Business line of credit vs business credit card

As a business owner, it can be important to make smart decisions about allocating resources and optimizing your cash flow. When it comes to financing, a common question is whether to use a business line of credit or a business credit card. Both options offer valuable benefits and important considerations, and you'll want to feel educated on how they each impact the financial wellness of your business.

In this article, we'll share more about a business line of credit, a business credit card and in which scenarios you might consider one over the other.

What is a business line of credit?

A business line of credit is a revolving credit account that provides businesses with access to funds up to a predetermined limit.

Opening a line of credit means you get the entire loan amount up front, if and when you are approved. You'll then pay it off in installments according to the terms of your loan – this is often monthly and with a fixed interest rate.

Many business owners use a line of credit to cover large startup costs that may exceed a credit card limit. This could include equipment, raw materials in bulk or even payroll.

To qualify, financial institutions may require that your business be under current ownership for a set amount of time. The full qualification process may take several weeks because business lines of credit typically have higher limits and lower interest rates and therefore may require a higher level of creditworthiness.

What is a business credit card?

Similar to a personal credit card, a business credit card offers business owners access to credit with a set limit and specific APR terms. They often come with benefits and resources that speak to the needs of a business. These can include things like expense monitoring, rewards for everyday business purchases and employee cards.

By keeping your business transactions on your business credit card, you avoid having to put them on your personal credit card. Keeping your finances separate like this may help you manage your accounting and taxes in a more organized way.

Comparing business line of credit vs. business credit card

Both a business line of credit and a business credit card can be useful tools for managing business expenses and cash flow. However, there are several scenarios in which you may want to consider one type of financing over the other.

When to consider a business credit card

A business credit card might work well when considering the following scenarios:

• When you want to separate business expenses. As your business grows, you may want to keep your business expenses separate from your personal. Having a credit card dedicated to your business may help you to more precisely understand your cash flow as well as the expenses that your business incurs.
• When you want to pay less interest. Credit cards require a minimum monthly payment, but you can choose to pay off the full amount each billing cycle and avoid interest. Some business owners find this appealing for smaller, everyday expenses that may vary each month but may not be burdensome to pay off in full.
• When you want to track expenses. If you need to track your spending in detail, a business credit card is nice for this purpose. Some business credit cards offer quarterly expense reports broken out by category and some even integrate with your existing accounting software so it's easy to see where your dollars are going. This tracking also allows you to identify spending patterns and use that to design budget cuts or adjustments.
• When you want to earn rewards. Business credit cards often offer rewards for dollars spent. You can then redeem those rewards for business travel or cash back, depending on the terms of the card you applied for. If you do a lot of business traveling or dining out with clients, you could get more bang for your buck with a business rewards credit card than you would with a line of credit. In addition, some may offer the ability to accelerate your reward earnings on common business categories of spend.
• When you want built-in business perks. Some business credit cards come with perks such as custom expense reports, purchase protections, extended warranties, travel emergency assistance and more.
• When you want your employees to have cards. Stay in control and enjoy added flexibility with credit cards for your employees. In addition to eliminating the need for cumbersome reimbursements, you can monitor company purchases, as well as set individual spending limits anytime. Plus, earn rewards from their eligible purchases. All employee cards roll up to the main cardholders account.

When to consider a business line of credit

On the other hand, a business line of credit might work well in these scenarios:

• When you need a cash flow infusion. A line of credit may provide a safety net for those unexpected expenses, overage mistakes or seasonal periods of slow sales. In addition, the repayment terms usually include a fixed monthly payment (as opposed to a variable one), which can feel predictable and easier to budget for.
• When you need flexibility. When you have access to liquid cash through a line of credit, this could help you pay your bills on time while being flexible as new opportunities or vendor relationships arise that you may want to take advantage of quickly.
• When you need a higher credit limit. Business lines of credit are often used to finance larger business expenses that you may want to pay off over time. They often come with larger credit limits and therefore make sense to have as your business grows or you need to make some pricier investments.
• When credit cards are not an accepted form of payment. Some businesses you work with may not accept credit cards as payment. This could include certain vendors or property management companies. In these cases, it could be helpful to have an alternate way to pay your bills.

The bottom line

Overall, you may find that a business credit card is well suited for dayto-day expenses you intend to pay off in the short term, and a business line of credit makes more sense for larger purchases and cash flow management. When used wisely and strategically, some business owners find that they can rely on both to serve different purposes in a complementary way. The best option for you will depend on your specific business needs and objectives.