Business line of credit vs. credit card: How to decide

When it comes to borrowing money for your business, two common financing options are business lines of credit (LOCs) and business credit cards. Both 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 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 the potential to earn rewards.

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.

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.

There are a few key differences between business LOCs and credit cards to consider when choosing what’s best for your company. Here’s a closer look at them.

A business LOC can be useful for larger expenses like inventory, equipment and payroll. For example, if you need to purchase laptops and company cellphones for 20 employees, the total cost might exceed your credit card limit. In that case, an LOC could help cover the purchase while giving you flexibility to pay off the balance over time.

A business credit card, on the other hand, might be more convenient for smaller purchases such as advertising expenses or travel costs.

The borrowing period for a business LOC—also known as the draw period—typically lasts a set number of years. During this time, you can withdraw funds as often as needed, as long as you don’t exceed your credit limit.

If your account is active and in good standing, your business credit card will remain open indefinitely. You can make charges as needed, as long as you stay within your credit limit.

A business LOC makes it easy to access cash when you need it, often with faster approval than a traditional business loan. You can access the cash through checks, a card or via a mobile app, depending on the lender. 

Use your business credit card to access funds for everyday spending, like office supplies, taking clients to lunch, subscriptions and more. And while you can use a business credit card to get a cash advance quickly, keep in mind that you could be subject to cash advance fees.

The credit limit on a business LOC is typically higher than on a business credit card. Depending on your credit history, you may be able to qualify for a business LOC with a credit limit of up to $100,000.

Business credit cards typically have higher credit limits than personal credit cards. However, they could still be lower than the credit limit you might receive with a business LOC.

Generally, interest rates on business LOCs are lower than those on business credit cards. But some business credit cards offer low introductory annual percentage rates (APRs) for extended periods as well. 

APRs can vary on business LOCs, but they’re usually competitive. Lenders will consider your credit score when determining the interest rate. If your credit score is on the lower end, you could expect to pay a higher rate.

Keep in mind that if a business credit card has a 0% introductory APR, the rate may increase once the promotional period ends. Credit card APRs can vary based on factors like credit history and issuer terms, with rates sometimes reaching as high as 30%.

Both business LOCs and business credit cards may be secured or unsecured.

A secured business LOC requires business owners to offer collateral that matches the total borrowed. Secured LOCs usually have lower interest rates and allow for higher borrowing limits, as they pose less risk to the lender. On the other hand, unsecured business LOCs don’t require collateral, but they might— like some credit cards—require a personal guarantee from the business owner to reduce risk to the lender.

Similarly, secured business credit cards require a security deposit equal to the total credit limit. Unsecured credit cards don’t require a security deposit and usually come with lower APRs and better reward options.

The types of fees associated with a business LOC include:

• Origination fees

• Monthly maintenance fees

• Annual fees

• Draw fees

• Late fees

• Interest fees

Business credit cards often have the following fees:

• Annual fees

• Late fees

• Cash advance fees

• Over-limit fees

• Interest fees

Business credit cards have an advantage over business LOCs when it comes to earning rewards on company expenses. Many business credit cards offer cash back rewards or travel rewards, like bonus miles, that can help put money back into your business while helping to offset business expenses.

Unlike business credit cards, most LOCs don’t offer any type of rewards program. So if earning rewards on your purchases is important, a business credit card might be the better option.

If you’re trying to decide which option is best for your organization, here are a few things to consider:

• What are your current or upcoming business expenses? If you know you’ll have short-term, seasonal or larger expenses, a business LOC can provide access to cash to cover these costs without hindering cash flow. But a business credit card is ideal for separating business expenses from personal ones while allowing you to make smaller company purchases.

• What is your credit score? It may be easier to get approved for a business LOC than other types of business loans, especially if you’re still building business credit or have been in business less than a year. But qualifying for a business credit card could be even easier than qualifying for a high-limit business LOC. Approval depends on multiple factors, so eligibility can vary. 

• Are you interested in earning rewards? Business credit cards often offer cash back or travel rewards, allowing you to earn as you spend. Some also have introductory bonus offers that help you get the most out of your spending and support business growth from day one of opening your account.

• Do you want to give employees access to company funds? Business credit cards let you extend purchasing power to multiple employees for business-related expenses. This can boost morale and empowerment while also giving you the ability to track spending, set limits and potentially earn rewards on their purchases.

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. You can even see if you’re pre-approved with no harm to your personal credit score.