Business credit line or credit card: Which is right for me?

Small business owner leaning over the order counter of his cafe, considering a business credit line vs. credit card.Image: Small business owner leaning over the order counter of his cafe, considering a business credit line vs. credit card.

In a Nutshell

If you're a business owner, understanding the pros and cons of a business line of credit vs. credit card can help you understand which one might be better for you and your company.
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As a small-business owner, getting access to capital can play a critical role in your ability to grow.

While small-business loans can be great for large or one-time purchases, business owners who need ongoing access to capital for things like cash-flow irregularities, unexpected expenses or inventory and supplies may turn to a business line of credit or credit card.

Both options are revolving lines of credit, which means you can use them over and over again. But their differences can make one better than the other in certain situations. In some cases, it may even make sense to use both. Here’s what to consider before you make a decision.



Business line of credit: What is it?

A business line of credit is a revolving loan that allows the business owner to access credit and pay it off over and over again. You’ll typically have a limit on how much you can borrow, but the ability to continually draw funds and pay off your balance can make it a good option for ongoing working capital needs.

Business owners can typically get a line of credit through a traditional bank, a credit union or online lenders. Eligibility requirements can vary, but you’ll typically need to meet criteria related to the age of your business and your annual revenue.

Advantages of using a business line of credit

Depending on your needs, a business line of credit can give you a handful of benefits.

Easy access to cash and no cash advance fees

You can draw funds from your line of credit in the form of a cash deposit to your bank account, allowing you to use the funds for just about anything you want. And unlike with a credit card, you don’t have to worry about cash advance fees, which can be expensive.

You may be able to write checks

Some lenders also allow you to access your line of credit through checks. This can be helpful in situations where you don’t feel comfortable using cash, or if credit cards aren’t accepted. You can also use your checks to make deposits into your business checking account if you prefer that method.

You can build a business credit history

A business line of credit might help you establish a positive credit history for your business. Simply use the account regularly and make your payments early to boost your business credit scores.

Disadvantages of using a business line of credit

While there are some clear benefits to using a line of credit over a credit card, here are some potential downsides to keep in mind before you apply.

You may need collateral

If you need a line of credit with a high credit limit, you may be required to secure it using some of your company’s assets. This may not be an issue for some, but if you fail to make your payments, the lender could repossess your assets.

Most don’t offer rewards

With few exceptions, even some of the best business lines of credit typically don’t offer rewards or other types of benefits like those you’d get with a credit card. If you like this idea of getting something back whenever you use your available credit, a line of credit may not be the best fit.

There’s no interest-free grace period

You only have to pay interest on the amount of credit that you’re using, but that interest starts accruing as soon as you draw the funds. In other words, there’s no interest-free grace period for the credit you use.

Business credit cards: What you need to know

Business credit cards also give you access to credit that you can use over and over again. And unlike business lines of credit, there’s generally no set requirement for time in business or annual revenue, so even brand-new business owners have a chance of getting approved.

You’ll typically apply for a business credit card through a traditional bank or credit union.

Advantages to using a business credit card

For some small-business owners, a business credit card may be the perfect way to cover certain ongoing business expenses. Here are some reasons why.

You can get rewards and perks

Many business credit cards offer sign-up bonuses as well as rewards on every purchase you make, which can come in the form of cash back, points or miles. If you travel a lot or like the idea of earning cash back on everyday purchases for your business, using a credit card may be a good option.

You can get an interest-free grace period

Credit cards generally have a grace period of roughly a few weeks after your monthly statement closes before your payment is due. If you pay your balance in full during this period, you won’t have to pay any interest on the debt. And if you pay some of the balance by the due date, you’ll only be charged interest on the amount you carry over to the next month.

You can build a business credit history

As with a business line of credit, using a business credit card can help you establish a business credit history. Make sure to use the card regularly, keep your balance relatively low compared to the credit limit and pay on time every month.

Disadvantages of using a business credit card

There are a lot of reasons to consider using a credit card for your business, but compared to a line of credit, here are some of the drawbacks.

Spending power might be limited

It’s possible that not all of your suppliers and vendors will accept credit cards as payment.

Cash advances are expensive

If you need quick access to extra cash, you could use your credit card to get a cash advance. But drawing funds from your credit card could cost you in upfront fees and higher interest rates.

Your personal credit may be affected

While you might be able to get a business line of credit without a personal credit check if your business is well established, credit card issuers may require your personal credit information in some cases.

Also, some card issuers will report your monthly account usage to both the commercial credit bureaus and consumer credit bureaus, which could affect your personal credit scores.


Next steps: Consider alternatives to a business line of credit or business credit card

Comparing a business line of credit vs. credit card can help you determine which is better for your small business’s financial situation and needs. And in some cases, you may even decide to have both. You might also consider taking out a small business loan, borrowing from friends or family, reinvesting your business profits or partnering with an investor. Or, if the purchase you want to make isn’t something you need immediately, it may be worth waiting until you’ve saved up enough cash.


About the author: Ben Luthi is a personal finance freelance writer and credit cards expert. He holds a bachelor’s degree in business management and finance from Brigham Young University. In addition to Cr… Read more.