a small business owner, there are going to be times when you need money. And when you do, you’ll often need it quickly.
That’s one reason lines of credit and credit cards are among the most popular types of financing business owners use most often. Once you’re approved for either type of business financing you can use it when you need it.
Unless you’ve used these financing options often, though, you may not be sure exactly how they work or fully understand the difference between a line of credit vs credit card. Most importantly, you may wonder which one is better.
Here we’ll explain how lines of credit and credit cards work, and when each may be the best choice for your business.
What Is a Line of Credit?
A business line of credit, also called a revolving line of credit, offers you credit you can access when you need it. It’s typically used for short-term financing that can help with the ups and downs of cash flow that are common in small businesses.
Here’s how a line of credit works. If you’re approved, you’ll be given a credit limit; you can borrow up to your limit.
You usually only pay interest on what you borrow, and your interest rate can either be variable (which means it can change when interest rates in the economy change) or fixed (it stays the same over the life of the loan). Your credit limit and interest rate is often based on your creditworthiness, which is determined in large part by your credit scores. Many lenders that offer business lines of credit check personal credit scores, and they may check business credit scores as well.
Repayment terms will vary by lender, but lines of credit often have a draw period; a specific number of months or years when you can borrow money. During the draw period you may be able to make interest-only payments, but during the payback period, you’ll need to make payments large enough to repay the full loan amount within a specific period of time. That means your payments during the draw period could be much smaller than during the payback period.
Lines of credit are available through traditional financial institutions such as banks and credit unions, as well as through online lenders. There are even SBA lines of credit.
Best Business Lines of Credit
If you’re looking for a business line of credit, consider these options:
What is a Credit Card?
Business credit cards are both a payment method and a line of credit. You can use a credit card to make purchases anywhere that card is accepted, and then either pay your balance in full to avoid interest, or make smaller payments to pay back the amount you charged over time.
Credit cards may be secured or unsecured. Most business owners will apply for unsecured credit cards, but secured cards can be helpful if you have bad credit.
Just like personal credit cards, most small business credit cards require a personal credit check and most cards require good to excellent credit. Higher credit scores can help you qualify for lower interest rates and larger credit limits.
If your credit scores are low, you may be asked to provide collateral (usually in the form of a savings account) for a secured business credit card. If you pay on time and maintain good credit, you may be able to qualify for an unsecured credit card.
Business credit cards often offer perks such as extended warranties or purchase protection, and many offer rewards programs that offer cash back or travel rewards.
Key Differences Between a Line of Credit and a Credit Card
Both lines of credit and credit cards offer financing so you can pay for purchases over time. (Charge cards, on the other hand, require payment in full.)
The key difference is that to get a business lines of credit, the business applicant will need to meet certain eligibility requirements. Credit will be one of them. But in addition, there will often be a time in business and revenue requirement. Businesses will often need to have at least 6-24 months in business, and make a certain amount of money to qualify.
Business credit cards, on the other hand, are available to startups as long as the owner meets personal credit requirements, and has sufficient income from all sources, not just the business.
Credit cards often offer perks and reward programs that lines of credit do not.
Whether your business needs a credit card or a line of credit depends on your specific circumstances. Both can offer an easy digital application process, while credit limits, interest rates, fees, and repayment terms vary.
Credit Limits
A line of credit will most likely offer a higher credit limit than a small business credit card. Depending on the lender and your creditworthiness, you may be able to access up to $500,000 or more from a line of credit. A high-limit credit card will often offer closer to $10,000 to $25,000 as the starting credit limit, depending on the issuer and the applicant’s qualifications.
Interest Rates and Fees
You’ll pay interest on both credit cards and lines of credit, but interest with a credit card is typically higher than a line of credit (although it depends on your application).
It’s hard to say which one offers higher interest rates, as rates can vary significantly.
Lines of credit may charge interest rates as low as the prime rate + 2.25% to 35% or more, while credit cards typically charge between 18% to almost 30%. Some credit cards offer intro APRs of as little as 0% for a year or more.
