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Line of Credit vs. Credit Card: Which To Use for Business

line of credit vs. credit card illustration

To an outside observer, it might look like building a business is a fairly linear process. Make a great product or service, advertise, sell, rinse and repeat. But if you’re in the trenches, you know that managing the day-to-day operations and finances can be much bumpier.

For many business owners, finding the right type of financing is important for managing cash flow—the timing of when you collect payments and pay bills. An otherwise successful business could even fail if it falls behind on bills while waiting on unpaid invoices.

Having a line of credit or using a credit card (a specific type of line of credit) can be helpful for smoothing cash flows. These accounts can also help you quickly come up with money when there's an unexpected opportunity or emergency.

What is a credit card?

A credit card is a revolving line of credit that lets you borrow money, pay down your balance, and borrow again without having to apply for a new loan.

Your credit card account will have a credit limit and your current balance increases as you use your credit card for purchases and other transactions, such as a balance transfer or cash advance. You can use your card until your current balance hits your credit limit—after that, your transactions may be declined. But, if you pay down your balance, you free up available credit and can use your card again.

What business owners should know about credit cards

Here’s what you need to know about credit cards and how you can use them to support your business.

  • Most credit cards are unsecured. You generally don’t have to offer any collateral to obtain a credit card. However, if you’re new to credit or have a low credit score, you may need to start with a secured credit card. You’ll then have to send the card issuer a refundable security deposit, which may determine your card’s credit limit.
  • You only pay interest on purchases while carrying a balance. You generally won’t have to pay interest on any of your purchases if you pay your balance in full every month. When you pay less than the full amount and revolve part of your balance, you’ll have to pay interest on the amount you revolve. Your new purchases will also start to accrue interest immediately.
  • You could have around 53 days to pay for your purchases. Credit cards tend to have a 28- to 31-day billing cycle (depending on the month’s length and weekends or holidays). At the end of each billing cycle, the previous balance and new transactions are added together to determine your statement balance and you’ll receive a bill that’s due about 21 to 25 days later. This means you may have anywhere from 49 to 56 days between when you make a purchase and have to pay the bill.

There are also consumer and small-business credit cards. These work similarly, although small-business cards may offer some business-specific benefits, such as the option to request employee cards.

Sole proprietors might designate one of their personal cards as a business credit card because their finances are intertwined. But if you’ve registered or incorporated your business, you may want to get a credit card with the business’s name to help keep your personal and business finances separate.

What is a line of credit?

A line of credit is similar to a credit card in many ways. You’ll receive a maximum credit limit on your line of credit and when you want to take out a loan—called a draw—you’re borrowing against your credit limit. However, lenders offer several types of credit lines:

  • Lines of credit can be revolving or non-revolving. Some lines of credit are revolving accounts and work similar to credit cards, the lender might even give you a card you can use to make draws. While they’re less common, you may also find non-revolving lines of credit, which means your credit limit will be the total amount you can borrow. You might still be able to take out multiple loans against a non-revolving credit line, but paying down the debt won’t increase your available credit and the creditor will close your account once you use up the credit line.
  • You can choose from secured and unsecured options. Lenders may offer unsecured lines of credit to consumers and business owners. Secured lines of credit, which require you to pledge collateral, are also available, such as a home equity line of credit and business equity lines of credit. Even borrowers who don’t have poor credit may decide to use a secured line if it offers a lower interest rate or higher loan limit.
  • Some lines of credit have draw and repayment periods. A line of credit may have an initial draw period, when you can take out loans and make minimum payments. When that ends, a repayment period starts, and your monthly payment could increase to ensure you’ll pay off the balance by the end of the repayment period. Others give you a predetermined repayment amount and period for each draw—similar to taking out an installment loan against your line of credit.

As with credit cards, lenders offer personal and business lines of credit, and deciding which makes sense could depend, in part, on your business’s structure. But because lines of credit don’t usually offer rewards or other perks, you may want to compare rates and terms.

What are the differences between a line of credit and credit card?

While specifics depend on the lender and account, there are a few general differences between a line of credit and credit cards.

