Business lines of credit and credit cards are flexible and renewable forms of funding. But they have different repayment structures, loan terms, borrowing limits and other distinctions. Either one has its place depending on your business needs. In some cases, having both may even be a smart move.
Business LOC vs. credit cards: A quick comparison
| What it is | Short-term renewable financing | A credit card for business purchases with unlimited loan terms |
| Best for | Larger purchases or cash flow needs | Travel expenses or smaller business purchases |
| Typical credit limits | Up to $250,000+ | Up to $100,000 |
| Interest rates | 5% to 50%+ | 17% to 28% |
| Term lengths | Typically 6 to 24 months | Indefinitely |
| Repayment structure | Varies by lender, but requires minimum monthly, weekly or daily repayments. May only have to make interest payments during the draw period. | Requires monthly minimum payments, including principal and interest charges |
| Time to funding | As soon as the next day after approval | Up to 10 business days (to receive the card), but you may be offered a virtual card almost immediately |
| Eligibility | Based on credit score, time in business and annual revenue | Based on personal credit score and business and employment income |
| Typical fees |
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What is a business line of credit and how does it work?
A business line of credit is a type of flexible financing, often used as an emergency fund or to cover short-term cash flow needs. Unlike term loans — which offer a one-time lump sum payment — credit lines are usually revolving, meaning your available balance replenishes as you pay it back. And you only pay interest on the funds you use.
But terms are typically short for credit lines — usually two years or less. You may also be required to make weekly or daily repayments, and LOCs often come with origination fees, draw fees or other mandatory charges.
How to qualify for a business line of credit
Requirements vary by lender, but here’s the minimum criteria you’ll typically need to meet:
- At least six months to one year in business
- Monthly revenue of $10,000+
- A credit score of 670 and up
In some cases, you may also need to provide collateral or a personal guarantee to secure the credit line. However, several LOCs don’t require a personal guarantee. The lender might also want to see a business plan.
Pros and cons of business lines of credit
Lines of credit have some definite high points, but it’s worth taking a closer look at the benefits and drawbacks before you apply.
Pros
- Higher credit limits. You can typically borrow more with a line of credit than you can with a credit card.
- Access to cash. Credit cards don’t give you the ready access to cash that you may need for some business expenses, such as payroll.
- Lower rates. Starting rates for LOCs are lower than credit card rates, so they could be less expensive with a good credit score.
- Builds credit. Both credit cards and LOCs can help you build business credit and qualify for lower-cost financing down the road.
Cons
- Extra fees. Unlike credit cards, LOCs typically have multiple fees that add to the loan’s cost.
- Minimum draws. Some line-of-credit providers have minimum draw requirements that may cause you to finance more than you need.
- Short terms. While sometimes LOC terms can be extended, they don’t have unlimited loan terms like credit cards.
- May require frequent repayments. Credit cards have monthly payments, but LOC lenders may require weekly or even daily repayments, which could be more difficult to manage.
- Potentially higher rates. Online lenders, in particular, could charge higher rates than credit card issuers, especially if your credit score is less than ideal.
When to consider a business line of credit
Here are a few situations where a business line of credit might be your best option:
- Qualifying for a better rate. Rates for business lines of credit typically start around 5% to 6%. If you qualify for the lowest rate, it might be cheaper to get an LOC than a credit card, just watch out for fees.
- Accessing cash. Certain expenses can’t be put on a credit card, which could make a credit line the better choice.
- Making larger purchases. Borrowing limits are typically higher for lines of credit than credit cards, making larger buys more feasible.
What is a business credit card, and how does it work?
A business credit card is also a type of revolving credit and works exactly like your personal credit cards. But it’s important to note some key differences from lines of credit. For example, it doesn’t automatically give you access to cash. Instead, you have to take out a cash advance, which comes with a transaction fee of around 3% to 5%, and you’ll be charged at a higher interest rate than normal purchases. Plus, credit cards usually have smaller credit limits than LOCs.
However, business credit cards are convenient, there’s no waiting period to access funds and you won’t be charged interest if you pay your balance in full each month. Also, many cards offer 0% financing on purchases for up to a year or more. And credit cards often have great perks, like cash back or travel points.
How to qualify for a business credit card
It’s typically easier to qualify for a credit card than a business line of credit — you don’t even need a formal business to apply. Freelancers, gig workers and other self-employed individuals are also eligible to get a business card.
As long as you have a good credit score of at least 670 (although 700+ is better), no derogatory marks on your credit history and sufficient income, you have a very good chance of approval. Income should include both employment and business earnings.
Pros and cons of business credit cards
Credit cards may be easier to qualify for, but it’s a good idea to weigh the advantages and disadvantages before making a decision.
