Business Line of Credit vs. Business Credit Card: Find out which option is best for you

June 27, 2022

Although small business loans are suitable for major or one-time purchases, if you are looking for ongoing access to funds for things like cash flow irregularities, unexpected expenses, or inventory and supplies, consider a business line of credit or credit card.

Both are flexible forms of financing with access to revolving lines of credit. However, the two products differ in how you pay interest and the time frames in which you can draw down funds.

So when is it best to use a business credit card versus a line of credit? Here, we will give you a brief overview to help you get the most out of both products.


How does a Business Line of Credit (LOC) work?

A business line of credit (LOC) gives your business easy access to credit for short-term business needs. It is a revolving that allows you to borrow and pay it back over and over again. There is usually a cap on the amount you can borrow, but the ability to continually draw down funds and pay off the balance makes it a good option for ongoing working capital needs.

With a business line of credit, you have access to a pool of funds that you can draw on when you need capital. You have the flexibility to borrow a set amount - usually between $50,000 and $500,000 - when you need capital. You make no payments and pay no interest until you draw down those funds. Similarly, you can draw on a small business line of credit to fill cash flow gaps, get more working capital, deal with an emergency or take advantage of a business opportunity.

What are the advantages and disadvantages of a business line of credit?

Advantages:

Revolving access to credit, usually without the need for collateral

Credit limits often higher than credit cards

Interest rates usually lower than credit cards

Easy to use for recurring payments

Helps build business credit

Disadvantages:

Repayment terms may not be as favorable as other financing methods, such as term loans

Processing time for approval is usually longer than with credit cards

Credit cards are more likely to offer 0% APR introductory terms than business lines of credit

May increase temptation to overspend

How does a Business Credit Card work?

Business credit cards are like personal credit cards, but designed for small business owners. Most of these cards are unsecured, but some are secured. Like business LOCs, there are fixed limits that you can charge up to as needed. Only revolving debt is subject to finance charges.

A business credit card is another type of revolving credit where you pay off your debt. However, business credit cards differ from a business line of credit in several ways. Credit cards often have higher interest rates than lines of credit; also, certain purchases or payments, such as leases, cannot be charged to a card.

What are the advantages and disadvantages of business credit cards?

Advantages:

Approval of a credit card usually takes less than 24 hours, often just a few minutes

Credit cards are generally unsecured and require no collateral

Many credit cards offer introductory offers or allow users to earn points and cash back

Risks of business credit cards

Disadvantages:

Credit cards typically have higher interest rates than many other forms of small business financing

Credit cards often have lower credit limits than business lines of credit

Some bills, such as rent, cannot be paid with a credit card, but can be paid with a line of credit

Which option should you choose?
Deciding between a business line of credit and a credit card depends on how much credit you need, how quickly you need it and for what expenses. For some industries that are seasonal and require large inflows of capital, such as construction and healthcare, a business loan may be ideal. In other industries, such as food service or trucking, there may be many one-time smaller expenses, such as pots and pans or fuel. This is where a business credit card might be best.

It's important to choose the right form of financing for each purchase. When in doubt, ask one of our staff members. We can help you determine which options are best for your business and needs at any given time.

We are committed to redefining small business lending by offering a wide range of financial products. If you have any questions or would like more information, please call or text us at 917-243-3113.