How is a line of credit different from a credit card?

When you’re a small business owner, there are going to be times when you need money. And when you do, you’ll often need it quickly. 

That’s one reason lines of credit and credit cards are among the most popular types of financing business owners use most often. Once you’re approved for either type of business financing you can use it when you need it.  

Unless you’ve used these financing options often, though, you may not be sure exactly how they work or fully understand the difference between a line of credit vs credit card. Most importantly, you may wonder which one is better. 

Here we’ll explain how lines of credit and credit cards work, and when each may be the best choice for your business.

What Is a Line of Credit?

A business line of credit, also called a revolving line of credit, offers you credit you can access when you need it. It’s typically used for short-term financing that can help with the ups and downs of cash flow that are common in small businesses.

Here’s how a line of credit works. If you’re approved, you’ll be given a credit limit; you can borrow up to your limit. 

You usually only pay interest on what you borrow, and your interest rate can either be variable (which means it can change when interest rates in the economy change) or fixed (it stays the same over the life of the loan). Your credit limit and interest rate is often based on your creditworthiness, which is determined in large part by your credit scores. Many lenders that offer business lines of credit check personal credit scores, and they may check business credit scores as well.

Repayment terms will vary by lender, but lines of credit often have a draw period; a specific number of months or years when you can borrow money. During the draw period you may be able to make interest-only payments, but during the payback period, you’ll need to make payments large enough to repay the full loan amount within a specific period of time. That means your payments during the draw period could be much smaller than during the payback period. 

Lines of credit are available through traditional financial institutions such as banks and credit unions, as well as through online lenders. There are even SBA lines of credit.

Best Business Lines of Credit

If you’re looking for a business line of credit, consider these options:

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Line of Credit by OnDeck

Product Updates: No More Monthly Maintenance Fee! Monthly Payments and Extended Repayment Terms (18 and 24 month terms) NOW AVAILABLE! A line of credit can be a great asset to businesses who need capital on hand- fast. It allows you the flexibility to draw funds when you need it, and you only pay interest on what you use. Once approved, you can draw available funds quickly and easily without having to provide additional documentation.

Pros

• No monthly maintenance fees
• Monthly Payments available and Extended Repayment Terms (12, 18 and 24 months) Minimal paperwork
• As soon as same-day approval and funding sent by next business day
• Transparent pricing
• Use as much as you need, only pay interest on what you use
• Access available funds with one click.

Cons

• Not available in all states.

Funding Amount

$6,000 - $100,000

Cost

As low as 29.9% APR

Repayment Terms

12, 18 and 24 month repayment term, resets after each withdrawal - Weekly & Monthly Payments

Funding Speed

As fast as 1 day

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Line of Credit by Fundbox

Nav recommends this product as a great solution for newer small businesses looking for a fast application process and access to a flexible LOC product. Bonus: When you click 'Apply now," we'll securely pass over your info, making applying with Fundbox a breeze. Only answer a few additional questions on their end and you're good to go.

Pros

• 625 minimum personal credit score
• No impact to credit score to apply (soft pull only)
• No draw fees
• Fast approval and funding, with funds available as soon as the next business day
• Use as much as you need, only pay interest on what you use
• Fundbox reports payment activity to all the major commercial credit bureaus via the Small Business Financial Exchange (SBFE), which can help strengthen a business's credit profile.

Cons

• Must have a business checking account with a minimum balance of $500
• May require large weekly payments (0.4% - 0.7% of the original draw amount per week) due to the short repayment duration.

Funding Amount

$1,000 - $150,000

Cost

As low as 4.99%*

Repayment Terms

12 or 24 weeks

Funding Speed

If approved, funds arrive as soon as the next business day.

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Flex Line by Revenued

Revenued utilizes revenue-based financing to provide working capital to businesses based on their revenue, not traditional factors like an owner’s personal credit score. Since launching, they’ve provided over $1 billion in funding to 30,000 + small businesses. Expand your access to working capital while only paying for what you use with the Revenued Flex Line. Bonus: When you click 'Apply now," we'll securely pass over your info, making applying with Revenued a breeze. Only answer a few additional questions on their end and you're good to go.

Pros

• No minimum credit score to apply. Approvals up to $500,000. 24/7 access to funds online and only pay for what you use. No application fee, no draw fee, no annual fee.

Cons

• At least $20k in monthly deposits is required for best offer. Not available for Sole Proprietorships.

