Your Guide to Business Lines of Credit vs. Credit Cards
According to a 2024 Small Business Payments Alliance report, 25% of small and medium-sized businesses (SMBs) said credit cards were their most preferred financing option for unplanned expenses, followed by business lines of credit at 15%.
For many small businesses, cash flow emergencies could often spell serious trouble. This is why small business owners often consider business line of credit vs. credit card options when faced with financial disruptions.
At first glance, it’s easy to confuse these two types of financing with each other since they seem to have similar benefits. However, they do have distinct purposes and characteristics beyond being handy for emergencies.
In this article, you’ll learn more about the differences between business lines of credit vs. credit cards and discover how to use them best. We’ll walk you through:
An overview of each funding type
Their advantages, disadvantages, and use cases
The types of businesses that benefit from each financing solution
Business Line of Credit vs. Credit Card: The Key Differences
Both financing options can be used to pay for short-term business expenses, such as utilities, marketing campaigns, and payroll. However, they have different fees, eligibility requirements, and repayment terms.
Below are their major differences:
Credit limits: A business line of credit is often used for more expensive purchases since it generally has higher credit limits and lower interest rates than business credit cards.
Draw period: A business line of credit has a draw period, while a business credit card can be used indefinitely.
Eligibility requirements: A business line of credit may have more eligibility requirements than a credit card since it has a higher credit limit.
Repayment terms: A business line of credit can offer more flexible payment terms (such as weekly), while a business credit card has monthly payments.
What Is a Business Line of Credit?
A business line of credit allows you to draw from a revolving credit facility at any time. When you make a withdrawal, the funds are then deposited into your business checking account.
You’ll only be charged interest on the amount you borrow, not your entire credit limit. Once you repay, you can use the borrowed amount again. This differs from traditional small business loans or SBA funding, in which the lender gives you a one-time lump sum of cash, which is repaid monthly with interest.
A business line of credit can be secured or unsecured. An unsecured line of credit doesn’t require collateral, while a secured line requires collateral due to its higher credit limits.
Your credit limit depends on your business’s financial performance and creditworthiness or credit profile. Generally, a business line of credit has higher credit limits than credit cards, making them ideal for much more expensive purchases like equipment upgrades and service vehicles.
As such, business lines of credit are best for:
Executing growth strategies, such as buying additional machines or hiring more workers during peak months
Buying inventory in bulk to enjoy discounts
Paying for operational expenses during slow months
When it comes to repayment terms, a business line of credit can be more flexible than business loans. For example, Backd’s Business Line of Credit can be paid weekly. This could be a plus for small businesses that want more control over their cash flow.
In terms of eligibility requirements, business line of credit providers prioritize your annual revenue, credit history, and how long you’ve been operating. As such, startups or new businesses may find it challenging to get approved.
It’s also important to be aware of some of the costs that come with this type of financing, which may include:
Origination fees
Draw fees
Annual fees, a flat fee you pay yearly for keeping your credit line open
Late payment fees
Advantages of a Business Line of Credit
It can give you access to higher working capital to invest more in your business’s growth.
The flexible repayment schedule can help you manage your cash flow better.
The interest rate only applies to the borrowed amount.
It can help you build your business credit history if you make on-time payments.
Many lenders don’t require collateral.
Disadvantages of a Business Line of Credit
It doesn’t offer rewards like a business credit card.
It has a defined term length or draw period, which means you’ll need to reapply for a new business line of credit once the term has ended.
The approval process may take longer than a business credit card.
Types of Businesses That Benefit From Business Lines of Credit
Businesses that need a lot of inventory, such as wholesale retailers and distributors
Companies with a growing workforce that would need higher capital for payroll
Contract-based firms that are prone to invoice payment delays
Businesses with seasonal expenses
Companies with capital-heavy investment strategies, such as office expansion
What Is a Business Credit Card?
Business credit cards are arguably the most accessible financing solution out there since many financial institutions offer them. Like personal credit cards, a business credit card allows you to make business purchases without using cash.
Business credit cards are often used for:
Paying for recurring business expenses, such as software subscriptions, office supplies, or travel expenses
Paying for emergencies, such as fixing broken equipment
Managing cash flow by spreading out payments
Business credit cards tend to have higher interest rates and lower spending limits than business lines of credit. Additionally, this funding requires strict monthly payments, or installments.
However, you won’t be charged interest if you pay the borrowed amount in full and on time. Credit cards also don’t have term lengths and typically don’t charge origination fees or draw fees.
Because of credit cards’ lower credit limits and high interest rates, their applications generally don’t require a lot of documentation. You’ll usually have to provide your business’s EIN and your revenue, and the card provider will run a check on your personal and/or business credit scores as part of the approval process.
Some possible costs that may come with business credit cards include:
Annual fees
Late payment fees
Cash advance fees, which you’re charged for withdrawing cash from your credit limit
Over-limit fees, which you’re charged for spending above your credit limit
Advantages of a Business Credit Card
Credit card statements can be connected to your accounting software for automated bookkeeping and expense management.
A credit card may include a rewards program that offers perks like cash back or airline miles.
It comes with an interest-free grace period that waives interest charges if you pay your balance in full by the due date.
The application process is simple.
It can be used indefinitely.
Disadvantages of a Business Credit Card
It often comes with a lower credit limit and a higher interest rate than a business line of credit.
Cash advance fees can be high if you want to turn your credit limit into cash.
Some vendors may not accept it for payment.
It can encourage unchecked or impulsive spending.
Types of Businesses That Benefit From Business Credit Cards
Companies that need to extend spending privileges to employees for travel or smaller business expenses
Startups and early-stage companies that aren’t eligible for other types of financing
Companies that want to automate their recurring expenses
Get Flexible Small Business Funding With Backd
Deciding between business line of credit vs. credit card options requires understanding your business needs well and analyzing your financial performance. While credit cards can be handy for smaller purchases and emergencies, a business line of credit can extend your working capital so you can take your business to the next level.
For example, Backd’s Business Line of Credit provides up to $750,000 and can be used for any purpose. We also offer a Working Capital Advance, which provides up to $2 million in funding with flexible payment schedules.
We do a soft credit pull during the application process to protect your credit score. You can receive a funding offer within as little as 6 hours after you submit your application.
Our eligibility requirements include:
$100,000 in monthly revenue
A credit score of 650+
Established business credit
Based in the U.S. with a brick-and-mortar address
Been in business for two years for a Business Line of Credit and one year for Working Capital Advance
Apply now to get flexible funding that fuels your growth.