Maximum credit limit

While you won’t know your account’s credit limit until after you apply and get approved, a line of credit often has a higher credit limit than a credit card. Unlike credit card issuers, lenders will also often advertise the maximum limit for their lines of credit.

Interest rates and accrual

Your interest rates can depend on the lender, type of account, and your creditworthiness—your credit score, credit history, debt outstanding, income, and other factors.

In general, credit cards have a higher interest rate than lines of credit. But credit cards also give you the opportunity to borrow money without incurring interest if you pay the balance in full. With a line of credit, you’ll start accruing interest on your draws immediately.

In either case, interest rates are often variable rates made up of a floating benchmark rate and an additional fixed rate. If the benchmark rate changes, the interest rate on your current credit card balance or line of credit draws may also rise. Additionally, a credit card’s interest rates may increase if a promotional period of low interest rates ends or if you fall behind on your payments. Card issuers can increase your interest rate at any point after your first year with the card, but they need to give you at least a 45-day notice and the increase only applies to new purchases.

Another notable difference is that a credit card’s interest rate is the same as its annual percentage rate (APR). A line of credit’s APR can depend on its interest rate, fees, and repayment terms.

Repayment terms

Credit cards always have a minimum payment, but they don’t have a specific repayment period. Some lines of credit have a fixed repayment amount and term for each of your draws. Others have a draw period with minimum payments and then a repayment period with fixed payments.

Rewards and Benefits

You can use a rewards credit card to earn points, miles, or cash back on all your eligible purchases. Many credit cards also offer additional benefits and perks, such as extended warranties, travel-related insurance, and zero liability for unauthorized purchases. In contrast, lines of credit generally don’t offer any rewards or extra perks to borrowers.

Fees

Credit lines may have an annual, monthly, or inactivity fee. There may also be an origination or draw fee that applies when you open your account or each time you take out a draw. Credit cards may also charge an annual fee. But there are cards without annual fees, and the other fees depend on how you use the card, such as a fee for foreign transactions, balance transfers, cash advances, and late payment.

How to choose between a line of credit and a credit card

It can be a good idea to have both a credit card and line of credit open, especially if neither one charges you an annual or ongoing fee. While they’re both types of credit lines, the specifics can make them useful in different circumstances.

For example, credit cards may be a better option for regular expenses because they offer rewards and purchase protections, and give you a little extra time to pay a bill. But a line of credit could be a better fit for a large expense or ongoing project if you can borrow more and pay less interest over time.

There may also be times when other types of credit, such as Shopify Capital, make more sense—it all depends on the terms of the loan and how you plan to use and repay the money. And no matter what type of funding you’re considering, compare the interest rates, fees, borrower benefits, and repayment terms on offers.

Lines of credit vs. credit card FAQ

Is it better to use a line of credit or a credit card?

Depending on the situation, a credit card might be best if you’ll earn rewards and can pay off the balance in full to avoid interest expenses. But a line of credit with a lower interest rate is better when you need to borrow more money or need a longer time to pay off the debt.

Is it better to pay off a line of credit or a credit card first?

Focus on paying down the debt with the least favorable terms, which generally means the account with the highest interest rate. But check if your line of credit charges a prepayment penalty, which is an additional fee incurred if you pay off your line of credit early. If that’s the case, paying down the credit card first might be the better option, even if its interest rate is lower.

How is a line of credit similar to a credit card?

A credit card is a revolving line of credit—a type of credit line—that you access using a card. Both credit cards and lines of credit give you the option to borrow money without requiring you to take out a loan, and you only pay interest if and when you borrow money.

Is there a downside to a line of credit?

You might have to pay a fee to open and keep your line of credit even if you don’t use it. A line of credit also might wind up costing you more than you expect if the interest rate increases after you take a draw.

Does applying for a line of credit affect your credit score?

Applying for a line of credit will generally require a credit check, known as a hard inquiry, which may hurt your credit score a little. Opening a new line of credit can also affect your score by lowering the average age of your accounts. However, the increased available credit and on-time payments, if you manage the account well, can improve your score over time.

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