Funding Amount

$5,000 - $500,000

Cost

Factor Rates: 1.07 - 1.49

Repayment Terms

6-12 months

Funding Speed

Within 24 hours

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Line of Credit by Headway Capital

Headway Capital provides businesses with a true revolving Line of Credit with no pre-payment penalties, one fixed monthly payment, and the ability to access additional capital any time you have funds available. Bonus: When you click 'Apply now," we'll securely pass over your info, making applying with Headway a breeze. Only answer a few additional questions on their end and you're good to go.

Pros

• Pre-approval process does not require hard personal credit inquiry
• Approval within hours of applying
• Only pay interest on what you use
• Offers 24-month repayment terms and monthly payments.

Cons

• Interest rates can be higher than some other line of credit providers
• Hard personal credit inquiry at the time of funding.

Funding Amount

$5,000 to $100,000

Cost

3.3% - 6.6% monthly interest rate

Repayment Terms

Monthly repayment for 12, 18 or 24 months

Funding Speed

As fast as the next business day.

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Line of Credit by Plexe

Line of credit product with weekly repayment options. Funding amounts can range from $10K- $250K, with weekly repayment durations spanning from 10 weeks to 12 months. Not all industries are eligible.

Pros

• Choose either a weekly payment, or a % of monthly revenue in the event cashflow is going to be low in the coming months
• Switch between fixed or percentage-based repayments at any time during mid-payback
• Only one payment for multiple draws. Consolidate all previous withdrawals into one manageable schedule

Cons

• Not available in Nevada, North Dakota, South Dakota, Tennessee, Puerto Rico, Hawaii, New York, and California
• Must have $360K in annual revenue to qualify

Funding Amount

$10,000 - $250,000

Cost

2% Draw Fee; 4%-22% simple interest

Repayment Terms

Weekly payment frequency; 10-52 week repayment terms

Funding Speed

Same business day, if approved

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What is a Credit Card? 

Business credit cards are both a payment method and a line of credit. You can use a credit card to make purchases anywhere that card is accepted, and then either pay your balance in full to avoid interest, or make smaller payments to pay back the amount you charged over time. 

Credit cards may be secured or unsecured. Most business owners will apply for unsecured credit cards, but secured cards can be helpful if you have bad credit. 

Just like personal credit cards, most small business credit cards require a personal credit check and most cards require good to excellent credit. Higher credit scores can help you qualify for lower interest rates and larger credit limits.

If your credit scores are low, you may be asked to provide collateral (usually in the form of a savings account) for a secured business credit card. If you pay on time and maintain good credit, you may be able to qualify for an unsecured credit card.

Business credit cards often offer perks such as extended warranties or purchase protection, and many offer rewards programs that offer cash back or travel rewards.

Key Differences Between a Line of Credit and a Credit Card

Both lines of credit and credit cards offer financing so you can pay for purchases over time. (Charge cards, on the other hand, require payment in full.) 

The key difference is that to get a business lines of credit, the business applicant will need to meet certain eligibility requirements. Credit will be one of them. But in addition, there will often be a time in business and revenue requirement. Businesses will often need to have at least 6-24 months in business, and make a certain amount of money to qualify.

Business credit cards, on the other hand, are available to startups as long as the owner meets personal credit requirements, and has sufficient income from all sources, not just the business. 

Credit cards often offer perks and reward programs that lines of credit do not.

Whether your business needs a credit card or a line of credit depends on your specific circumstances. Both can offer an easy digital application process, while credit limits, interest rates, fees, and repayment terms vary.

Credit Limits

A line of credit will most likely offer a higher credit limit than a small business credit card. Depending on the lender and your creditworthiness, you may be able to access up to $500,000 or more from a line of credit. A high-limit credit card will often offer closer to $10,000 to $25,000 as the starting credit limit, depending on the issuer and the applicant’s qualifications.

Interest Rates and Fees

You’ll pay interest on both credit cards and lines of credit, but interest with a credit card is typically higher than a line of credit (although it depends on your application). 

It’s hard to say which one offers higher interest rates, as rates can vary significantly.

Lines of credit may charge interest rates as low as the prime rate + 2.25% to 35% or more, while credit cards typically charge between 18% to almost 30%. Some credit cards offer intro APRs of as little as 0% for a year or more. 

There are also fees associated with each type of financing. Lines of credit may charge a draw fee each time you borrow money, and an origination fee when you open the line.

Both credit cards and lines of credit may charge late fees and annual fees. 

Credit cards may charge cash advance fees and balance transfer fees.

Repayment and Usage

Both a line of credit and a credit card have credit limits that define the maximum amount you’re allowed to borrow at one time. A business line of credit will often have a predefined draw period and a payback period. You may have to make interest-only payments during the draw period. This means during the months or years that you’re allowed to borrow from the line of credit, you may make payments but not pay down the actual debt.

