Do you want to know the best financing option between getting a line of credit vs business credit card? If YES, here is a detailed comparison and advice to help you.

If you need funds to expand your business or execute certain business-related projects, you can apply for credit at your bank or some other financial institution. These institutions offer credit to borrowers who pass certain criteria.

Before a bank or financial institution grants your application for credit, you need to fill out an application form that requests certain financial information. Then the institution will check your credit history to know if you are likely to pay back or not. When applying for credit, you have two options:

  • A business credit card
  • A line of credit

A business credit card is an electronic card—issued by a bank or a credit card company—that allows you to make purchases with loan money until you reach a specified limit. Then you will repay the money over a period of time along with interest.

A line of credit, however, makes the cash assessable to you through paper checks rather than electronic cards. Like a credit card, it offers revolving credit up to a certain limit. Only banks can issue lines of credit.

In both cases, as you repay the amount used, the funds become available once again for you to use. Both credit cards and lines of credit are of two types:

  • Secured
  • Unsecured

Unsecured credit cards or lines of credit are not backed by any type of asset and are approved based on the credit history and score of the potential borrower. Secured credit cards and credit lines, on the other hand, are backed by the potential borrower’s assets. Should the borrower fail to make timely payments, the lender reserves the right to seize and sell the asset used as collateral.

Secured credit cards and credit lines come with less interest rates than unsecured ones because a secured loan is at least partially guaranteed by an underlying asset, such as a home.

Business Credit Card vs Line of Credit – Features

While credit cards and lines of credit are similar in that they offer revolving credit, there are some key differences on their features.

First, a line of credit usually issues paper checks with which you can access the funds you need, but a credit card is a plastic electronic card used for purchases.

Second, lines of credit typically come with lower interest rates. Many home equity lines of credit in particular have fixed-rate options for purchases over a certain amount, which means you can lock in on an otherwise variable line of credit. This is not possible in the case of credit cards.

Business Credit Card vs Line of Credit – Benefits

Some differences also lie in the benefits that come with lines of credit and business credit cards. The major benefit of credit cards is convenience. You can make any purchase you want without leaving the comfort of your home or office because so many merchants accept Visa, Mastercard, and other popular brands that issue credit cards. So, as a credit card user, you don’t have to carry cash or checks about.

As for lines of credit, the primary benefit is that the interest rates are not only low, but are also stable because many of them are tied to prime interest rates, which are set by the government. So, in terms of low inflation and falling interest rates, lines of credit are preferable to credit cards.

Business Credit Card vs. Line of Credit – Other Differences

Aside the ones already discussed, more differences between a business credit card and a line of credit are highlighted below:

  • A credit card gives a grace period of 20 to 56 days in the case of a purchase, but none in the case of a cash advance. A line of credit gives no grace period.
  • Credit limits for credit cards are typically high, while those for lines of credit are typically low.
  • Credit limit for cash advance is 20 percent for a credit card, while it’s 100 percent for a line of credit.
  • Annual fees are payable on credit cards, but are waived for lines of credit.
  • Credit cards give rewards for purchases (but not for cash advance), but lines of credit don’t give rewards.

Final considerations

A line of credit is better if you need to finance or pay off purchases over a long period of time, because the interest rates are lower. A credit card, on the other hand is better for purchases, especially when you can pay up on time (while a line of credit is better for cash advance).