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 one 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 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, fee structures and credit limits.
• When choosing between a business LOC and a business credit card, consider factors like your spending needs, the potential costs and whether you’re looking to earn rewards.

A business LOC is a flexible financing option that provides access to funds you can borrow, repay and borrow again up to a set limit. And you typically pay interest only on the amount you borrow. Business LOCs can be secured or unsecured, which determines whether you need to provide collateral to secure the line of credit.

Business LOCs work by allowing you to draw funds during a designated draw period and repay them according to the line’s terms. If approved for an LOC, you will get access to a certain amount, called your credit limit.

You can borrow and repay as many times as you need within the line’s terms and conditions, but you can’t exceed its limit. Depending on the lender and terms, you typically have access to the LOC for a few years.

Here are some of the advantages and disadvantages of business LOCs.

A business LOC can offer several potential benefits, including:

• Higher credit limits—sometimes upward of $100,000 or more, based on the business’s credit history and financial performance
• Straightforward access to cash through checks, a card or the lender’s mobile app—typically without cash advance fees
• Lower interest rates than those of business credit cards and some types of business loans.

There are some potential drawbacks to consider, such as:

• Collateral may be required to secure a business LOC with a higher credit limit
• Rewards—like cash back or travel miles—and other benefits aren’t typically offered
• The draw period tends to end after a set period of time; funds can’t be accessed indefinitely

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 operating costs. One unique feature of business credit cards is that they often offer rewards like cash back or miles. This can potentially provide cost savings, as you earn cash or rewards on money you’re already spending to grow your company.

Business credit cards work on a revolving basis, so your available credit becomes available again as you pay down your balance. Depending on the card, you may be able to carry a balance from month to month or be required to pay it in full.

There are different types of business credit cards, such as traditional business credit cards and no preset spending limit (NPSL) business credit cards. 

• Traditional business credit cards: These work like personal credit cards in that you can make purchases up to a set credit limit and pay down the balance repeatedly. With traditional business credit cards, you can carry a balance—but this could result in interest charges. 
• NPSL business cards: Sometimes called charge cards, NPSL business cards don’t have a fixed credit limit. Instead, the card’s spending capacity may adjust from month to month based on factors like payment history and credit profile. But with this type of card, you usually have to pay the balance in full each month.

Either type of card can help your organization manage cash flow throughout the year while providing access to other benefits, like accounting tools or airport lounge access. And compared to personal credit cards, business credit cards typically offer higher credit limits.

Here are some of the benefits and drawbacks of business credit cards.

Business credit cards can provide several advantages for managing everyday expenses, including:

• Open-ended access to funds as long as the account is active and in good standing
• Access to rewards and other benefits to make the most of everyday spending
• Ability to add employee cards to your business card account with customizable spending limits and monitor staff’s spending while earning rewards on their purchases

There are some potential limitations to keep in mind, such as:

• Credit limits may be lower than those offered by business LOCs
• Higher interest rates may apply if you carry a balance, although some business card issuers offer interest-free introductory periods or NPSL cards that don’t charge interest (as these cards typically require the balance to be paid in full each month)
• Some vendors or suppliers don’t accept business credit cards, which could require an alternative payment method or a cash advance—often resulting in additional fees

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

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 help cover these costs while supporting cash flow. But a business credit card may be a better fit 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 some other types of business loans, depending on the lender and your qualifications. But qualifying for a business credit card may be easier than qualifying for a high-limit business LOC. Approval depends on multiple factors, such as time in business and credit history, 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 can 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 help streamline expense management while also giving you the ability to track spending, set limits and potentially earn rewards on their purchases.
• What are the costs of each type of funding? Both business LOCs and business credit cards have different fees, but business LOC interest rates tend to be lower than business credit card interest rates. However, you may be able to find a business credit card that offers a low or 0% introductory APR. What’s more, NPSL business credit cards don’t normally assess interest charges, as the balance is paid in full each month. 

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 and 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, discover Capital One business credit card options today. You can even find out whether you’re pre-approved with no harm to your credit scores.