Business line of credit vs. business credit cards
Key takeaways
- A business line of credit (LOC) can provide financing for larger business expenses but could be more difficult to qualify for than a business credit card.
- An LOC offers financing for a defined draw period during which you can access the funds, whereas you can tap into a business credit card at any time.
- Business credit cards are more likely to provide card rewards than LOCs.
As a business owner, you might wonder what the difference is between a business line of credit and a business credit card. Do you need both? When should you use one over the other?
Consider a business line of credit and business credit card as financial siblings. They share many of the same characteristics but are two separate products. Even better, when paired together, they can get along quite nicely.
How does a business line of credit work?
A business line of credit (LOC) is a fixed amount of money that a bank allows you to borrow. LOCs may either be unsecured or secured with assets. They may have a draw period, which is the number of years you have to tap into the funds. During that time, you can withdraw as much as you like up to the credit limit, and only the borrowed amount is subject to finance fees. To access the funds, you usually use a company checking account, credit card or mobile app.
The credit line on a small business line of credit can be quite high. Depending on your credit history and the company’s financial health, it can easily be $100,000 or more.
The lender will assess the minimum monthly payment due, which may be calculated as a percentage of the outstanding balance or based on the interest being charged. If a debt remains after the draw period ends, the lender will determine the installment payments necessary to repay it based on terms set forth in the initial agreement, such as three or five years.
If you’re considering a business line of credit, it’s important to understand any fees you may be charged. As with all financial products, there are costs involved. Depending on the lender, the LOC may come with:
Key terms
- Origination fee
- An application processing fee that is typically charged as a percentage of the LOCs total value, often 0 percent to 2 percent
- Annual fee
- Commonly $100 to $250 (or more) each year
- Draw fee
- This fee may be charged each time you make a withdrawal from the LOC, often at about 1 percent to 2 percent of the amount you take out
- Late fee
- Varies by lender
- Interest
- APRs vary dramatically, from as low as the prime rate (plus a small percentage) to almost 30 percent, with no interest-free grace period
Pros and cons of business LOCs
Pros
- Easy access to cash with no cash advance fees
- Access to cash via checks, card or mobile app
- Building a positive business credit history, as long as you make payments on time
Cons
- You may need collateral for LOCs with a high limit
- Lack of rewards like the ones you can get with credit cards
- No interest-free grace period for the credit you use
How does a business credit card work?
Business credit cards are similar to personal credit cards but designed with small-business owners in mind. Most of these cards are unsecured, though there are some secured business cards on the market. They can typically be used for purchases, cash advances and sometimes balance transfers.
As with business LOCs, business credit cards have fixed limits. You can charge as much as you like up to your credit limit, and only unpaid balances will be assessed financing fees. Unlike LOCs, you can keep the account active for as long as you like.
With a business credit card, you’ll owe a minimum monthly payment on any outstanding balances. This minimum payment is determined by the credit card issuer, although you can estimate your monthly payment with our minimum payment calculator.
Regarding fees, there are a few:
Key terms
- Annual fee
- Some cards come with no annual fees while others charge $500 or more
- Late fee
- Commonly $25 to $41 after your first late payment, with some cards charging 3 percent of any amount past due (whichever is greater)
- Cash advance fee
- Usually $5 to $40 or up to 3 percent of the amount (whichever is higher)
- Over-limit fee
- These fees vary by card and may be charged if you go over your available spending limit
- Interest
- Typically a variable APR ranging from 17 percent to 30 percent (excluding 0 percent APR intro offers), usually with a grace period during which interest is not assessed on purchases as long as you pay your balance in full by the due date
Pros and cons of business credit cards
Pros
- Earning rewards and perks every time you use the card
- Taking advantage of interest-free grace periods
- Establishing business credit history that can raise your score
Cons
- Limited spending power, as not all suppliers accept credit cards
- Expensive cash advances with high upfront fees and interest rates
- Impact on your personal credit, if your business card issuer reports your usage to the consumer credit bureaus
Comparison of business lines of credit and business credit cards
| Business Line of credit | Business credit card | |
|---|---|---|
| Suitability | Higher spending needs | Regular business needs |
| Period available | Defined draw period | As long as required |
| Secured or not | Can be secured by assets or unsecured | Can be secured or unsecured |
Line of credit vs. credit card
Since the credit limits with business lines of credit are usually quite high, business LOCs are typically used as short- to mid-term financing solutions for expensive items that you intend to pay off over time. For example, let’s assume you need $50,000 worth of restaurant equipment. If your business credit card has a limit of $25,000, you’d be out of luck. However, a business line of credit with a higher limit could help you purchase the items your business needs. Furthermore, the interest payments on an LOC are typically lower than with credit cards.
On the other hand, perhaps your business plans to spend an extra $1,000 on advertising and can pay the bill in 30 days. Using a business credit card rather than drawing from a LOC means you’d enjoy an interest-free grace period and wouldn’t be subject to potential draw fees. Using a credit card with a 0 percent introductory rate could be even better, allowing you even more time to charge purchases without interest being added to your balance.
There are also small business rewards to consider. While some business LOCs offer a rewards program, many don’t. Conversely, business credit cards often offer rewards on your business purchases. If your business involves a lot of travel, you may want to consider a good business travel card. They’re loaded with benefits that can help reduce travel costs while offering compelling perks like airport lounge access, various travel credits and more.
Finally, it is important to note that — due to their higher limits — business LOCs can be more difficult to qualify for than small business credit cards.
The bottom line
In the end, business lines of credit and business credit cards are compatible products. Once you understand the differences between them, you can decide which one is best for your business needs.
Perhaps the right strategy for your business is to use both, depending on the nature of your purchase. It may be beneficial to use an LOC to pay for expensive items over time. On the other hand, using one of the best business credit cards for everyday business expenses is often a sound strategy. With either option, you will only pay interest on the money you use.
