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Line of Credit vs. Credit Card: Which Is Right for You?

Line of Credit vs. Credit Card: Which Is Right for You? ; As your small business grows, from time to time you may wish you had a reservoir of cash to draw on to cover unpredictable small needs or help tide you through seasonal lulls.
Ashley Kilroy

Ashley Kilroy

Updated May 20, 2021
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As your small business grows, from time to time you may wish you had a reservoir of cash to draw on to cover unpredictable small needs or help tide you through seasonal lulls. Fortunately, there are at least two options that fit the bill: a business line of credit or a business credit card. Both can help you cover immediate costs and can also boost your business’s credit history (provided you make your payments on time, of course). Which is the better choice? The answer depends on your company’s individual situation and needs.When you’re considering a business line of credit versus a credit card, there are a few differences it may be helpful to take into account. Let’s take a closer look.

What Is a Business Line of Credit?

A business line of credit, sometimes called a commercial line of credit, offers you a convenient, flexible way to cover expenses like working capital, bills, inventory, and other small, last-minute expenses. Unlike a personal loan or long-term business loan, a line of credit gives you access to a defined amount of funding with a maximum set by the lender. You’re charged interest only for the amount you borrow, rather than on the entire amount available. Typically, you can withdraw funds from your credit line and repay as needed, as long as you don’t exceed the approved credit limit.Business lines of credit are highly flexible, so they may be useful for many types of business. If your business has seasonal ebbs and flows, a line of credit may help you maintain a healthy cash flow. But even if your business is growing steadily, it can be helpful to have a line of credit to tap into if you spot an unexpected opportunity you haven’t budgeted for but would  like to pursue. And if your lender reports to one of the major credit agencies, paying back what you owe on time can benefit your business’s credit rating and possibly your own.

Pros of a Business Line of Credit

A business line of credit has many potential benefits. 
  • Easy access to funds. Compared  to some other options, such as SBA loans, business lines of credit offer the borrower earlier access to money. Once you secure a line of credit, the money is basically on tap for you to withdraw and use as needed. 
  • You use (and pay interest on) only what you need. A business line of credit is a good option for those who don’t have consistent costs to cover each season. If your expenses change from time to time, your withdrawals can reflect that. As long as you stay within your limit, you can use the funds at will
  • Flexibility. The funding is not purpose-specific. You are free to spend the funds for business purposes more or less as you see fit, so using the credit line can be a flexible way to address any of your business’s needs.

Cons of a Business Line of Credit

While a line of credit can be beneficial, it may also have drawbacks in some situations.
  • Low maximums. The sum of money you have available to you with a line of credit may be less than you’d get with other forms of finding--typically $10,000 to $1,000,000. A business line of credit may not provide enough capital for a large or expensive endeavor. 
  • Short terms. A business line of credit also usually has shorter repayment terms than other options--typically 3 to 18 months. That means that if you withdraw a lot on your credit line, paying back what you borrowed can deplete your monthly funds quickly
  • Variable payment amounts. The payment amount can fluctuate from month to month based on how much you owe. But additionally, since credit lines can come with variable interest rates, you may not have a fixed payment amount to budget for, regardless.
  • Impact on your personal credit. Especially if you’ve issued a personal guarantee to secure your business’s line of credit, any missed payments may affect your personal credit history. 

What Is a Business Credit Card?

A business credit card is another way a company can get access to funds as needed and pay back only what’s borrowed (plus interest). Much as you would for a personal credit card, you apply with a credit card company, and, if approved, you receive a card (or cards) that you can use to make business-related purchases. You’re then expected to make regular payments until the money you’ve taken out is paid back, with interest. Like a line of credit, a credit card will also come with a maximum, beyond which you can’t withdraw more money.Business credit cards can be useful for many kinds of business, especially startups in which the owner is trying to separate his or her personal credit from the business’s credit. For some business, potential perks, like airline miles, may also be a plus.  Typically, credit cards have relatively low maximums and high interest rates, so it’s more practical to reserve them for incidental and miscellaneous expenses, rather than planning to cover payroll with them. Your best bet is to make small, manageable payments that you can pay off ultimately each month.A business credit card is also potentially a way for your business to build its business credit (as long as you verify that the credit card company reports to one of the major credit bureaus). However, keep in mind that  when you open a credit card under your business’s name, it can still affect your personal credit score, too. So, if your business’s credit score begins to drop, yours may also.

