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A business line of credit provides flexible access to cash for large or unpredictable costs, with interest paid only on the amount drawn. A business credit card is better for daily spending and offers rewards like cashback, providing a revolving credit line for standard operating expenses.
Choosing the right way to fund your company is a vital part of making running a business easier. While both options offer revolving credit—meaning you can borrow, repay, and borrow again—they serve very different purposes. This guide explains the basics of obtaining a business line of credit versus using a card, helping you decide which tool fits your current needs.
What is a business line of credit?
A business line of credit is a flexible loan that gives you access to a specific amount of money. You do not have to take the full amount at once. Instead, you "draw down" only what you need, when you need it.
How does a business line of credit work?
It acts like a financial safety net. Once a lender approves your business credit line, you can transfer cash into your business bank account.
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The draw period: This is the time (usually 12 to 24 months) during which you can take money from the line.
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Interest: You only pay interest on the money you actually use, not the total limit.
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Repayment: As you pay back the principal (the original amount borrowed), those funds become available to use again.
Comparing business line of credit vs. credit card
While both provide a credit line for business, the way you access and use the money is different. A card is a physical or virtual tool for payments, while a line of credit is a cash facility.
|
Feature |
Business line of credit |
Business credit card |
|
Drawdown speed |
1–3 days to transfer cash |
Instant at checkout |
|
Interest rates |
Often lower (variable) |
Higher (but 0% if paid in full) |
|
Repayment |
Monthly or weekly chunks |
Monthly full or partial |
|
Perks & rewards |
Rare, usually none |
What are the advantages and disadvantages of a business line of credit?
Getting a line of credit for business offers great flexibility, but there are trade-offs to consider.
Advantages
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Access to larger funds: Limits can be much higher than standard credit cards, helping with major projects.
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Lower rates: Business lines of credit interest rates are typically lower than the rates charged on credit card balances.
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Cash flexibility: You can use the cash for things cards often can't cover, like paying staff wages or property leases.
Disadvantages
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Drawdown fees: Many lenders charge a fee every time you take money out.
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No rewards: Unlike business credit cards, which usually offer cashback, lines of credit rarely offer rewards.
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Interest starts early: Interest usually starts the moment the cash hits your account.
Understanding credit limits and drawdown fees
Your credit limit is the maximum you can borrow. This is based on your credit score and business turnover. However, accessing those funds often comes with specific costs that you should factor into your budget.
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Drawdown fees: Always check if your lender charges a fee (often 1%–3%) every time you move money from the line to your bank account.
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Unsecured lines: No assets (like property) are needed to back the loan. These are faster to set up, but limits may be lower and interest rates may be higher.
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Secured lines: You provide collateral (like a property or equipment). This can lead to higher limits and better rates for business line of credit, but your assets are at risk if you cannot repay.
When to choose a line of credit over a card
Deciding between the two depends on what you need to buy.
Choose a business line of credit when:
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You need to pay for something that doesn't accept cards: This includes things like staff wages or property leases.
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You are making a very large purchase that exceeds your credit card limit: Although, some credit cards like the Capital on Tap Business Credit Card, offer features like Preloading, which allows you to top up your balance with your own funds to spend beyond your credit limit.
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You need to borrow for several months: If you cannot pay the balance in full quickly, a line of credit often has a lower interest rate than a credit card's standard APR.
Choose a business credit card when:
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You want to earn rewards: You can earn cashback on your everyday business spending.
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You can pay in full: You can avoid interest entirely by clearing the balance each month.
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You want purchase protection: Many cards offer protection if a supplier fails to deliver or a product is faulty.
Learning how to use your business credit card effectively can help you maximise these benefits.
Can I have both a card and a line of credit?
Yes. In fact, many business owners choose to have both a business credit card and a line of credit as part of a broader financial strategy. This allows you to use the card for daily expenses and rewards, while keeping the line of credit as an emergency cash reserve for unexpected bills or repairs.
However, there are two small things to keep in mind when managing an unused line.
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Account fees: Some lenders may charge a small monthly maintenance or "inactivity" fee even if you don't draw any funds. Always check your agreement for these hidden costs.
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Credit building: While an unused line shows lenders you are responsible, you won't build a strong business credit history if you never use credit at all. Occasionally using and promptly repaying small amounts can help prove to lenders that you are a reliable borrower.
The bottom line
Both a business line of credit and a business credit card are useful financial tools, but they work best for different tasks. A line of credit is built for larger, cash-based needs, while a business credit card is designed for daily spending and rewards. Before choosing either, consider the interest rates and fees involved to ensure the cost of borrowing aligns with your business's financial health.
Frequently asked questions
Is a line of credit harder to get than a credit card?
Generally, yes. Lenders often require more detailed financial information and longer trading history for a line of credit compared to a business credit card.
Which is better for short-term cash flow?
A business credit card is usually better for short-term needs (under 30 days) because you can avoid interest entirely. For longer-term cash needs (several months), a line of credit is often cheaper.
Does a line of credit require a personal guarantee?
Many unsecured business lines of credit require a personal guarantee, meaning the business owner is responsible for the debt if the company cannot pay.
Can I get a line of credit as a start-up?
Getting a line of credit for new business can be more difficult than for established companies. Lenders usually want to see at least 6–12 months of trading history and consistent cash flow. If you are a very new start-up, you might find it easier to start with a business credit card. This helps you build a business credit score, which makes getting a line of credit much easier in the future.
This does not constitute financial advice. To understand the best financing options for your specific needs, you should speak with your financial advisor or accountant.
