Business Credit Card vs. Line of Credit: What’s the Difference?

In this article we cover:

• Benefits of a small business line of credit
• Benefits of a business credit card
• The difference between a small business line of credit and a business credit card
• Can I use a small business loan instead?
• Can I use both a small business line of credit and a business credit card?
• Summary

A business credit card and a small business line of credit can help small business owners operate. They each have their benefits and limitations which we will cover in this article. However, choosing between the two is not a zero-sum game, and operating your business with both can be very beneficial.

Benefits of a small business line of credit

A business line of credit is similar to a credit card. Lenders will establish a credit limit for the maximum amount of money they will lend you and you can tap as much as you need up to your limit. Like a credit card, you pay interest only on the amount you borrow.

In most cases, having a business line of credit is beneficial because running a business isn’t always smooth sailing. Entrepreneurs know that surprises are around every corner and having access to capital can help navigate those periods of uncertainty.

Preventing unanticipated expenses is impossible but having a business line of credit is a great way to be prepared for them. There are also opportunities around every corner and having access to capital can help you take advantage of them. Sometimes the window of opportunity is very slim and a business line of credit can give you the immediate cash you need to act.

A business line of credit is a versatile and flexible financing option for businesses that allow them to take advantage of opportunities or navigate a downturn. Let’s review the pros of a business line of credit:

• Competitive Interest Rates
• Flexible
• Revolving
• Ready cash
• Improve credit profile
• Take advantage of an opportunity
• Navigate periods of uncertainty or stress
• Unsecured/no collateral needed
• Relative to loans, they can be easier to open

For a deeper look into each of the benefits listed above, please review our article Why Should a Small Business Open a Business Line of Credit?

Benefits of a business credit card

A business credit card is a great way to make small business purchases. A business credit card can strengthen your cash flow, build a credit history for your business, or leverage a strong personal credit profile should your business be new and not have a credit history, and can even come with perks such as credit card reward points.

There are almost always benefits and perks being offered to small business owners from the credit card issuer to incentivize them to sign up. There is so much competition among credit card issuers, that they are always raising the stakes in terms of introductory benefits.

Here are some of the benefits of opening a business credit card:

• Introductory 0% interest rate period possible
• Intro offers if you spend a certain amount of money upon opening the card (this is not a real offer, but for illustration purposes: spend $10,000 in the first 90 days and receive a $750 cash bonus in the form of a statement credit)
• Reward points
• Benefits (for example, special access to airline lounges or experiences)
• Cashback
• A higher credit limit than a personal credit card
• A tactic to help you build up your business credit profile

For a deeper look into each of the benefits listed above, and other key things to know, please review our article on the 9 Most Important Things to Know About Getting a Business Credit Card.

The difference between a small business line of credit and a business credit card

There are similarities between a business line of credit and a business credit card but they are two very different ways to access capital. In general, interest rates for credit cards can be much higher than a business line of credit. Receiving cash with your credit card means paying a fee and/or a higher interest rate for a cash advance. Credit cards have inflexible monthly payments that require you to meet the payment in full or be charged a high-interest rate. With a business line of credit, you may be able to arrange a custom repayment schedule that fits your business cycle.

High level, the main differences between the two are the amount of cash you have access to and the time in which you have to pay it back. Later in this article, we will break down a strategy that involves using both a small business line of credit and a business credit card and when you should use each.

Can I use a small business loan instead?

The short answer is yes. You can use a small business loaninstead of a business line of creditor a business credit card. The next logical question is, “why would I want to use a loan instead of a credit card or line of credit?” The answer lies in what you need the capital for because there are many loan options to consider. Are you taking your team out for coffee (no, a loan doesn’t make sense), buying a new computer (no, a loan doesn’t make sense. Unless you are buying a new computer for a large number of employees), or purchasing an entire building to expand your operation (yes, a loan makes sense for larger purchases).