Pros of a Business Credit Card

Business credit cards are not just for companies with big storefronts or businesses with multiple employees. Qualifying individuals who have a side hustle, such as photography or tutoring, can also benefit from them. Depending on what card you get, the benefits may vary, but they can include the following.
  • Rewards. Unlike lines of credit, business credit cards may offer perks like sign-up bonuses and/or reward systems that give you things like airline miles for using your card.
  • Relatively easy to get.  Since credit card issuers often target small businesses, the cards are typically easily accessible. You may not need a business credit history of even a profit minimum. The main requirement is your credit history. So, even in situations where you don’t qualify for a business loan, you might still have the option of a business credit card.  
  • Flexibility. Like a line of credit and unlike many other forms of funding, a business credit card will let you use the funds for any business expense.

Cons of a Business Credit Card

Not surprisingly, business credit cards may have negative features, too.
  • High threshold for sign-up bonuses and/or rewards. While the sign-up bonuses or cash back perks may be tempting, you usually have to spend a lot before you can earn them. 
  • Fees. There may also be a complicated fee system tied to your card. Annual fees, transactional fees, and foreign currency purchasing fees, can all be included in the card’s terms and conditions, depending on which card you choose. While lines of credit may also have fees, typically credit card fees are higher.
  • High APRs. In general, business credit cards tend to have higher APRs than many other kinds of funding, including lines of credit.
  • Payment problems could impact your personal credit score, too. Although you have to check to see if your credit card company reports to a credit bureau first. If your business fails, the credit card company will likely view you as liable, especially since many of them ask you for a personal guarantee. 

Key Differences Between Line of Credit and Credit Card for Businesses

When it comes to evaluating a credit card versus a line of credit, you may see a lot of similarities. Both are generally types of revolving debt that can provide your business with the option to spend money up to a set limit. However, there are a number of key differences between them that you should be aware of. Understanding these differences can point you towards the right fit for you.

Maximums

While in general both lines of credit and business credit cards provide smaller amounts of money than many other kinds of loan, typically business credit cards have lower maximums than business lines of credit. If you’re looking for a larger amount of money, a business line of credit might be a better bet.

Interest Rates

In general, interest rates tend to be lower for business lines of credit than for credit cards. If you think you’ll end up carrying a balance, that can be an important distinction, since you’ll end up paying more in interest on a credit card.

Collateral

Business credit options may be secured or unsecured. For a secured option, you’re asked to provide collateral to “secure” your debt. That helps reduce risk for the lender, since it can take your collateral if you default on your loan. Sometimes, you may be given a choice between secured or unsecured funding, in which case the unsecured option is likely to have a lower maximum and/or higher interest. All of that said, credit cards are more likely to be unsecured, while lines of credit are about equally likely to be secured or unsecured. So if you don’t have collateral to put up or don’t wish to put up collateral, you may want to consider whether a credit card will work for you. 

Annual Fees

Business lines of credit and business credit cards are generally both subject to fees, such as annual fees. Typically, credit cards tend to have more extensive fees than lines of credit. But there’s a wide range of fees that can apply to either form of credit, you may be able to find options that don’t follow the general rule.Wells Fargo, for example, offers three business credit cards, but only its Elite Signature Card requires an annual fee of $125 after the first year. Its business lines of credit come with a $95 annual fee after the first year for credit limits up to $25,000 or $175 for larger amounts.Looking at a number of options may help you find either lines of credit or credit cards with fee structures you’re comfortable with.

Cash Advances

You can usually use either a credit line or a credit card to access a cash advance. However, cash advances with a credit card tend to involve fees and a higher APR--as much as one to seven percent above the usual interest rate. And lines of credit typically allow you to take out as much as your entire credit line as a cash advance, while credit cards may cap your cash advance at around 20% of your maximum. 

Rewards

Business credit cards may offer rewards for spending money on your card, while lines of credit typically don’t offer rewards. Different cards will have different rewards. You might find that your business credit card offers extra cash back for spending money on specific kinds of items, for example, or it might reward you with airline miles.While rewards may be appealing, it’s important to consider whether it makes sense for you to spend enough money on your card to earn the reward and whether you (or your business) really needs the reward. If, for example, you travel occasionally for business, a card that rewards you with airline miles may make sense. 

The Takeaway

Business line of credit versus business credit card--which is best? No answer fits every company across the board. Business lines of credit and business credit cards can be valuable credit tools. They can help you cover immediate costs and work on building up your company’s credit score. Take some time to review your options by comparing business lendersReviewing your options can help you make an informed decision about whether a line of credit or a credit card might be best suited to you and your business’s financial needs.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC21027

About the Author

Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is a personal finance expert with years of experience in radio, newspapers, magazines, and online content. Her work has appeared on websites including Forbes and Yahoo Finance. Ashley writes on a variety of personal finance topics for SoFi, including student loans, taxes, and insurance.
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