Business Lines of Credit vs. Business Credit Cards
In this post, we’ll outline the differences between credit cards and lines of credit and explain how both options are better suited for certain types of businesses. Let’s get started!
What is a Business Line of Credit?
A line of credit allows you to withdraw cash as you need it. Interest is applied when funds are spent, and the repayment schedule typically starts within 6 to 12 months of the withdrawal.
You can either request an unsecured line of credit, or you can secure it with collateral. It’s important to note that if you’re unable to repay your debt, the collateral could be seized by the lender. In comparison, unsecured lines of credit typically come with stricter terms and lower amounts.
After you’re approved for a business line of credit, you can withdraw cash almost immediately. Then, you can borrow that amount again, once you’ve repaid your balance.
The Benefits of Business Lines of Credit
With a business line of credit, you can pay invoices to vendors that don’t accept credit cards. Your payments are applied toward interest only, and you get free cash advances.
Paying your lender back in a timely manner can improve your business’s credit history as well. Compared to business credit cards, lines of credit often have lower interest rates and larger allowable utilization.
The Downsides of Business Lines of Credit
Unfortunately, since you’re giving your lender interest-only payments throughout the duration of the credit line, there is no interest-free grace period when it’s time to repay your debt. If you own a newly opened business, your lender is less likely to loan you a larger line of credit. Additionally, this agreement probably won’t include rewards or benefits and could require collateral.
It can cost $150 or more to apply for a line of credit, with annual or monthly renewal and maintenance fees. Interest accrues as you make purchases, and it can be anywhere from 8 to 35 percent.
The Types of Businesses Best Suited for Lines of Credit
If your business continually uses suppliers that don’t accept credit cards, or if those suppliers charge a high fee for using credit cards, a business line of credit may be a better option for you. Another great reason to open a business line of credit is to have a quick, flexible way of withdrawing large amounts of money in the event of emergencies or large purchase orders.
Because you only need to pay when you withdraw, lines of credit are a great fit for seasonal businesses, those with unpredictable cash flows, and businesses taking on new projects with unknown total costs. Plus, if you have a low personal credit score, this may be a better and less expensive option than a business credit card.
What is a Business Credit Card?
Business credit cards function similarly to personal credit cards. Ultimately, it’s important to pay the balance before you accrue interest, or you might find yourself in a difficult situation.
The Benefits of Business Credit Cards
Credit card benefits can outweigh their downsides for some business owners. The application process is usually painless and seamless. In addition, business credit cards often require no collateral, making them unsecured.
Many credit card providers even offer rewards and benefits, like cash-back or travel points. These reward programs can be extremely beneficial, especially if you select a card that has benefits that you’d like to take advantage of.
Another benefit that many business credit cards come with is the ability to have an interest-free grace period, making credit cards a great way to grow your business without paying additional fees.
The Downsides of Business Credit Cards
Since your business credit card is connected to your personal credit, you could end up ruining your personal credit score if you don’t responsibly repay your debts. Unlike business lines of credit, credit cards can cost you a lot in fees and surcharges. In addition, not all vendors accept credit cards, while some vendors charge a hefty fee for using credit to make a payment.
Annual fees are present on most credit cards, averaging $95 up to $400 for premium cards. Compared to lines of credit, payment plans for credit cards are typically stricter and more regimented. Similarly, it’s more difficult to utilize your whole credit limit with a credit card, compared to a business line of credit.
The Types of Businesses Best Suited for Credit Cards
If you frequently travel for business or buy large pieces of equipment, the rewards and protection that credit cards offer can be too good to pass up. Of course, you must have good business and/or personal credit to qualify.
Businesses that need to issue employee cards for reimbursement purposes can also benefit from having a credit card. Your employees’ cards also accrue rewards and points for your overall company account.
Since line of credit providers typically require that applicants make a significant amount of revenue, a business credit card could be right for you if you don’t meet lenders’ minimum revenue requirement.
Lines of Credit vs. Credit Cards: It Comes Down to Your Business’s Bottom Line
If you need access to large lump sums of cash with a more flexible repayment schedule, a line of credit may be your best bet. If you think you’ll want cash-back perks and rewards, and you know you can make timely payments, then a credit card might work best for you.
Although a business line of credit greatly differs from a business credit card, they can work in tandem if your business needs both short-term and long-term cash and credit. However, there isn’t a concrete answer for which product is best for your business. It’s crucial for you to complete all due diligence to assess your unique situation before acting on your business’s financial future.
Editor’s Note: This post was updated for accuracy and comprehensiveness in November 2018.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.