Lines of Credit vs. Credit Cards: Two Types of Revolving Credit For Your Business

At first glance, business lines of credit (LOCs) and credit cards look pretty similar. They both offer revolving credit, meaning you can borrow money, repay the funds you borrowed, and then borrow more money―over and over and over.

And sure, that’s a pretty big similarity, but LOCs and credit cards have some big differences too. If you want to save yourself money—and frustration—you’ll need to know what those differences are to choose the right product.

In this guide, we’ll show you how a business line of credit and a business credit card compare and explain when you might prefer one over the other. By the end, you'll have the info you need to make a decision on if you want a line of credit, a credit card―or both.

As we’ve already pointed out, both a business line of credit and a business credit card are types of revolving credit.

That means that both products give you a credit limit (usually based on your creditworthiness). You can borrow as much money as you want (or as little) up to that credit limit. Then, as you repay the money you borrow, those funds become available to borrow again. (You’ve probably seen this in action with your credit card.

But as we said, business lines of credit and credit cards have quite a few differences. So let’s talk through those.

The first difference between a line of credit and a credit card start when you apply.

Generally speaking, it's easier to qualify for a business credit card than a line of credit.

In both cases, lenders will look at your personal credit score, credit history, time in business, and business revenue to decide whether or not to approve you. Though, credit card companies will usually accept lower numbers than LOC lenders will. Plus, credit card companies will sometimes consider your personal income and not just your business revenue, which can be helpful for startups.

Of course, the specific qualifications will vary from product to product. You can absolutely find super fancy business credit cards that have stricter borrower requirements than some lines of credit. But as a general rule, credit cards are easier to get.

Why is that? It mostly comes down to size.

Business lines of credit usually have higher credit limits than credit cards, giving you more money to borrow.

Again, this is a general rule―you might get approved for a very small line of credit or a big limit on a credit card. That said, you can easily find lines of credit with maximum credit limits in the millions of dollars, while most business credit cards top out at less than $100,000.

In either case, your specific credit limit will depend on your lender and borrower qualifications. But in most cases, lines of credit give you more money to work with than credit cards.

After you get approved, you can start using your business credit card or revolving line of credit. At this point, some other differences will crop up.

Business lines of credit usually have lower APR (annual percentage rate) than business credit cards.

As you may know, APR describes the cost of financing over one year―including both interest and fees. So when we say LOCs have a lower APR, we mean they cost you less to borrow money.

As with your credit limit, your specific APR will depend on your qualifications and lender. In most cases, though, business lines of credit make borrowing cheaper.

Depending on how quickly you repay the funds you borrow, though, your APR may not matter much at all. If, for example, you pay off your credit card in full each month (good job!), then you’ll never end up paying interest on your credit card.

In other words, you shouldn’t get a line of credit just because it has a lower interest rate―especially since credit cards have some nice perks.

Many business credit cards, like personal credit cards, come with rewards and bonuses. Lines of credit don’t.

These credit card rewards usually take the form of points on your purchases. If you earn enough of these points, you can exchange them for things like cash, airline tickets, gift cards, and more.

Some credit cards even offer cash bonuses when you spend a certain amount in a specific time frame―like $10,000 in the first six months after opening your card.

Depending on your spending habits, these credit card rewards programs can really add up. In fact, these rewards programs are one of the biggest advantages credit cards have over lines of credit.

But lines of credit have their own advantages. Aside from a lower APR, business lines of credit also make it easier and cheaper to get cash.

Credit cards usually charge big cash advance fees, while lines of credit don’t. 

That means that credit cards work just fine when you purchase office supplies from a store―but if you need to make payroll, lines of credit offer a more affordable way to get the cash you need.

Once you’ve borrowed money, you’ll have to start paying it back. At this point, you’ll notice a few final differences.

Pretty much all credit cards have a monthly repayment schedule (including both personal credit cards and business credit cards).

Credit lines, on the other hand, can have really different payment schedules. Some lenders will accept monthly payments, while others will require weekly or even daily payments.

Typically, traditional financial institutions (banks and credit unions) will stick to monthly payments, while online lenders (a.k.a. alternative lenders) will ask for more frequent payments.

