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 could fit the bill for your business: a line of credit and a 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). 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.
Key Points
• A business line of credit provides access to a larger pool of funds for short-term needs, whereas business credit cards are better suited for smaller, frequent purchases.
• Lines of credit often come with more flexible repayment terms and typically lower interest rates. Credit cards require minimum monthly payments and often have higher interest rates if balances are not paid in full.
• Business lines of credit are ideal for managing cash flow or financing larger expenses, while credit cards are convenient for everyday expenses, online purchases, and travel.
• A credit card and a line of credit both allow businesses to borrow up to a limit, repay, and reuse the funds, but credit cards usually come with rewards or cashback benefits.
• Lines of credit may require stronger credit scores and financial documentation, while credit cards are easier to obtain but may come with higher fees for cash advances or exceeding credit limits.
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What Is a Business Line of Credit?
A business line of credit, sometimes called a commercial line of credit, is a convenient, flexible way to cover expenses like working capital, bills, inventory, and other small, last-minute expenses.
Unlike a small 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 businesses. 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, including:
• 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 available through your business checking account, a mobile app, or a card for you to use as needed.
• You use (and pay interest on) only what you need: With a business line of credit, you’re only charged interest on the amount you use. And, 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 working capital needs.
Cons of a Business Line of Credit
While a line of credit can be beneficial, it may also have drawbacks in some situations, such as:
• Low maximums: The sum of money you have available to you with a line of credit may be less than you’d get with a small business loan. A business line of credit may not provide enough capital for a large or expensive endeavor. You may even want to compare a personal loan vs. a line of credit to see if you can get more favorable terms.
• Short terms: A business line of credit also usually has shorter repayment terms than other options — typically three 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. In addition, some credit lines come with variable interest rates. As a result, you may not have a fixed payment amount to budget for.
• Impact on your personal credit: Any missed payments may affect your personal credit history, especially if you’ve issued a personal guarantee to secure your business’s line of credit.
When to Consider a Business Line of Credit
There are some scenarios in which a business line of credit makes sense. Some examples might be:
• You need to pay for an expansion or other large project: A business line of credit typically offers more runway than a credit card. Credit limits may be as high as $250,000 in some cases.
• You’re looking for a lower APR: Lines of credit tend to have lower interest rates (but, often, annual fees). Business credit cards may charge more than 20% APR for purchases — and even more for cash advances.
• You need bridge funding during a slow period: You might need to use a line of credit to pay for inventory, vendors’ invoices, payroll, rent, or other expenses that exceed the limit on your credit card.
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.
A business credit card can also be 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 commercial credit bureaus). Just keep in mind that, even if your business credit card is in your company’s name, it can potentially still affect your personal credit score. Some business credit card issuers will report late payments and serious delinquencies to consumer credit bureaus.
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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 personal 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 other types of business loans, a business credit card will let you use the funds for any business expense.
Cons of a Business Credit Card
Business credit cards also have some drawbacks. Here are some you may want to consider:
• 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 significant amount 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 annual percentage rates (APRs) than many other kinds of funding, including lines of credit.
• Payment problems could impact your personal credit score: Business credit card issuers will often report negative payment history to both commercial and consumer credit bureaus. If your business fails, the credit card company will likely view you as personally liable for unpaid debt, especially since many of them ask you for a personal guarantee.
When to Consider a Business Credit Card
A business credit card can often be a worthwhile addition to a line of credit. And there are times when a card may be a better fit for your business situation, such as:
• You have a business credit history but no collateral: Credit cards are generally unsecured, and if your business credit score is decent, it’s likely you’ll be approved without collateral.
• You only need to make everyday business purchases: The card’s credit limit should be able to accommodate day-to-day expenses. Plus, if the card offers rewards, those sums can be reinvested in your business.
• You want access to the credit indefinitely: Unlike a line of credit, spending with a business credit card is not limited to a defined draw period. As long as you pay at least the minimum charge each month, you can keep the account active for as long as you like.
