Both business lines of credit and business credit cards give you access to cash flow when you need it and the flexibility to use funds how you want, creating a cushion for emergency situations and allowing you to seize time-sensitive opportunities. They are forms of credit, so they require hard inquiries, resulting in temporary reductions to your business credit scores, and both can come with higher interest rates than traditional business loans.
The two are similar, but there is a significant difference in what they can offer your business. In some situations, you may want to have both a business line of credit and a business credit card available. That’s what we’ll help you figure out with the guide below.
But first, we want to share a quick definition in case you are not familiar with how they differ. From there, we have a quick table you can come back to and reference, which shows the similarities and differences, as well as a guide on when to choose one over the other or both.
- Business lines of credit are a form of financing that gives you a pre-approved limit of cash you can borrow, and you can use the funds up to this limit on an as-needed basis. They can take a week to a few weeks to get approved. They generally offer you larger amounts than a business credit card and typically come with lower interest rates. Business lines of credit are harder to get approved for, and depending on your risk level, may require collateral. Unlike a business credit card, you pay interest each time you use funds vs. only when you have a balance outstanding.
- Business credit cards also give you a pre-approved limit, and you can use them on an as-needed basis. You can be approved within minutes to a couple of business days online. The amount you can borrow is normally less than a business line of credit and the interest rates are generally higher, but credit cards are easier to get approved for and normally come unsecured, meaning you do not have to put down collateral. Another benefit to a business credit card over a business line of credit is you only pay interest when you have a balance left outstanding.
How Business Lines of Credit and Business Credit Cards Compare
| Business Lines of Credit | Business Credit Cards | |
| Approval times | 1 – 3 weeks or longer | In minutes to a few business days |
| Amount of funds | Larger | Smaller |
| Interest rates % | Lower but paid on all funds borrowed | Higher but may only be required when you pay the minimum payment or have payments due |
| Fixed or variable interest rates | Both | Both |
| Flexibility for usage of funds | High flexibility | High flexibility |
| Revolving or installment credit | Revolving | Revolving |
| Requires a hard inquiry | Yes | Yes |
| Good for day-to-day expenses | No | Yes |
| Good for larger purchases | Yes | No |
| Good for company expansions and growth | Yes | No |
| Get perks and rewards | No | Yes |
| Can build business credit scores | Yes | Yes |
Some situations, like expanding your company’s footprint with a new location, make sense for business owners to have both a business credit card and a business line of credit. The credit card can be used to pay utilities, while the line of credit can be used to fund the inventory and displays. There are times when one makes sense over the other, so if you’re stuck choosing between the two, the next sections will help.
Choosing a Business Credit Card Over a Business Line of Credit
Business credit cards offer quick approval times, the ability to increase the amount of funds available (instantly and online), and provide cash as you need it, giving them clear advantages over business lines of credit. These benefits are ideal for specific scenarios including:
- Repairs—Fixing equipment like a vehicle that got into an accident or a machine that requires a technician to work are short-term expenses that can be paid back easily, making business credit cards a better match.
- Single or small item purchases—Replacing a single examination table for a medical practice or one to two display cases makes sense on a business credit card, as the total cost may not be very high. The expense can be offset fairly quickly by selling products or seeing patients, making it easy to avoid interest, which would be required if you drew from a business line of credit.
- Perks—Rewards, like travel points to attend meetings and conferences and cashback on everyday purchases for paying utilities, are a benefit of business credit cards that business lines of credit do not have. The rewards can be used to pay for perks at work or provide access to travel lounges at airports. Cashback can cover expenses like utilities and software upgrades or be reinvested back into the company for growth.
- Short-term expenses—Rent, utilities, and day-to-day expenses are better paid with business credit cards because they are easy to pay back, so there is no interest required necessarily.
- Start-ups—If you don’t have assets for collateral or a history of financial stability, business lines of credit may not be available, making a business credit card one of your only current options for financing. Some lenders offer start-up business loans, including the SBA option, but you’ll need to make payments on a schedule vs. only taking on debt as you need cashflow.
- Multiple and repeat purchases—For business meals, office supplies, and other regular low-amount purchases, a business credit card is better than a business line of credit as there are no draw or per-purchase fees, whereas some business lines of credit will have them for each transaction.