Pros
- Longer terms. Credit cards usually have limitless loan terms as long as you make your payments, whereas LOCs tend to have short terms.
- Promotional periods. Tons of business cards offer low or 0% financing for up to a year or more — something you won’t find with LOCs.
- Good for recurring payments. A credit card makes it easy to set up automatic payments for certain recurring expenses, such as utilities.
- Perks. Cashback rewards, travel points and other perks all help to make a credit card a more attractive option.
- Fewer fees. Credit cards generally have fewer mandatory fees than lines of credit.
Cons
- Annual fees. Many business cards charge an annual fee, which could cost you around $200 to $600 or more per year.
- Lower borrowing limits. In general, credit cards don’t offer as much available credit as a credit line, especially if your credit score is on the low end.
- Risk of overspending. Seamless access to credit with no draw fees can make it easier to overspend.
When to consider a credit card
There are solid reasons to have either a business line of credit or a credit card — or both. But here are some situations where a credit card may be a good choice.
- Paying for routine expenses. The ease and convenience of using a credit card to purchase office supplies or other necessities can’t be beat.
- Automating recurring payments. Setting up your credit card to autopay bills, such as utilities, internet or other regular expenses, can streamline your bill-paying process.
- Saving on interest. If you can afford to pay your balance in full each month, you won’t have to pay interest.
- Taking advantage of card perks. Cashback rewards, travel points and other perks can add significant value to your choice of financing.
Key differences between business lines of credit vs. credit cards
Consider some of the major differences between these types of flexible funding.
Credit limits vs. loan terms
Business lines of credit typically have higher borrowing limits than credit cards, which can make a huge difference depending on your funding needs. But you have less time to access the funds because LOC loan terms are usually two years or less, while credit cards can theoretically be used forever.
Fees and interest
Credit lines may potentially come with lower rates than credit cards, but they’re not necessarily cheaper. This is because they also charge a number of fees that add to the cost. By contrast, credit cards only have one mandatory fee — the annual fee — unless you need a cash advance. There’s also no grace period with credit lines. You can’t avoid interest by repaying your balance each month like you can with a credit card.
Repayment terms
The payment structure is very different between the two. With a credit card, you have only one minimum monthly payment. Repayment terms for lines of credit, though, can vary widely by lender. For instance, payments may be required weekly or daily and the payment structure may be different based on whether you’re in the draw period or repayment period.
In addition, some lines of credit treat each withdrawal as a loan, but credit card funds always replenish as you pay them back. In general, a credit card is a more predictable and stable form of funding than a business line of credit, but it typically has a smaller credit limit.
The similarities
The key similarity that connects these types of business funding is access to revolving credit. Most other loans are disbursed in one lump sum, and that’s it. So, although LOCs and credit cards are structured differently, they both allow you to repay funds and borrow again without having to go through another application and approval process.
They may also offer similar interest rates. Credit lines tend to fall within a broader range of rates, but depending on your credit score and other factors, you could end up with basically the same rate for either option.
Business LOCs and credit cards may have similar approval and funding times as well. In many cases, you could receive a decision the same day you apply and access to funds within hours or days.
Alternatives to consider
If neither a business line of credit or a credit card is the right move for you, consider these alternatives.
- Home equity line of credit (HELOC). Homeowners may want to consider a HELOC — another form of revolving credit. It typically offers more competitive rates than a credit card and a longer draw period than a business line of credit.
- Business term loan. A term loan might be a better option if you have a large purchase in mind and know exactly how much you need to borrow.
- Invoice factoring. If you run a B2B business, using an invoice factoring company like FundThrough is a way to access capital without going into debt, but it is an expensive option.
- Business loans marketplace. Explore multiple financing options through a marketplace like Lendzi. It has more than 60 lending partners and provides business loan experts to guide you through the process.
- Personal loan. It’s typically easier to qualify for a personal loan than a business loan, making it a more accessible choice to fund your business.
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The Finder Score crunches 12+ types of business loans across 35+ lenders. It takes into account the product’s interest rate, fees and features, as well as the type of loan eg investor, variable, fixed rate – this gives you a simple score out of 10.
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Frequently asked questions
Is it better to have a credit card or a line of credit?
That really depends on how you plan to use the funds. If you prefer a long-term credit limit to make some small purchases and reap rewards, a credit card might be the right choice. For short-term goals or larger purchases, a line of credit could be a better option.
Is it better to use a business credit card or a personal card?
It’s usually better to use a business card because it keeps your personal and business finances separate. If you decide to use a personal credit card instead, you may want to designate one that you only use for business expenses. This strategy can also be helpful at tax time if you itemize your deductions.
