Business Credit Center

Compare and contrast: Business line of credit vs. a credit card

Before you apply, learn about these two types of credit and how they can help your business in different ways.

Published: August 08, 2016

When considering business credit options, a common question surfaces regarding the difference between a line of credit and a credit card.

They have a lot in common. Both offer a flexible, convenient way to cover expenses. They're both "revolving," which means you can pay them down and use them again whenever you choose. And both can help you manage your business cash flow. So what's different? The biggest distinction is how you use them — and when.

Credit card basics

Many business owners depend on a credit card for everyday needs, from coffee and supplies to services and travel. The convenience and business-friendly features of a card make it easy to track and manage your spending. Many business credit cards offer competitive rewards programs, so your day-to-day expenses can help earn you cash back or rewards points. And if you pay down the full balance of the card each month, you avoid paying interest — making it cost-effective.

Line of credit basics

When larger, recurring needs come along, such as purchasing inventory or covering a seasonal dip in revenue, business owners can turn to a line of credit to supplement their cash flow. This tool also comes in handy for the unexpected, whether that's a promising opportunity or an unforeseen shortfall. Because it's often used for larger expenses, it's more common to carry a balance on a line of credit — though it's still a good idea to pay it off when you can.

With a line of credit, you can often get cash advances with no fee and at the same low interest rate as other uses. Plus you can usually access a line of credit in several ways — such as online transfers, a dedicated card, and personalized checks.

Making your choice

Every expense matters in a small business, so carefully scrutinize fees and rates. Opening and annual fees for a card are typically lower than for a line, or there may be none. But while a line may cost you more in fees, the interest rate is almost always lower. With this in mind, it makes sense to use a card for smaller, immediate needs and a line for larger amounts when you may carry a balance.

There's one more dimension to these tools — secured and unsecured variations. While unsecured credit is more familiar, secured cards and lines are linked to cash accounts used as collateral. These can be a great way to build solid credit, whether you're starting out and don't have much credit history, or have had credit difficulties in the past.

The bottom line? Consider combining both options in a way that makes sense for your business needs. With these flexible, complementary tools, there's no right or wrong choice, only possibilities.

Thinking about applying for credit for your business soon? Get advice on how to present the strongest possible application.