With credit cards, you can pay your statement balance in full to avoid interest charges. Or you can make smaller payments, and pay interest. Minimum payments can stretch out your debt for years, and can result in significant interest charges.

Choosing Between a Credit Card or Line of Credit

If you’re looking for a high credit limit so you can access money as you need it for expenses like expanding your business or bumping up staff for a big job, a line of credit might make more sense.

Alternatively, if you want a way to purchase equipment or office supplies and like the idea of earning rewards on those purchases, a credit card could make more sense.

If your business is new, it will be difficult to qualify for a business line of credit, but you may be able to get a business credit card. 

Of course, you may not have to choose. Plenty of small businesses use both lines of credit and credit cards successfully.

When to Use a Credit Card

Credit cards are best for everyday purchases. They are one of the safest ways to pay for purchases, rewards can provide even more value. You may be able to earn points on purchases that you can redeem for travel expenses, cash back, or other items.

As long as you can pay your balances in full and avoid interest charges, there’s no downside to using credit cards to pay for business purchases.

When to Use a Line of Credit

A line of credit can be helpful for short-term working capital needs such as inventory or to cover expenses when cash flow is slow. If you qualify for a low-rate line of credit, you’ll have access to financing when your business needs it. 

If you have a specific project that you need to finance, a term loan may be a better option than a line of credit. You’ll borrow a lump sum and you’ll often pay it back over a longer period of time with weekly or monthly payments.

How To Get the Most Credit? A Line of Credit or a Business Credit Card

It depends. A well-established business may qualify for a very large million-dollar-plus business line of credit. To get a credit card with that size of credit line, your business would likely need to qualify for a corporate card. 

On the other hand, an entrepreneur with a brand new business will have trouble qualifying for a business line of credit but may be able to get a credit card with a healthy credit limit. 

Again, the size of the line of credit or credit card limit your business can qualify for will depend on your qualifications and lender requirements. 

What Builds Credit Faster? A Line of Credit or a Business Credit Card

Both business lines of credit and business credit cards can help you build business credit, provided the lender reports to business credit bureaus (most do) and you pay on time. In that sense, either one can help you establish business credit.

Paying late will hurt your credit, and credit cards tend to offer more flexible payment terms since you can make minimum payments when cash flow is tight. 

On the flip side, it’s important to remember that credit cards and lines of credit can impact your credit scores. Paying on time can help boost your credit scores, and some card issuers will raise your credit limit if you pay on time. Late payments can trigger a lender or issuer to reduce your credit limit, or even close your account. 

What’s Better for Bad Credit? A Line of Credit or a Business Credit Card

If you have bad credit, it will be difficult to qualify for many business lines of credit and business credit cards, as most will require a good to excellent credit history. 

If you have bad credit and need financing, you may want to consider loans available with bad credit, including a secured business credit card, merchant cash advance, invoice factoring or even crowdfunding. 

Nav’s Final Word: Line of Credit vs. Credit Card

Borrowing money in any form is a great responsibility. A business credit card or line of credit can give your business flexibility, but it’s essential to understand the costs and pay debt back as quickly as possible.

Many business owners find they can use both a small business line of credit and business credit card in complementary ways.

Get your personalized small business loan options using your business’s details from Nav today.

Frequently asked questions

How can I use a line of credit vs. a credit card for my small business?

Both a line of credit and a credit card are flexible funding options for business expenses. If you need a higher credit limit to fund a larger project like an expansion, you’ll likely be able to find the capital you need with a small business line of credit or even a term loan. On the other hand, if you need funding to cover everyday business expenses, or if you want to earn rewards, a credit card might serve you better.

Does a line of credit affect a credit score more than a credit card?

A line of credit and a business credit card may both affect your business credit scores. Most business lines of credit and credit cards do not report to the owner’s personal credit, though some card issuers reserve the right to report to personal credit if the owner defaults.

Is it better to use a line of credit or a credit card?

Whether a line of credit or credit card is better depends on your business needs and your unique circumstances. Whichever option lets you pay less in interest is likely the best choice. If you can get a lower interest rate with a line of credit and need to borrow more money than you could pay off each month on a credit card, a line of credit might be better for you. On the other hand, if you only borrow smaller amounts that you can pay off in full each month, a business credit card can allow you to save on interest.

What’s the difference between a line of credit and a credit card?

The difference between a line of credit and credit card is smaller than you may realize. Both offer short-term financing and flexibility in how you spend your money. Credit cards are ideally used when you can pay the balance off in full and avoid interest charges, while lines of credit may  be better for short-term financing.