There are also fees associated with each type of financing. Lines of credit may charge a draw fee each time you borrow money, and an origination fee when you open the line.
Both credit cards and lines of credit may charge late fees and annual fees.
Credit cards may charge cash advance fees and balance transfer fees.
Repayment and Usage
Both a line of credit and a credit card have credit limits that define the maximum amount you’re allowed to borrow at one time. A business line of credit will often have a predefined draw period and a payback period. You may have to make interest-only payments during the draw period. This means during the months or years that you’re allowed to borrow from the line of credit, you may make payments but not pay down the actual debt.
With credit cards, you can pay your statement balance in full to avoid interest charges. Or you can make smaller payments, and pay interest. Minimum payments can stretch out your debt for years, and can result in significant interest charges.
Choosing Between a Credit Card or Line of Credit
If you’re looking for a high credit limit so you can access money as you need it for expenses like expanding your business or bumping up staff for a big job, a line of credit might make more sense.
Alternatively, if you want a way to purchase equipment or office supplies and like the idea of earning rewards on those purchases, a credit card could make more sense.
If your business is new, it will be difficult to qualify for a business line of credit, but you may be able to get a business credit card.
Of course, you may not have to choose. Plenty of small businesses use both lines of credit and credit cards successfully.
When to Use a Credit Card
Credit cards are best for everyday purchases. They are one of the safest ways to pay for purchases, rewards can provide even more value. You may be able to earn points on purchases that you can redeem for travel expenses, cash back, or other items.
As long as you can pay your balances in full and avoid interest charges, there’s no downside to using credit cards to pay for business purchases.
When to Use a Line of Credit
A line of credit can be helpful for short-term working capital needs such as inventory or to cover expenses when cash flow is slow. If you qualify for a low-rate line of credit, you’ll have access to financing when your business needs it.
If you have a specific project that you need to finance, a term loan may be a better option than a line of credit. You’ll borrow a lump sum and you’ll often pay it back over a longer period of time with weekly or monthly payments.
How To Get the Most Credit? A Line of Credit or a Business Credit Card
It depends. A well-established business may qualify for a very large million-dollar-plus business line of credit. To get a credit card with that size of credit line, your business would likely need to qualify for a corporate card.
On the other hand, an entrepreneur with a brand new business will have trouble qualifying for a business line of credit but may be able to get a credit card with a healthy credit limit.
Again, the size of the line of credit or credit card limit your business can qualify for will depend on your qualifications and lender requirements.
What Builds Credit Faster? A Line of Credit or a Business Credit Card
Both business lines of credit and business credit cards can help you build business credit, provided the lender reports to business credit bureaus (most do) and you pay on time. In that sense, either one can help you establish business credit.
Paying late will hurt your credit, and credit cards tend to offer more flexible payment terms since you can make minimum payments when cash flow is tight.
On the flip side, it’s important to remember that credit cards and lines of credit can impact your credit scores. Paying on time can help boost your credit scores, and some card issuers will raise your credit limit if you pay on time. Late payments can trigger a lender or issuer to reduce your credit limit, or even close your account.
What’s Better for Bad Credit? A Line of Credit or a Business Credit Card
If you have bad credit, it will be difficult to qualify for many business lines of credit and business credit cards, as most will require a good to excellent credit history.
If you have bad credit and need financing, you may want to consider loans available with bad credit, including a secured business credit card, merchant cash advance, invoice factoring or even crowdfunding.
Nav’s Final Word: Line of Credit vs. Credit Card
Borrowing money in any form is a great responsibility. A business credit card or line of credit can give your business flexibility, but it’s essential to understand the costs and pay debt back as quickly as possible.
Many business owners find they can use both a small business line of credit and business credit card in complementary ways.
Get your personalized small business loan options using your business’s details from Nav today.
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This article was originally written on August 26, 2020 and updated on September 26, 2023.
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