So your business needs access to funds to patch up cashflow gaps, pay for an ongoing project or prepare for an unexpected expense…
Both lines of credit and credit cards are useful for working capital needs, but they aren’t exactly the same. While there are times when one can be more beneficial than the other, some businesses might find both useful.
Business lines of credit vs. business credit cards
Business line of credit
Business credit card
Covering cashflow gaps and ongoing projects
Managing employee expenses and small projects
$2,000 to $500,000
$500 to $40,000
Typical starting APR
Origination or withdrawal fee of 1% to 5%
Annual fee of $0 to $450
1 to 3 days
7 to 10 days
Minimum credit score
6 to 12 months to pay off each withdrawal or minimum monthly repayments
A business line of credit is often compared to a credit card for good reason. Both give your business access to funds up to a credit limit, which you repay plus interest. But there are a few key differences. Lines of credit tend to be larger, for example — with some online lenders offering limits up to $500,000 — and have lower rates.
While some lines of credit come with an annual fee, it’s more common for lenders to charge an origination fee when you first sign up or every time you withdraw funds. This is often between 1% and 5% of the credit limit or withdrawal amount.
How you repay your loan also depends on the lender. With providers like Kabbage, each withdrawal turns into a short-term loan that you repay, plus interest, over a fixed period of time — typically between six and 12 months. With other lenders, each withdrawal gets added to your balance and you only have to make minimum monthly repayments.
When to take out a business line of credit
You might want to use a business line of credit in the following situations:
When you’re experiencing seasonal cashflow gaps. With higher limits than a credit card, you can use a line of credit to cover relatively large expenses like rent, inventory or payroll when you’re struggling.
When you need access to cash. Some vendors don’t accept credit as payment. That’s where a line of credit comes in handy — you can withdraw cash without having to pay the extra rates or fees that come with a credit card.
When you don’t have perfect credit. Business lines of credit are accessible to a wider range of credit scores than credit cards — though your interest rate may be higher.
Benefits and drawbacks of a business line of credit
Not sure if you want a business line of credit? Take these factors into consideration before making your decision.
Benefits of a business line of credit
Higher credit limits. Business lines of credit can come with credit limits as high as $500,000 with online lenders.
Access to cash. A line of credit can cover costs that you can’t pay with a credit card, like rent or some vendors.
Usually no annual fee. Annual fees aren’t common with business lines of credit.
Drawbacks of a business line of credit
Origination or withdrawal fee. Some lenders require you to pay a fee every time you make a withdrawal from your credit line.
Not always revolving. This means you might have to reapply for your line of credit every year or so, rather than having indefinite access.
Potentially high rates. APRs on credit lines might start low, but they can get higher than anything you’d find on a credit card if you have bad credit.
SBA lines of credit
Businesses that have big ongoing projects with costs that are difficult to predict might want to look into lines of credit backed by the Small Business Administration (SBA). Credit limits can go up to $5 million, plus they come with highly competitive rates.
To be eligible, you need to meet the SBA’s size standards for small businesses and prove you’ve tried and failed to get credit elsewhere, among several other requirements. The application can take a long time to complete, so you might want to take advantage of a service like SmartBiz to help you navigate the laundry list of forms and documents your business needs to submit.
How business credit cards work
Business credit cards work by giving you a card and access to a revolving line of credit, which you can withdraw from as needed. Each time you make a withdrawal, it gets added to your loan balance and accrues interest. As you pay down your balance, you’re free to borrow that money again.
Typically, credit cards come with minimum monthly payments of around 25% of your loan balance, though there’s no penalty for paying it off in full. Many come with a 0% intro APR period of around six to 12 months. And your business can often earn rewards like airline miles or cash back based on how much you spend.
Credit limits can go up to around $40,000, making it an option for smaller projects, but not sustainable for larger financing needs like covering rent or payroll. Credit cards make it easier to keep track of employee expenses, though, as most issuers allow you to add extra employee cards to your account.
When to get a business credit card
When you have low revenue. Minimum monthly repayments make it possible to pay off your business’s debt as you’re able, reducing the risk of default.
When you need to manage employee expenses. Credit cards make it easier for your employees to make day-to-day office purchases, book flights or cover business lunches.
When you want rewards. With cashback rewards, you can earn between 1% and 5% of what you spend as statement credit or a deposit into your bank account. Other rewards include airline miles or discounts on gas.
When your business is starting out. Credit cards can be easier to qualify for if you can’t meet the revenue or time-in-business requirements that often come with lines of credit.
Benefits and drawbacks of a business credit card
Business credit cards might be great in certain situations, but there are some downsides.
Benefits of a business credit card
Multiple cards per account. Business credit cards can give multiple employees and business owners access to funds — doing away with the need to collect receipts and issue reimbursements.
Flexible repayments. Minimum monthly repayments make it easier for you to pay off your business’s debt as you can afford to.
Earn points for spending. Many business credit cards offer rewards for every dollar you spend, which can help your business save big.
Intro APR period. A new business credit card can allow you to make a large purchase and pay it off over a few months time without interest.
Drawbacks of a business credit card
Longer turnaround time. It typically takes a week or longer to get your hands on a new business credit card, so it’s not ideal for emergency expenses.
Danger of taking on too much debt. Minimum monthly payments are a double-edged sword. If you’re not careful, you could end up with more debt than your business can comfortably handle paying back.
Variable rates. Credit cards typically come with variable interest rates, which have the potential to be lower than fixed rates, but can make repayments difficult to predict.
Compare business lines of credit and business credit cards
Since business lines of credit and credit cards fit different needs, there are some situations when you might want to look into both.
When you need access to more funds. Taking out a business line of credit and a credit card can help you maximize your business’s credit limit.
When you want to improve your business credit score. Business credit scores might not be as widely used as personal credit scores, but paying off multiple types of debt can strengthen your rating more than if you only went with one.
When you want flexible cash and payments. A line of credit has the benefit of giving you access to cash, while a credit card comes with the perk of flexible repayments.
Business lines of credit and credit cards might work similarly, but they serve different purposes. There’s a chance your business might only benefit from one — or you could find them both useful, depending on your needs.
It depends on your lender. Some might require you to secure your line of credit with your business assets, especially if you just meet their eligibility requirements. Others might give you the option to secure it, which can often help you qualify for more favorable rates.
A line of credit gives your business access to funds that you can draw from at any time. A term loan gives your business a one-time lump sum that you repay plus interest in installments over a set period of time.
Both can be beneficial to your business if you pay them off on time. However, since credit cards come with minimum monthly repayments, it’s easy to dig your business into even more debt if you don’t have a plan to pay it off.
If your business is struggling with credit card debt, you might want to consider taking out a debt consolidation loan to make payments more manageable — and hopefully qualify for a lower interest rate.
Anna Serio is a trusted loans expert who's published more than 800 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Fundera, Business.com, and ValueWalk feature her professional advice, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
How likely would you be to recommend finder to a friend or colleague?
Very UnlikelyExtremely Likely
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which finder.com receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. finder.com compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.