Another nice feature of credit cards? Just about every credit company will report your activity to credit bureaus, meaning you can improve your credit score by using and repaying your credit card.

(Of course, if you make late payments or miss payments, this could end up hurting your credit score.)

Some line-of-credit lenders report to credit bureaus, but not all. You can expect most traditional banks to report, but lots of online lenders (like Kabbage, for example) don’t report to credit bureaus at all―meaning you won’t get to build your credit.

So with all that said, should you get a line of credit or a credit card?

For big business expenses, lines of credit work better.

These big expenses might include the following:

• Payroll/hiring new employees
• Equipment purchases
• Marketing campaigns
• Remodeling and office improvements
  

The reason we prefer business lines of credit for these expenses comes down to the lower APR and higher credit limit you get with an LOC. Without a high credit limit, you may not be able to cover big expenses in the first place. And if you pay a high-interest rate and, in turn, a high APR on your funds, the cost of those big expenses can easily spiral out of control.

Fortunately, business lines of credit make it possible to pay for and afford all kinds of bigger expenses.

That said, we don’t recommend drawing on your revolving line of credit for smaller expenses. You’ll miss out on the rewards (and potentially the credit-building power) that a credit card would give you. And if you make small enough purchases that you can pay off quickly, you won’t really benefit from the low APR on an LOC.

Put simply, business lines of credit work best for larger expenses that you won’t pay off immediately.

To handle smaller, everyday costs, you should probably get a business credit card.

For example, a credit card can work well for these types of expenses:

• Staff lunches
• Office supplies
• Utility bills
• Software subscriptions

These expenses are small enough that you can pay them off quickly, so you won’t have to worry about the high APR that credit cards often have. Instead, you’ll get all the credit-building benefits of regular credit use. And depending on your credit card, you may earn extra cash or other rewards while doing so.

As a bonus, credit cards offer convenience that makes them perfect for day-to-day purchases. Just swipe or insert your card and you’re good to go―no need to mess around with a draw from your credit line.

Just make sure you pay off your business credit card regularly―in full each month, if possible. Otherwise, you might be shocked by how quickly those little expenses add up, thanks to the high APR. And if you’ll regularly need cash, you might find that an LOC will be more affordable than paying the cash advance fees on your credit card.

But as long as you responsibly use and pay off your credit card, you can get great perks on your small, everyday expenses.

Both business lines of credit and business credit cards offer revolving credit, but they have quite a few differences. Lines of credit commonly have higher credit limits and lower interest rates, but they’re harder to get. Credit cards offer nice rewards and can be easier to qualify for, but they're often more expensive.

So which should your business get? We recommend lines of credit for larger expenses and credit cards for smaller expenses, so depending on your needs, you could perhaps get both. 

Of course, you know your business best, so we’re sure you’ll make the right credit choice for your company. Either way, we hope you get the credit you need.

Think you want a line of credit? Find our favorite options on our list of the best business lines of credit.

When you first apply for and get a line of credit or credit card, your credit score might drop a bit.

That’s because most lenders do a hard credit check, which negatively affects your credit. 

That said, don’t worry too much. As you make on-time payments, your credit score will improve. Both on-time payments, as well as more available credit, help boost your credit score.

And with any luck, your credit score may end up higher than it was before you got an LOC or credit card.

The credit score required to qualify for a line of credit varies from lender to lender, but it might be lower than you think. On our rankings of the best bad-credit business loans, we found LOC lenders willing to accept a credit score as low as 500.

Of course, to get the best business lines of credit, you’ll need a better credit score than 500. Banks, for example, usually look for a credit score in the high 600s.

And remember, your personal credit score is just one part of your application. If you have high business revenue and an older business, you’ll have an easier time getting a line of credit with a poor credit score than if you have low revenue and a young business.

For many businesses, getting a business line of credit is absolutely worth it. After all, LOCs offer a convenient way to borrow money, and they have lower interest rates than most credit cards.

Still, not every business will benefit from a line of credit. If you don’t have enough cash flow to repay your credit line, an LOC will be more trouble than it’s worth. So think carefully about both your business’s needs and budget before you apply.

Disclaimer

At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.