Business Lines of Credit vs. Credit Cards

It’s understandable for business owners to confuse business credit cards with business lines of credit. Although they share similar terminology, these products possess distinct features and serve different purposes.

Let's delve into the distinctions between business lines of credit and business credit cards to assist you in deciding whether your business needs one, the other, or both.

What is a Business Line of Credit?

A business line of credit (LOC) is a type of revolving loan for businesses that comes with a defined credit limit. Approval for a business LOC hinges on the financial status and creditworthiness of the business, and may sometimes require collateral. LOCs are intended to address daily operating expenses and significant costs that might surpass typical credit card limits, such as equipment purchases, raw materials, and payroll.

Repayment conditions, interest rates, and terms can differ based on the business LOC utilized by a company. For instance, Chase provides a business LOC for commercial purposes, starting at a minimum of $500,000, with the full balance due at the maturity date established by the bank.

What is a Business Credit Card?

Business credit cards function similarly to personal consumer cards, where cardholders receive a predetermined credit limit and must pay a minimum balance monthly to keep their account in good standing. At TPG, we strongly advise settling your card balances in full whenever feasible.

Both card types usually come with different annual percentage rates (APRs), which is why it's essential to prioritize paying off balances — carrying a balance from month to month means you'll incur more interest on top of what you owe.

Certain business cards offer rewards for your purchases. For instance, the American Express® Business Gold Card provides up to a $240 annual statement credit (up to $20 per month) for qualifying U.S. purchases at FedEx, GrubHub, and office supply stores (enrollment required), while the Ink Business Preferred® Credit Card allows you to earn 3 points per dollar on travel purchases (for the first $150,000 spent in combined purchases each anniversary year), then 1 point per dollar on all other purchases.

Business credit cards require a minimum monthly payment on any outstanding balance. Most allow you to carry a balance month to month, subject to the current APR. However, some cards, like the Capital One Venture X Business, mandate that the balance be paid in full each month to avoid late fees.

Additionally, business credit cards can offer tools such as expense tracking and employee cards to assist businesses in managing their finances and spending capabilities.

How to Apply for a Business Line of Credit

The application process for a business LOC can be more comprehensive than applying for a business credit card. Unlike business credit cards, most applications for a business LOC need to be completed in person at a bank branch or via phone.

When seeking a business LOC, banks will ask for various documents, so it's advisable to prepare your paperwork before applying. This may include financial statements, tax returns, a list of both business and personal assets, and employee information. The qualifying requirements for a business LOC can also be quite stringent, often requiring your business to have been operational for a minimum number of years and meet certain annual revenue benchmarks.

How to Apply for a Business Credit Card

Applying for a business credit card is relatively straightforward and can often be completed online. You can use your social security number and, if applicable, an employer identification number to apply. Your creditworthiness is typically assessed based on your personal credit score. As long as it remains in good standing, gaining approval should be manageable.

If you engage in a side hustle, freelance work, or contract jobs, you are considered a business owner and can benefit from business credit cards and their perks.

Business Line of Credit vs. Business Credit Card

Here’s a comparison of how business LOCs and business credit cards stack up against each other.

Due to the typically high limit on a business LOC, it is commonly used to finance everyday operations or as a short- to medium-term solution for significant purchases that will be paid off gradually. For example, a construction company that needs $200,000 to acquire raw materials like concrete and steel would greatly benefit from a business LOC.

From my experience, encountering a business credit card with such a high limit is quite uncommon. A business LOC would be the most suitable option, and the APR for a LOC is generally lower than that of most credit card interest rates.

Conversely, if your business anticipates spending a reasonable amount on travel one month and an additional $2,000 on advertising the next, a business credit card is the more appropriate choice.

In contrast to a business LOC, purchases made using a business credit card are usually smaller, and payment is not required until the statement due date. This gives business owners an interest-free grace period on their purchases before the statement closes. A business credit card will only begin to accrue interest if the balance remains unpaid in full by the due date.

You should think about the potential benefits and rewards your business could miss if you rely solely on a business LOC. Unlike business credit cards, most business LOCs do not provide cash back or travel rewards.

In summary

Business lines of credit and business credit cards are distinct financial tools. The former is beneficial for large businesses that require significant capital, while the latter caters to those with ongoing spending needs. It may be advantageous for a large business to utilize both, with the business line of credit for substantial purchases and a business credit card for smaller transactions.