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Business line of credit vs. business credit cards

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As a business owner, you might be wondering what the difference is between a business line of credit and a business credit card. Do you need both? When should you use one over the other?

Consider a business line of credit and a business credit card as financial siblings. They share many of the same characteristics, but are two separate products. And they can get along quite nicely.

How does a business line of credit work?

A business line of credit (LOC) is a fixed amount of money a bank allows you to borrow. LOCs may either be unsecured or secured with assets. They have a draw period, which is the number of years you have to tap into the funds. During that time, you can withdraw as much as you like up to the credit limit, and only the borrowed amount is subject to finance fees. To access funds, you usually use a company checking account, credit card or mobile app.

The credit line on a small business line of credit can be quite high. Depending on your credit history and the company’s financial health, it can easily be $100,000 or more.

The lender will assess the minimum monthly payment due, which may be calculated as a percentage of the outstanding balance or based on the interest. If a debt remains after the draw period ends, the lender will determine the installment payments necessary to repay it based on a term, such as three or five years.

As with all financial products, there are costs involved. Depending on the lender, the LOC may come with:

  • Origination fee: An application processing fee, often between 0.5 percent and 1 percent of the credit line
  • Annual maintenance fee: Commonly $25 to $50 each year
  • Draw fee: Typically 1 percent to 2 percent of the amount you take out
  • Late fee: Varies by lender
  • Interest: APRs vary dramatically, from as low as the prime rate plus a small percentage to almost 30 percent, with no interest-free grace period

How does a business credit card work?

Business credit cards are like personal credit cards but designed with the small business owner in mind. Most of these cards are unsecured, though there are some secured business cards on the market. As with business LOCs, they have fixed limits and you can charge up to that amount as needed. Only revolved debt will be assessed financing fees. Unlike LOCs, you can keep the account active for as long as you like.

The credit card issuer will assess the minimum monthly payment due, which is usually 2 percent of the balance (unless the balance is so low that it will be a fixed amount, such as $25). You can use the card for purchases and cash advances.

Regarding fees, there are a few:

  • Annual fee: No annual fees on some cards, others charge $500 or more
  • Late fee: Commonly $39 to $41 after your first late payment, with some cards charging 3% of any amount past due (whichever is greater)
  • Cash advance fee: Usually $5 to $15 or 3 percent of the amount (whichever is higher)
  • Over limit fee: May be up to $35
  • Interest: Typically from 14 percent to 26 percent variable APR (excluding 0 percent APR intro offers), with a grace period where interest is not assessed on purchases, except for cash advances

The credit lines on business credit cards usually top out at about $50,000.

Line of credit vs. credit card

Since the limits can be so high, business LOCs are typically used for short- to mid-term financing for expensive things you want to pay for over time. For example, you may need $50,000 worth of restaurant equipment. If your credit card has a limit of $25,000 you’d be out of luck, but the LOC would carry you through.

On the other hand, you may just need to spend an extra $1,000 on advertising and can pay the bill in 30 days. With the business credit card, you’d get an interest-free grace period. Or, if you used a credit card with the 0 percent introductory rate, you would have even more time to make charges without any interest added to the balance.

There are also small business rewards to consider. While some business LOCs offer a rewards program, many don’t. Business credit cards almost always do. And if you’ll be flying around the country or world, choosing a good business travel card may be the way to go. They’re loaded with benefits that can lower those costs while offering compelling perks.

Be aware that because business LOCs tend to offer high limits, they can be more difficult to qualify for than small business credit cards.

The bottom line

In the end, business lines of credit and business credit cards are compatible products. Once you understand the differences between them, you can decide which one is best for your business needs. Perhaps the right strategy for your business is to use both: a business line of credit along with one of the best business credit cards. With either option, you will only pay interest on the money you use.

Written by
Erica Sandberg
Credit And Money Management Expert Contributor
Erica Sandberg is a credit and money management expert who began her career at Consumer Credit Counseling Service (CCCS). There, she helped individuals and families overcome their debt issues and developed budgets, then transitioned into the agency’s primary media spokesperson.
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