Business line of credit vs. credit card: What to consider
Both business lines of credit (LOC) and business credit cards offer access to a revolving credit line. And both can help ensure your business has the funds it needs to operate efficiently. But there are some key differences to consider when choosing which option might be best for your business.
Here’s a closer look at these two types of financial products to help you determine which may be right for your business’s needs.
What you’ll learn:
- A business line of credit (LOC) offers flexible funding that can be borrowed, repaid and reborrowed as needed to support cash flow needs.
- A business credit card also provides funding unique to business expenses, with the potential to earn rewards based on the card you choose.
- Some of the differences between business LOCs and business credit cards include interest rates and repayment terms.
What is a business LOC?
A business LOC provides access to funds you can borrow, repay and borrow again up to its limit. And you pay interest only on the money you borrow. If approved for an LOC, you will get access up to a certain amount, called the draw limit. This allows businesses to access funds as they need throughout the designated draw period without paying interest on a lump sum of cash as they would with a business loan.
You can borrow and repay as many times as you need within the line’s terms and conditions, but you can’t exceed its limits. Depending on the lender and terms, you typically have access to the LOC for a few years. Business LOCs can also be secured or unsecured, which determines whether you need to provide collateral to guarantee loan repayment.
What is a business credit card?
Business credit cards provide access to funding up to a certain amount, called a credit limit. They are often used to pay for business expenses like supplies, utilities, travel and other business operations costs. Depending on the type of card you choose, you may have to pay the card’s balance in full each month. In other cases, you can carry a balance. Either way, credit cards can help organizations manage cash flow throughout the year while accessing other perks.
One unique factor of business credit cards is they often offer rewards like points, cash back or travel miles. This can provide cost savings as you earn cash or rewards for money you’re already spending to grow your company.
What’s the difference between a business LOC and a business credit card?
There are a few key differences between business LOCs and credit cards to consider when choosing what’s best for your company.
| Business line of credit | Business credit card | |
| Types of purchases | Large business expenses | Smaller, everyday expenses |
| Borrowing period |
Typically a few years |
Typically infinite as long as your account is active and in good standing |
| Access to funds | Easy access to cash | Tends to have cash advance fees |
| Credit limit | Typically higher | Typically lower |
| Interest rates | Typically lower | Typically higher |
| Secured or unsecured | Typically unsecured, but may be secured | Can be secured or unsecured but is often secured for high limits |
| Fees | Often has an origination fee, annual fee, draw fee, late fee and interest |
Often has an annual fee, late fee, cash advance fee, over-limit fee and interest |
| Rewards potential | Rarely offers rewards | Typically offers reward programs |
Benefits of business LOCs
Business LOCs may offer the following advantages:
- Cash flow support: A major benefit of a business LOC is that it provides access to cash to cover short-term or seasonal expenses and unexpected costs to keep your organization running smoothly without hindering cash flow.
- Better approval odds: It might be easier to get approved for a business LOC over other types of business loans, especially if you’re still working to build business credit or have been in business less than a year. However, approval depends on many different factors, so your approval may not be guaranteed.
- Higher credit limit: Depending on your credit history, you may be able to get a credit limit upward of $100,000 with a business LOC. This can be helpful for making large business purchases without hindering your cash flow.
- Quick access to funds: You can usually get approved for a business LOC faster than a traditional business loan. Plus, you can access cash easily, often with checks, a card or via a mobile app depending on the lender.
Benefits of business credit cards
Business credit cards may offer the following advantages:
- Separate business and personal expenses: Business credit cards allow you to keep business spending separate from personal spending. This can help with accounting, spend tracking and more.
- Access to funds for everyday spending: Business credit cards can be used for small, everyday purchases like office supplies, travel expenses, subscriptions and more.
- Ability to earn rewards: Business credit cards may offer cash back or travel rewards that allow you to earn as you spend. Some also have introductory bonus offers to maximize your spend and support business growth.
- Individual employee cards: Business credit cards allow you to provide multiple employees with an option to make company purchases. This can support morale and empowerment while giving you the ability to track spending and set limits.
Key takeaways: Business line of credit vs. credit card
You have options when it comes to accessing funds that can help your company grow and thrive. Both business LOCs and business credit cards can help you cover expenses as well as manage your cash flow. But if you’re interested in earning rewards, providing free employee cards and using tools to keep track of spending, a business credit card might make more sense for your company.
If you think a business credit card is the right choice for your organization, compare Capital One business credit cards today.
