Revolving credit is one way to help provide liquidity to your company. It lets you borrow money up to a predetermined limit and pay it back over time, and because it’s revolving, you can borrow that money again after it’s repaid.
In this article, we’ll compare two types of revolving credit: business lines of credit versus business credit cards. We’ll also cover short-term business financing and long-term financial planning for businesses, two concepts that should be part of your business plan.
What is a business line of credit?
You’ll often see a business line of credit compared to a small business loan. The application and approval process are similar, but business loans need to be taken by the borrower as one lump sum. Meanwhile, a line of credit can be accessed in as-needed increments up to the total amount approved by the lender, making it more flexible business funding.
Another difference between a loan and a credit line for business is the interest rate. Small business loans typically have fixed interest rates. With a line of credit, you’re usually charged the interest rate available at the time of your withdrawal, making it a variable rate.
The approved amount for a business line of credit is usually between $5,000 and $250,000, though some lenders may offer up to $500,000. Only a limited number of lenders will go higher than that. Approvals are based on your business’s financial health, number of years in operation, payment history with vendors, and credit card debt. Your FICO® score may also be a factor.
Don’t underestimate the impact of your business credit score when applying for a line of credit. Reports and business scores from FICO®, Experian, Equifax, and Dun & Bradstreet are reviewed before the credit limit for businesses is set. If your scores are low, investigate secured lines of credit that you can collateralize with business assets—do not use your personal assets.
What is a business credit card?
Accessing business capital in the form of a loan or line of credit can be difficult if your business is new or doesn’t have a good credit history. Even if you are approved, the financing terms and conditions might make that type of funding too expensive. If that’s your story, business credit cards are an alternative to consider.
Business credit cards work like a line of credit but are typically used for smaller expenses. Many small businesses start their credit journey by applying for unsecured business credit cards, which are one of the most common financial products for businesses. They can be used for managing business expenses because most credit card companies offer an online dashboard to track transactions. These online resources can also be used to track credit utilization for businesses, which is an important variable in credit score calculation.
Comparing a line of credit and a business credit card
The main difference between these two financial products is how you use them. Credit cards can be used for major purchases if your limit is high enough, but the interest rate is typically higher on a credit card than on a business line of credit. The line of credit is a better option if you’re spending big money. No one buys a new office space with their credit card.
Business lines of credit are considered business loan alternatives, while business credit cards are cash alternatives. They’re rarely mentioned when discussing loans because the average transaction amounts differ.
Applying for a business credit card is also quicker and easier. Most credit card issuers can give you an answer right away and have your card delivered by mail within days, while applying for a business line of credit takes longer. Lenders will want to see company financial reports and your personal and business credit scores before they approve you.
Cost analysis of business financing options
Business borrowing costs for a line of credit can include a processing fee, management fees, and interest payments when you withdraw money. The total interest you pay will be less if you repay the money promptly. Your costs will be significantly higher if you let the balance carry into the line of credit repayment period, so avoid this if you can.
Credit card companies advertise the cost of their products using an annual percentage rate (APR). That number includes the interest and fees you’ll pay for a business credit card. According to WalletHub, average APR for business credit cards falls at roughly 22% during the first half of 2024. APRs on business lines of credit are often in single digits, making them significantly cheaper.
Watch out for hidden costs when you apply for either of these products. Your credit card may have a monthly maintenance fee. Lines of credit can have origination fees, annual fees, or even charge a draw fee every time you take out money. These fees can add up, so read the terms and conditions carefully before signing the agreement.
A final cost to consider is the opportunity cost of using credit to make business purchases. Your credit repayment strategies will allocate some liquidity to repay the debt. That will limit your spending bandwidth in other areas. Be careful when managing this. You don’t want to overleverage your company and stagnate your growth plans.
Advantages and disadvantages
The primary advantage of having a business credit card is the ability to track business expenses through the card issuer’s dashboard. The main disadvantage is the higher interest rates you’ll be charged for your purchases, but you can eliminate that interest by paying your full balance every month.
A line of credit offers lower interest with higher fees than a business credit card. The limits on a credit line are higher, which is an advantage, and you can also draw funds only when you need them, which can be huge when you need flexible funding. Examples of when a line of credit might be advantageous include funding an expansion or getting through an off-season.
Choosing between a business line of credit and a credit card
The good news is that you don’t need to choose between a business line of credit and a business credit card. Many small businesses elect to have both, but you may need to start out with a business credit card while you build up your credit rating to qualify for a line of credit. That’s how building business credit works.
Your choice isn’t about which financial product to apply for—it’s about which product is best for each situation. Your line of credit should be used to fund large investments, while business credit cards are a better choice for covering smaller expenses. Use that as a general rule, and you should find your debt more manageable.
Fuel your growth with a business line of credit.