Whether it’s a loan from the SBA, an online lender, or from a traditional financial institution like a bank or credit union, loans are better for very large purchases that give you many years to pay back the money at a reasonable interest rate. For more information on loans, read our article Information About Small Business Loans Every Small Business Owner Must Know.

Can I use both a small business line of credit and a business card?

The short answer is yes, and having both a business credit card and a small business line of credit open at the same time is a sound business strategy. Small business owners need to make purchases all the time to operate their business and having both can help you optimize your purchases.

Sometimes cash is low but you still need to make a purchase to operate. Having financing options available to you is critical, and you never want to be in a situation where you can’t make a move because you don’t have access to capital.

Given there are lots of similarities between the two financing options that we’ve discussed above, when is it best to use a business credit card versus a line of credit? Let’s review each option to help you make the most of each.

Small business line of credit

Generally speaking, it is very smart of a business to open a business line of credit as soon as possible. Even if there is no immediate need for capital, opening a business line of credit allows you to confidently navigate the uncertainties of operating a business

• Using a line of credit helps for covering purchases you can’t put on a credit card or that might exceed your spending limit on a credit card. For example, if you need $25,000 for a franchise fee to expand, you can immediately access the capital with a line of credit that’s already open with that credit limit.
• If you need longer than a month to pay back the cash. A business credit card only gives you 30 days, and then your outstanding balance will be charged a very high-interest rate with no grace period. You can essentially use a business line of credit as an ad-hoc short-term loan because once it’s open you don’t need to re-apply.
• Avoid high cash-advance fees of a credit card
• Generally lower interest rates

Business credit card

There are several cases where using a business credit card is better for a small business owner than a credit card:

• Everyday business expenses that are smaller in value. For example, taking the team out for coffee, gas in the company car, printer ink, office supplies, etc.
• Using your credit card and paying it off in full every month – don’t just make the minimum monthly payment – will help you raise the credit profile for your business which can lead to higher limits on both a business credit card and a line of credit.
• Obtaining quick, collateral-free financing up to your limit for general business needs. Assuming you have the cash flow to pay it off in full before being charged a high interest rate.
• Set operational expenses to “set it and forget it”. For example, your small business credit card can be automatically charged to cover your internet, cell phone, and other bills. Also, you can usually set up your credit card to automatically make payments from your business checking account at the end of the month to further automate your expenses ensuring nothing slips through the cracks.
• If a purchase you were planning on making qualifies for a credit card introductory offer, it might be a good opportunity to open a business credit card.
• If you have bad credit, you can use a business credit card to rehab it. Making small purchases every month and paying off your balance in full every month is one tactic to improve your credit.

Credit and fee considerations

Both a business credit card and a small business line of credit are good options to build business credit. Obtaining the best business financing and highest available credit depends on your creditworthiness. If you are at the very beginning of your business journey, your business credit score might not be very strong so the lender will typically rely on your personal credit score. Be prepared to have your personal finances reviewed. All three credit bureaus will likely be checked to generate a credit report. Be open to doing a little credit work if you are new in business.

It’s important to do your due diligence on fees that might be involved with a business credit card and a small business line of credit. For a line of credit, familiarize yourself withdraw fees, draw periods, maintenance fees, late fees, origination fees, and annual fees. For a business credit card, familiarize yourself with maintenance fees, late fees, and annual fees.

Summary

The combination of a business credit card and a small business line of credit can be a smart way to operate a small business. While each of the two financing options has its nuances on when to use them, it’s smart to open both as soon as you can to give your business the flexibility and ability to operate by giving your business ready cash in times of need.

Whether you are after a business line of credit to make a purchase for your business, or you have a business that you want to expand, Biz2Credit is a great place to start. Our helpful staff will provide you with exceptional customer service and will work hard to understand the needs of your business, the intended uses for your loan, and the best terms that can be offered. Get in touch today to find out how small business financing via a business line of credit can help you.