Business Line of Credit Vs Business Credit Card: How Do They Differ?

The line of credit vs credit card debate has been around for some time. Whether you are looking to expand your business’ operations or just want a financial cushion to rely on, the right credit can be beneficial. But should you choose a business line of credit or a credit card for your business? Which option is better? This review aims to help you in selecting the best credit for your company.

Woman debating between two different forms of credit
Woman debating between two different forms of credit

What is a Business Line of Credit?

Like credit cards, lines of credit (LOCs) are a common form of credit. In general, they offer higher credit limits than credit cards. These can be anywhere between $10,000 to $3 million. LOCs also involve significantly lower interest rates, usually ranging between 5% and 20%.

When you have a LOC, you can use as much money as you like up to your credit limit. 100% of the latter can be withdrawn in cash without any hassle. Unlike a credit card, a LOC can be either secured or unsecured. If it is unsecured, you don’t have to provide the lender with any form of collateral.

You can apply for a business line of credit at a bank, lender’s office, or with an online alternative lender. You will be required to provide personal and financial information about yourself and your business.

Business funding is the key to take your company to the next level. With a recession looming ahead it is essential to make sure you are prepared financially. Find out what funding you may be entitled to.

What is a Business Credit Card?

Much like a LOC, a business credit card gives you access to a certain amount of credit. The credit limit usually ranges from $15,000 to $100,000. Some credit cards offer credit limits of $200,000 or more. However, they are more challenging to acquire, especially for startups or small businesses. The interest rates are usually very high, between 15% and 30%.

A credit card also allows you to use as much credit as you like up to your credit limit. However, there are restrictions on cash advances. Generally, you can only receive 20% of your credit limit in cash. Cash advances also involve higher costs. Credit cards are almost always unsecured and come with variable interest rates.

Credit card applications can be made online, at your bank, or at another lender’s office. Personal and financial information about yourself and the company you represent must be provided.

How does a line of credit for businesses work?

In the line of credit vs credit cards for businesses investigation, we can find that LOCs work a lot like credit cards. If you wish, you can use the entire credit amount, but you may also use a smaller sum. Likewise, the LOC can be left intact. In such a case, it will be available for future needs. You only pay interest on the used amount.

Repayments are made monthly at a low, convenient interest rate. Therefore, it is common for customers to choose repayment schedules as opposed to repaying the full balance each month.

How does a business credit card work?

Similarly to LOCs, you will only pay interest on the amount used. Users are recommended to repay the full balance by the end of each month. Most credit cards have a grace period, which ranges from 25 to 30 days. If you repay the total balance within this time period, then you don’t have to pay any interest.

You may also make minimum payments on your balance. However, this can be a very costly venture. Since interest rates are high, your debt can grow at a rapid pace and become more challenging to manage.

Naturally, the line of credit vs credit card debate begs for information on the pros and cons of each alternative.

Lines of Credit Pros and Cons

Pros Cons
Higher credit limits than credit cards LOCs can be secured
Lower APRs than credit cards No bonuses, cash backs or other rewards
Lower costs of month-to-month payment schedules No grace periods
Flexibility in terms of cash advances  
No fees for cash advances (possibly draw fees)  
More limited effect on credit rating  
Often unsecured  
Can help to build your credit rating  

Credit Card Pros and Cons

Pros Cons
Welcome bonus Higher APRs
Cash backs, discounts, and other rewards Lower credit limits
Grace periods of 25 to 30 days Limited cash advances
Can help improve your credit score Higher costs of cash advances
  Fluctuating interest rates

When is a Business Line of Credit Preferable?

In terms of a business line of credit vs a credit card fro your business, a LOC is a good option if you prefer a higher credit limit. The same is valid if you wish to repay your balance over a more extended period of time. Businesses with a greater need for cash are also advised to consider LOCs. These make it easy to withdraw 100% of your credit limit without any hassle or high costs. Lastly, lines of credit are excellent if you are not concerned with cash backs, bonuses, and other rewards. Most lines of credit offer no such benefits.

When is a Credit Card Preferable?

If your company is not in need of a very high credit limit, a credit card would be convenient. Of course, this is only valid if you can repay the full balance within the grace period every month. Credit cards are also a good option if you are not too concerned with cash advances. Finally, you can clearly benefit from credit cards if you appreciate rewards. If you acquire a card that offers cash backs on purchases that your business makes frequently, such a card would be practical.

Bottom line

So, which option should you choose? To the line of credit vs credit card debate, the answer is simple: both alternatives can be excellent choices. It all depends on what type of benefits you value and what your business needs are.

FAQs

What’s the difference between a loan and a line of credit for business?

A LOC is a revolving account, while when you get a business loan, a lump sum that is transferred to your account. A revolving account means that the lender can withdraw money multiple times and repay until the credit limit is reached.

Should I get both a line of credit and a credit card?

That depends on your particular business needs. If your finances are on the rocks, it is clearly not advisable. However, if your business has the means to manage them, they could both serve as useful tools.

Why can credit cards be so expensive?

If you only make minimum payments on your credit card, the total amount will grow. Since the interest rate is often high, you can quickly find yourself having to pay more for the interest than your actual purchases.

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