Business credit cards are excellent choices for everyday and short-term emergency expenses, but there are times when a business line of credit is going to be a better choice.
Choosing a Business Line of Credit Over a Business Credit Card
For larger purchases that require substantial amounts of funds, business lines of credit can provide the financing needed to cover the costs, like a small business loan. Unlike business credit cards and short-term loans, business lines of credit come with lower interest rates and the credit is revolving vs. fixed, repaid over a predetermined amount of time.
This is why a business line of credit makes sense over a business credit card in the following situations:
- Outfitting entire locations—From consulting spaces that need software systems and computers to retailers that need multiple displays, inventory, and security devices or medical practices that need equipment, business lines of credit make more sense than business credit cards because it will take time to pay the debt back and the lower interest rate frees up cashflow while you run your business.
- Time to wait—If you do not need funds fast, a business line of credit can give you more funding with lower interest rates, making it ideal if there are no immediate business needs (like purchasing a competitor or their equipment if they’re going out of business).
- Large-scale disasters—If a large-scale disaster strikes, a business line of credit lets you fund a new temporary location or keep operations running, as it offers larger amounts of funding. Business lines of credit make more sense than business credit cards, as you’ll spend less on interest and free up cashflow over the payback period, which is vital in times of emergencies.
- Lower interest rates—Because your business is established, you likely have assets that can be put up as collateral to secure the business line of credit, getting you lower interest rates. If lower interest rates are important, as you want to have larger amounts of cashflow at the time of borrowing, business lines of credit are going to win over business credit cards.
- Unexpected cash flow gaps—Seasonal and unexpected lulls happen, whether it is the housing markets in real estate or shopping trends because of economic uncertainty. When cashflow gets tight, a business line of credit is better than a business credit card because the lower interest rates keep the payments lower, freeing up cashflow to keep your operations running.
- Long-term expenses—If the expense is going to be long term or take a while before you are profitable on the investment, the lower interest rate on the business line of credit compared to the business credit card is going to benefit you because you’ll have more cashflow to fund your operational and daily business expenses, while you clear the long-term debt.
- Vendor restrictions—Some higher-ticket items like large rent bills or payroll won’t accept credit cards but may accept a line of credit if you don’t want to sync your business checking account, making a business line of credit the better option as business credit cards cannot be used.
- Carrying a balance—If it is toward the end of the year where a new balance will incur interest, or you will not be able to pay off the larger expense quickly, the lower interest rate on the business line of credit will save you money compared to the balance on a business credit card, which is subject to a higher interest rate.
Sometimes, one of these two financing options is a clear winner. Other times, you may want to choose traditional financing like a small business loan. Then again, for some occasions, having both a business line of credit and a business credit card can work to your advantage.
When Business Lines of Credit and Business Credit Cards Both Make Sense
Sometimes, you’ll want both a business line of credit and a business credit card like in the example above about expanding your business. As a small or mid-sized business owner, you face obstacles that require both small and large expenses. This is where having both options available can work to your advantage.
- Team building for new locations—When opening a new business location, you’ll have to hire and train staff, while also bonding with them as a team. The business line of credit can handle larger costs like paying for recruiters, interviewing, and training, while a business credit card can cover team outings and lunches.
- Cash flow management—Business credit cards are perfect for funding short-term and smaller expenses, so you can keep the business line of credit (the larger cash reserve) untapped for larger emergency situations. Not having to tap into the larger reserve makes it available for when you need it most. Here, having both is a cashflow management strategy that established businesses can enjoy.
- Flexible interest rates—Both business credit cards and business lines of credit can have variable or fixed interest rates. If you get a fixed rate on a business credit card and the variable rate on a business line of credit increases over the amount on the card, you can use the business credit card and not have to take the higher interest rate from the business line of credit.
Business lines of credit and business credit cards are both good for business owners, but business credit cards are better for smaller, day-to-day, or operational expenses than business lines of credit. Business lines of credit are normally a better choice for larger purchases, as the amounts of financing are higher and they have lower interest rates, but they take more time to get approved for and require collateral in many situations.
SmallBusinessLoans does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