Key Differences Between Line of Credit and Credit Card for Businesses
Both lines of credit and business credit cards are 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.
| Business lines of credit | Business credit cards | |
|---|---|---|
| Purpose | Larger pool of funds for short-term needs; ideal for managing cash flow or financing larger expenses | Better suited for smaller, frequent purchases; convenient for everyday expenses, online purchases, and travel |
| Constraints | May require stronger credit scores and financial documentation | Easier to obtain but may come with higher fees for cash advances or exceeding credit limits |
| Maximum credit amounts | Tend to be higher | Tend to be lower |
| Interest rates | Tend to be lower | Tend to be higher |
| Collateral | May be either secured or unsecured | Typically unsecured |
| Annual fees | Tend to be lower | Tend to be higher, but no-fee options exist |
| Cash advances | Maximum tends to be larger than with credit cards; fees and APRs generally lower | Maximum typically lower than with line of credit; fees and APRs tend to be higher |
| Rewards | No | Commonly offered |
| Repayment flexibility | Draw period for using capital may last for several years, but once it ends, repayment schedule for outstanding balance is imposed and withdrawals are disallowed | Minimum monthly payments required, but no time limit on paying off the outstanding balance as long as credit limit is not exceeded |
Maximums
Typically, both lines of credit and business credit cards provide smaller amounts of money than many other kinds of loans. However, business credit cards tend to 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 likely end up paying more in interest on a credit card.
Collateral
Business credit cards are typically unsecured, meaning you don’t have to provide any collateral to “secure” your debt. Business lines of credit, on the other hand, can be secured (require collateral) or unsecured (no collateral required). If you don’t have collateral to put up or don’t wish to put up collateral — and can’t qualify for an unsecured line of credit — you may want to consider whether a credit card could work for you.
Annual Fees
Both business lines of credit and business credit cards generally come with annual fees. Typically, business credit cards charge higher annual fees than business lines of credit, but that’s not always the case. Some banks offer business credit cards with no annual fees.
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 higher fees and higher APRs than advances from a line of credit. Also, you can typically get a larger cash advance from a line of credit than you can from a credit card.
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 types of rewards. You might find a business credit card that offers extra cash back for spending money in certain categories (like office supplies), for example, or one that offers extra points for business travel.
While rewards can be appealing, some reward cards come with high annual fees, so you will want to make sure the rewards you’ll earn by using the card will more than make up for the fee.
Repayment Flexibility
With a credit card, there’s no official deadline for paying off the principal. The minimum payment for a credit card may be a small percentage of the balance along with interest accrued, and the account stays open indefinitely as long as you pay the monthly minimum. Also, credit cards typically have a grace period of three weeks or so before interest is charged to the account.
By contrast, with a line of credit, interest accrues right away on any withdrawal. Also, a line of credit requires you to pay off the principal eventually, in addition to the interest, within a time period defined in the original loan agreement. And once you pay off the balance in full, the account is closed and cannot be used again.
The Takeaway
Business line of credit vs. credit card — which is best? No answer fits every company across the board. Both business lines of credit and business credit cards can be valuable credit tools. Credit lines generally offer higher credit limits and lower APRs, but credit cards often come with valuable rewards and some have a 0% APR introductory period.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What is the main difference between a line of credit and a credit card?
A line of credit offers a pool of funds that can be drawn upon for larger, short-term financial needs with flexible repayment options. A credit card is designed for everyday expenses, offering convenience and rewards but often with higher interest rates if balances aren’t paid in full.
Which option is better for managing irregular cash flow?
A line of credit is better for managing irregular cash flow, such as covering payroll or seasonal expenses, due to its typically larger limits and lower interest rates. Credit cards are less suitable for such purposes because of their smaller limits and higher interest.
Can a business have both a line of credit and a credit card?
Yes, a business can benefit from having both. A line of credit provides backup for larger cash flow needs, while a credit card is useful for day-to-day transactions and earning rewards on purchases.
What are the risks of using a business line of credit?
A business line of credit may involve a number of unforeseen fees or penalties, even if you make payments on time. The lender may charge you a fee for each withdrawal or wire transfer. Some may impose payment processing fees or early repayment penalties. Worse yet, the ease of borrowing with a line of credit could lead to a cycle of debt if not managed carefully.
How does applying for a line of credit affect your business credit score?
If your business applies for a line of credit, the creditor will generally access your credit file in what’s known as a hard inquiry or a hard credit check. Regardless of your existing credit score, it will generally go down after a hard inquiry, no matter the outcome. FICO estimates that one inquiry can reduce your score by five points or less. The effect typically subsides after 12 months. Bear in mind, too, that each business credit bureau (Equifax, Experian, and Dun & Bradstreet) has its own criteria for scoring, so results may differ by bureau.
About the author
Ashley Kilroy
Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.
Photo credit: iStock/milan2099
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