Line of credit vs. business credit card: An overview

Small business owners occasionally need to make a big purchase or pay invoices when cash is low. That’s why having financing options is critical and why having both a business credit card and a line of credit can be integral to your success. “It is advantageous to have both because it gives you a lot of flexibility,” says Arshia Gupta, Small Business Card product executive at Bank of America.

However, given there are lots of similarities, when is it best to use a business credit card versus a line of credit? Here’s a quick overview so you can make the most of each.

When a business credit card may be the best option

There are a couple of scenarios for which using a business credit card tends to be most advantageous to a small business owner.

Making everyday business purchases

Credit cards can be ideal for making routine business purchases you don’t need to pay for with cash or a check that you want to track in your records — such as office supplies and travel. Many popular accounting software programs let you upload transactions from your business credit card automatically, making it easier to include these purchases in your bookkeeping records and claim tax deductions for your purchases.

Building business credit

Using your business credit card can help you build up a history of responsible borrowing that may let you win access to more financing in the future. “Not only will having a credit card help you build credit, which is important should you want a business line of credit down the road, but you can also benefit from any rewards and perks associated with your card,” says Gupta. And credit card rewards can be reinvested in your business. There’s another advantage: You generally won’t be asked to put up collateral like you might when applying for a secured line of credit.

When a business line of credit is warranted

Using a line of credit can be ideal for covering purchases you can’t put on a credit card or that might exceed your spending limit on a credit card.

Paying for purchases you can’t charge

Think of a line of credit as on-demand funds you can use for payments that you’re not permitted to pay by credit card. Often, these include inventory, vendors’ bills, payroll and leases. While it’s best to rely on operating cash flow for items like these, using your line of credit to cover them during a shortfall or dormant period is sometimes warranted.

Covering larger purchases

“A line of credit may work best if you have a need for making a larger purchase since credit lines typically have higher line amounts — and if you aren’t sure how much and when you need to make payments for things like larger projects or business expansion,” says Roderick Wilson, Small Business Lending product executive at Bank of America. Business lines of credit often have limits up to $100,000 and sometimes as high as $250,000. They’re also convenient: You can withdraw from your line of credit using a card that comes with your account, business checking account or a mobile banking app.

If you want to get a line of credit, you’ll need to plan ahead. Approval takes longer than for a business credit card — up to one or two weeks if the lender gets all the necessary information up front, according to Wilson. “The lender will want to see financial statements and that the current ownership has at least two years in business,” he adds. For amounts greater than $100,000, you may be required to secure your line of credit with a blanket lien on your assets or a certificate of deposit.

Know the cost of borrowing

For both a business credit card and credit line, interest starts to accrue when you tap the funds, and the amount you pay (except for interest) will be available to be borrowed again as you pay down your balance.

However, there’s a difference in interest rates. Rates for a business line of credit tend to be lower than those for a business credit card, which can charge more than 20% APR for purchases — and even more than that for cash advances — so it's often more cost-effective to use your line of credit. However, note that while the credit card may not have an annual fee, the line of credit likely does.

The takeaway

It’s important to use the right type of financing for each purchase. When in doubt, ask a trusted advisor. “A banker can help you determine which options are best for your business and for your needs at any given time,” suggests Wilson. At the very least, you’ll come away with some helpful strategies you can put to work for your business in the future.