A business’s operating cash keeps fluctuating, and expenses often hit when it’s low. To push through these phases, most businesses keep a line of credit or a credit card as a backup.
But since these two have many similarities, knowing when to use each is crucial. Today, we’ll do a face-off between a business line of credit and a credit card to explain how they impact your cash flow. Keep reading to always make the right choice.
Differences Between a Business Line of Credit and a Credit Card
Business financing can help when your cash reserves are declining, and operations need money. Banks, private lenders, and fintech companies all offer these solutions, but with exclusive prerequisites. That said, here’s how a line of credit (LOC) and a good-old credit card differ:
Costs and Interest
Borrowing costs for both credit models come down to their interest rates and fees. Notably, business lines of credit carry relatively lower annual percentage rates (APR), mostly between 8% and 25%. At the same time, a business credit card could charge 20% to 30% APR on purchases and more on cash advances.
The payable interest for LOCs and credit cards builds differently because a line of credit charges only on the amount you have drawn. On the other hand, a card charges on the balance left after the grace period ends, and that difference shows in the numbers.
Suppose a business carries $20k for 6 months and its line-of-credit rate is 14%; the interest will be about $1400. But the credit card’s supposed 24% rate would take that balance to almost $2,400.
However, it’s worth mentioning that a line of credit will likely charge an annual fee but a card wouldn’t, so the ultimate cost of borrowing depends on your business specifics.
Credit Limits and Cash Access
A credit limit is the most you can borrow at one time, and is approved based on your revenue, time in business, and credit history. Most limits start around $10k for new small businesses and can pass $250,000 for established companies. After approval, you can draw those available funds straight into your business bank account and use them as cash.
However, a business credit card is a payment method first, so its limit is often smaller, sometimes just a few thousand dollars. Also, it only works where cards are accepted, and you can’t withdraw those funds. Although cash can be available through a cash advance, that carries a 3-5% fee, and interest starts the same day with no grace period. Hence, a line of credit gives a business more room for larger or cash-only expenses.
Repayment Structure
A line of credit and a business credit card are both revolving loans, which means the amount you repay becomes available to borrow again, but their repayment structure differs.
A credit card sends a monthly statement with a minimum payment and a due date. If you pay the full balance by that date, you pay no interest on purchases. And if you pay less than what you owe, it carries the remainder forward with interest. So while this makes the payable balance linger, it gives a business some control over repayment timing.
A line of credit follows a schedule set by the lender, usually monthly payments. But some online lenders debit payments weekly or give each draw a fixed term of 6 to 12 months. Sure, this structure is stricter, but it keeps debt from dragging on and makes cash outflows easy to forecast.
When to Use the Line of Credit or Credit Card
Using the wrong kind of business financing for a particular task can further weaken your financial health. So experts want you to weigh the pros and cons to decide which credit option fits best.
Here are some situations you’ll face and the right financing for it:
Business Credit Card
Everyday Purchases
Businesses often put small expenses on a credit card, such as software subscriptions, fuel, or office supplies. Since these costs are usually paid by card anyway, the card gives a business something back in the form of rewards or perks.
Building Business Credit
If a business wants to build credit to show a positive financial history (to secure a term loan or franchise financing later), responsibly using a credit card is one way to do it. Many card issuers report payment activity to business credit bureaus, and regular on-time payments raise your standing over time.
Separating Business and Personal Expenses
Mixing personal and business spending creates problems at tax time. Because you have to sort every purchase, mistakes can mean missed deductions or awkward questions in an audit. Therefore, a dedicated business card solves this by keeping every business transaction in one place.
Business Line of Credit
Large Purchases
Big purchases like equipment, inventory, or a vehicle require hefty cash and a credit card doesn’t support that. That’s when you resort to a business line of credit because it offers higher limits and lower rates to keep the cost of these purchases manageable.
Seasonal Cash Gaps
Some businesses earn most of their income in a few months of the year, but costs like rent and supplier payments continue through the slow months. That’s when a line of credit allows you to draw money and manage these expenses. And when revenue picks up, you repay the balance and the credit becomes available again.
Payroll and Bills
A line of credit gives you access to cash that can be used for any business purpose. So when you have to pay staff salaries or bills, and there’s no cash reserve, use your line. For example, if a business invoices on 30-60 day terms and needs to pay staff and suppliers before the money arrives, a line of credit bridges that delay.
Conclusion
If there’s always a secure cash pool for your business, it carries you through rough phases and makes sure your growth doesn’t stop. But while both a credit card and a line of credit are good, their specifics determine how well they’ll work for your business. So discuss your requirements and limitations with the financial experts at ROK Financial to find which option will work in your favor.
FAQs
Is a line of credit easier to get than a credit card?
A credit card is usually easier to get because lines of credit require stronger credit, more revenue, and often at least 6-24 months in business. That’s why newer businesses often qualify for a card first.
Do I need collateral for a line of credit or a credit card?
Credit cards are typically unsecured, so you don’t need to pledge collateral. However, lines of credit can be secured or unsecured, and secured ones require assets like equipment or receivables as collateral.
Can I have both credit options at once?
Yes. Many businesses use both and use them for different tasks. For example, the card handles everyday purchases, and the line of credit covers large expenses. But while lenders do not restrict this, having both credit options counts toward your total debt.