Line of Credit vs Credit Card: What’s Better for Your Business?

Author: Paige Smith | February 23, 2021

If you need flexible or short-term funding for your business, you might be considering a business credit card or a business line of credit. To figure out which one will work best for your business, keep reading for a detailed breakdown of the two financing solutions. 

How does a line of credit work? 

A business line of credit gives you access to a revolving credit line, which is money you can use on an ongoing basis. Depending on your business’s credit score and the lender you choose, you could get access to a few thousand dollars or several hundred thousand dollars.  

With a line of credit, you only pay interest on the money you borrow, and you can access your funds over and over as long as you pay them off. For example, if you use your entire $10,000 line of credit to pay for inventory, you’ll have access to the full $10,000 again as soon as you bring your balance back to zero. 

Interest rates on lines of credit vary widely; depending on the lender, you could end up paying 3% APR or closer to 80%. At Fundbox, we aim to keep our interest rates low, ranging from 4.66% to 8.99%.  

What should you use a line of credit for?  

A line of credit works great for short-term funding needs and regular operational expenses. You could use a line of credit to pay your office’s utilities, restock supplies, order inventory for your busy season, hire staff, or cover unexpected costs during a crisis.

A line of credit is particularly helpful for bridging gaps in cash flow. Let’s say you run a social media marketing agency and need to cover payroll by the end of the week, but payments from your clients won’t come in until the end of the month. That’s where you can dip into your line of credit. 

Benefits of using a line of credit

  • Versatility: You can use the funds for a variety of purposes. 
  • Flexibility: You only pay interest on the money you borrow, so if you end up needing less cash, you could save money. 
  • Higher credit limit: You may not even need the extra cash, but knowing it’s available in a crisis can give you peace of mind. 

Downsides of using a line of credit

  • Variable interest rates: Some lines of credit come with variable interest rates—meaning they change with the market—which can make it harder to budget for your payments. 
  • Extra fees: If you miss a payment, you could end up paying a hefty fee. Plus, many lines of credit come with monthly maintenance or draw fees, which can add up over time. 

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How does a business credit card work? 

Business credit cards give you a set amount of credit per month to make non-cash purchases. The credit limit you get approved for depends on your personal credit score and the particular bank or credit union you apply to, but the average business credit card limit is around $50,000. 

Similar to a line of credit, the credit loan available to you with a credit card depends on how much you spend and pay off each month. If, for example, you spend $15,000 of your $30,000 credit limit and don’t bring your balance back to zero, you’ll only have access to the remaining $15,000 the following month. 

To maintain your business credit card, you have to make a minimum monthly payment, which is either a fixed fee or 1-3% of your total credit card balance. Paying only the minimum monthly payment can give you more cash flow to work with, but it’s also an easy way to rack up debt. For business credit cards, average interest rates are around 17%, but if you pay off your full credit card balance each month, you won’t have to pay interest. 

What should you use a business credit card for? 

You can use a business credit card to pay for regular expenses—like utilities or supplies—that you know you can pay off in full each month. Business credit cards also work well for non-cash purchases that don’t require a big chunk of money. 

Imagine, for example, that you run a parking lot maintenance business. If you need to buy a new power washer but don’t want to dip into your company’s cash flow, you could use a business credit card to buy the equipment, then either pay it off at the end of the month or chip away at the cost over time.

Benefits of using a business credit card

  • Versatility: You can use a business credit card for a number of different purchases and expenses. 
  • Business credit: Business credit cards give you the opportunity to build business credit, but only if you pay off your monthly credit card bill in full—and on time—each month. Improving your business credit score can make it easier to get approved for business financing in the future or score more favorable terms. 
  • Rewards: Many business credit cards offer sign-up bonuses, points with purchases, or cash rewards. 

Drawbacks of using a business credit card

  • Potential debt: If you only pay your minimum monthly payment, you could rack up more debt than you intended to and have to consider debt consolidation down the line. 
  • Fees: Depending on the credit card, you might have to pay annual maintenance fees.
  • Based on your personal credit score: To apply for a business credit card, you have to use your personal credit. If you don’t have a decent score, you may have to provide collateral to get approved for a card. 

Business line of credit vs. credit card

To help make your decision, consider the following factors: 

  • Your financial needs: How much money do you need and what do you need it for? Would you prefer a flexible amount of cash, or would you rather have access to monthly credit?
  • Your cash flow: How often do you have gaps in cash flow? 
  • Your comfort with debt: How likely are you to pay off a credit card in full each month?
  • Your goals: Do you want to establish a cash flow safety net or start a major growth project? Do you want to build business credit or earn points and cash back for future business purchases? 

If you need a significant amount of cash for business expenses or growth initiatives, or if you’re not sure how much money you need, a line of credit could be helpful. Not only are you more likely to get a higher limit with a line of credit, you may also get more affordable interest rates, which makes it easier to repay the money you borrow on a gradual basis instead of all at once. 

On the other hand, if you want to earn rewards or if you only need a small amount of money per month—and have the cash to pay it back in full—a business credit card could be a great solution. 

Where to get a business credit card 

You can apply for a business credit card through your preferred business banking service, a local bank or credit union, or an online bank. Make sure you do your research and consider your goals before applying. 

If you want a low interest rate, look for credit cards that offer 0% APR. If you want perks and points, seek out cards with good cash-back deals and bonuses. Or if you want to build up your business credit, look for a basic business credit card with a low spending limit to keep yourself in check. 

Where to get a business line of credit

You can get a business line of credit through a bank or alternative online lender. Every lender will have different term lengths, interest rates, and qualifications for lines of credit, so don’t forget to ask about the specifics.

If you’re interested in flexible funding and straightforward pricing, check out Fundbox’s line of credit. You can apply in just a few minutes and get funds in your bank account as soon as the next business day if you’re approved. 

Ready for more?

Apply for funding and find out if you qualify today

Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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