Business Credit Card vs. Line of Credit: What’s the Difference?

Disclaimer: Information in the business line of credit articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the business line of credit articles often covers financial products that Biz2Credit does not currently offer.

A business credit card and a small business line of credit can help small business owners pay for expenses as they come up. They each have their benefits and specific situations where one may be a better fit over the other. Here’s what you need to know about choosing between a business credit card vs line of credit.

Benefits of a Small Business Line of Credit

A business line of credit is similar to a credit card. Lenders will establish a credit limit for the maximum amount of money they will lend you and you can tap as much as you need up to your limit. Like a credit card, you pay interest only on the amount you borrow. The amount you borrow is deposited into a business checking account for you to use as you need.

In most cases, having a business line of credit is beneficial because you can use it as you need. And if you don’t need to use it, you don’t need to pay interest on the unused credit line.

This makes the product a solid lending product for unexpected business needs or anticipated business expenses that may vary in cost.

The repayment terms typically come with a draw period where you’re able to pull from the line and pay it off as needed. Once the draw period closes, the loan must be paid back, typically with monthly payments.

Benefits of a Credit Card for Small Business

A business credit card is a great small business financing to make small business purchases. A business credit card can strengthen your cash flow, build a credit history for your business, or leverage a strong personal credit profile should your business not have a credit history.

There are almost always perks offered to small business owners from credit card issuers to incentivize them to sign up. Here are some of the benefits of business credit cards that may be available:

• Introductory 0% interest rate period possible
• Rewards programs like points or cashback when you spend on the card
• Could potentially help you build your business credit profile

Differences Between a Business Credit Card vs Line of Credit

First, interest rates for credit cards can be much higher than a business line of credit. So, if you’re focused on using financial products with lower interest rates, a business line of credit will definitely be the better option.

Additionally, consider the payments cycles required for both. Credit cards for small businesses have inflexible monthly payments requiring you to meet the payment in full or be charged a high-interest rate. With a business line of credit, you may be able to arrange a custom repayment schedule that fits your business cycle.

If you’re able to pay your monthly statements without issue, the rewards program from a business credit card could help you offset some of those unexpected expenses. Additionally, eligibility requirements for a business line of credit can be higher than a small business credit card.

But, if you need immediate cash, using a cash advance from a small business credit card can be costly as higher interest rates will apply immediately. So, if you need a lump sum of cash for short-term expenses, a small business line of credit could be a better fit.

Can I Use Both A Small Business Line of Credit and A Business Card?

Having both a business credit card and a small business line of credit open at the same time can be a great small business financing strategy. Small business owners can use a business credit card to make regular business purchases like office supplies and other small purchases they can pay off without friction. If a larger expense like a office improvement or equipment repairs come up, a small business line of credit can provide the working capital needed without the higher interest rates.

Keep in mind that the credit card issuer could approve you for a business credit card with a lower revolving credit line. If this occurs, you can work with the issuer to potentially give you a higher credit limit if you make timely payments.

What To Consider Between Business Credit Card vs Line of Credit

Both a business credit card and a small business line of credit are good options to build business credit. Obtaining the best business financing and highest available credit depends on your creditworthiness. If you are at the very beginning of your business journey, your business credit score might not be very strong, so lenders will typically rely on your personal credit score. All three credit bureaus will likely be checked to generate a credit report, and the lender will make their financial decision using that history.

It’s important to do your due diligence on fees that might be involved with a business credit card and a small business line of credit. For a line of credit, familiarize yourself withdraw fees, draw periods, maintenance fees, late fees, origination fees, and annual fees. For a business credit card, you may potentially face higher annual fees, spending limits, late fees, and annual fees.

Final Thoughts

The combination of a business credit card and a small business line of credit can be a solid small business financing strategy. While each of the two financing options has its nuances on when to use them, it’s smart to open both as soon as you can to give your business the flexibility and ability to operate by giving your business ready cash in times of need.

FAQs about Business Credit Card vs Line of Credit

What’s the difference between business credit card vs line of credit?

A business credit card provides a revolving credit limit that can be used for everyday purchases, with monthly payments based on the amount spent. A business line of credit offers flexibility to access funds when needed, and only paying interest on the borrowed funds.

Is it cheaper to have a credit card or a line of credit?

This is dependent on the interest rates agreed to. Generally, credit cards will have higher interest rates. But it’s also important to consider fees in the total cost for both financial products.

What is a small business line of credit?

A small business line of credit is a flexible financing option that allows businesses to borrow funds up to a predetermined limit as needed. It’s similar to a business credit card where the business can draw, repay, and reuse the funds repeatedly. This type of financing is ideal for cash flow management, covering unexpected expenses, or funding short-term projects.

How does the interest rate compare between business credit card vs line of credit?

Interest rates will vary with each product, but generally, a business line of credit will have a lower interest rate.

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