Is There a Difference between Credit Cards and Lines of Credit?

If you are a business owner or entrepreneur, you have probably researched different funding options for your business or startup. Two of the most popular options for obtaining business funds are business credit cards and lines of credit. When comparing these two small business funding options, you will find that both of them can help support your business when you need it most. However, there are some important differences that you should consider before you determine which is right for your business.

What is a Business Credit Card?

Much like a personal credit card, a business credit card is a revolving line of credit. This means that you can use and repay the credit line as many times as you want, given that you are making at least the minimum monthly payments and your balance doesn’t exceed your credit limit. These can be used on a variety of business expenses from paying the phone bill to paying for hotels and plane tickets.

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What is a Business Line of Credit?

A business line of credit is also a revolving credit account that allows you to borrow money against a pre-approved credit line. Again, you can continue to use and repay this credit as long as you make the minimum payments and your balance doesn’t exceed the credit limit. The funds from your line of credit are deposited into your business bank account, and you can use these funds at any time to cover any of your business costs.

What’s the difference between credit cards and lines of credit?

Though both funding options involve pre-approved credit lines that you borrow against and pay back, there is one major important difference between a credit card and line of credit – when you use a business credit card, these funds do not end up directly in your bank account. You can only use the funds when you spend on specific purchases. Whereas with a line of credit, you have this cash on hand in your bank account during times when you need it most.

It is important to note that although you can get cash advances from your business credit card to cover upcoming expenses, you will most likely have to pay high fees or increased interest rates when using these funds. With a business line of credit, you are able to draw from funds when you need them and only pay fees on the funds that you actually use.

Pros and Cons of Business Credit Cards and Lines of Credit

Business credit cards can be a great option for businesses that want to take advantage of rewards. Just like personal credit cards, business credit cards often offer rewards like cash back for certain purchases or low introductory interest rates. This is also a great option for businesses that lack collateral and those who need help tracking expenses by keeping their personal and business expenses separate.

However, business credit cards tend to have a higher annual percentage rate than other funding options, and having too high of a balance on the card can negatively impact your credit scores. This is also not the best option for business owners who are trying to grow their business because the interest rates are typically higher than a line of credit.

Business lines of credit give you the peace of mind in knowing that you have working capital available when you need it. This funding option allows you to draw from the account to cover business expenses when they arise, and you only have to pay fees on the funds you use, adding no additional costs to your business.

One of the downsides of this option is that business lines of credit often take longer than a business credit card to apply for and obtain funding. However, alternative online lenders offer a quick and painless application process and deposit funds straight into the business bank account. This is the best option for business owners who want a line of credit and need funding quickly. 

Each business lending option has its pros and cons. When comparing business credit cards to lines of credit, some business owners find that a business credit card gives them more flexibility than a personal credit card while allowing them to build their business credit. Other business owners find that they prefer the line of credit because the funding goes right into their bank account, making it easier to make payments. Ultimately, the decision comes down to what works best for your business based on your unique funding needs. Think about what is most important to you when it comes to business funding before you decide which funding option will allow you to grow your business.