A business credit card and a line of credit are two common short-term financing options used by small businesses. Business owners use business credit cards and lines of credit to cover similar working capital needs, such as office expenses, vendor payments, and inventory. In this article, we’ll compare a small business credit card vs line of credit, and explain why having both is a good idea.
Kabbage, sponsor of this article, offers a small businesses line of credit of up to $150,000. There’s no cost to set up your line of credit, no obligation to draw funds if you qualify, and you pay only for the funds you actually use.
Business Line of Credit
A business line of credit is a flexible financing option from a bank or private lender. A line of credit gives small business owners access to funds that can be drawn on as needed. Interest is charged only on the capital used (after funds are drawn) and not on the line of credit extended. Businesses have a predefined period of time to repay the amount borrowed, typically 6-12 months.
You can think of a line of credit like a hybrid business credit card and loan option. This is because a line of credit can be revolving, similar to a business credit card. When applying for a line of credit, you’ll typically receive a credit amount up to $150,000. From there, you can draw on that line of credit as needed, much like a credit card. You’re not required to use it.
Some providers of small business lines of credit charge fees in addition to the interest charged on borrowed funds. These fees may include:
- Origination fee between 1% – 5%
- Draw fee each time a draw is taken, typically around 1%
- Annual service fee if you don’t take a draw, typically around 1%
Kabbage, however, does not charge origination, draw, or annual services fees. For small business owners who like the idea of having a business line of credit just in case, but don’t have an immediate use for the fund, Kabbage can be a great option.
Once you’ve drawn down all or part of your line of credit, the amount you borrow is repaid as a term loan. The typical repayment term is between 6 – 12 months per draw, where you’ll be charged a fixed monthly fee between 1% – 10%. This translates to an APR between 20% – 50%.
The funds you draw from a line of credit can be used to cover payroll, rent, and other working capital needs that a credit card may not be a good option for. Since you only pay if and when you draw on the line of credit, they are an especially good option for seasonal businesses, businesses with unpredictable cash flows, or businesses taking on new projects where the total costs are unknown until completion.
Kabbage finds that their customers often use lines of credit to manage cash flow while they wait on their accounts receivable. With lines of credit of up to $150,000 and no cost or obligation to draw funds if you qualify, a Kabbage line of credit gives business owners a high degree of flexibility as they grow. Prequalify online in minutes.
Business Credit Card
A business credit card is a credit card tied to a business and used to make business-related purchases. A business credit card, like a consumer credit card, gives a person access to a credit line that can be used as needed. Expenses are required to be paid off monthly and all outstanding expenses are charged monthly interest until repaid.
It’s common for small business credit cards to have a credit limit between $10k – $50k+. Like a line of credit, a business owner can use some or all of that credit limit as needed. However, unlike a line of credit, a business credit card doesn’t have a predetermined timeline for repayment. They do, however, set a minimum monthly payment which typically reflects a percentage of the outstanding balance (usually 1-3%).
Any balance not paid off within a month are charged an APR between 21% – 24%. Some small business credit card accounts have an annual service fee. Further, these accounts will also sometimes charge a fee for each additional employee card issued.
The typical annual fees can range from $0 – $500 per card and/or per account. Higher fees generally translate to more robust rewards programs (cash-back and travel rewards) and greater perks. Determining whether those perks and rewards will be worth the annual fee can be difficult and will depend greatly on the card and your business’s spending habits.
A business credit card is therefore a good option for business owners who want to earn rewards and manage employee expenses. This is because multiple cards can be issued to a single account, and all of these cards have the potential to earn points or cash back for purchases made on the card.
If you already have a small business credit card and want to increase the amount of revolving credit your business has access to, get prequalified online for a line of credit with Kabbage. There’s no cost or obligation to draw funds. Lines go up to $150k.
Business Credit Card vs Line of Credit
There are many differences between business credit cards and lines of credit. While both offer short-term credit lines and typically require personal guarantees, each of these financing options has their own benefits and drawbacks. Specifically, business credit cards and lines of credit have 3 major differences:
- Access to Capital
- Repayment Schedules
- Fees & Rewards
1. Access to Capital
The major difference between a business credit card and a line of credit is access to capital. This is due to two reasons. The first is that a line of credit will typically have a larger maximum credit limit than a business credit card. It’s common to find lines of credit up to $150,000+ while business credit cards typically have limits between $10,000 – $50,000+.
The second is that when you draw from a line of credit, those funds can be deposited as cash into your account. By comparison, a business credit card is usually only used for credit. It’s possible to get a cash advance, but that amount is usually limited and the fees associated with it are costly.
2. Repayment Schedules
The repayment schedule of a business credit card vs line of credit is also a key difference. For example, a business credit card requires minimum monthly payments. However, it’s possible to float a balance as there’s no predetermined repayment schedule. Conversely, a line of credit is treated more like a loan and has a fixed repayment schedule, between 6 – 12 months, typically.
This makes a business credit card more flexible in terms of repayment. While a monthly fee is charged on outstanding business credit card balances, a cardholder is only required to make monthly minimum payments equal to 2% – 4% of the outstanding amount. However, there are some cards called business charge cards that require balances to be repaid in full every 15 – 30 days.
This is in contrast to lines of credit, which act more like loans when it comes to repayment. Even though you can use a portion of your line of credit, each draw is treated as a separate “loan,” which is repaid evenly over a period of 6 – 12 months. There is no option to float expenses beyond that timeline or to make “minimum payments.”
Lines of credit can require daily, weekly, or monthly repayments. The most common type of repayment schedule is typically daily or weekly. However, Kabbage offers lines of credit with monthly repayment terms. This can help you manage cash flow and makes the total cost of borrowing competitive with business credit cards.
For example, let’s say that you have a $50,000 line of credit with a 2% monthly fee. You decide to use $5,000 in January and $5,000 in March. The first draw is repaid monthly from February to July with an initial monthly amount of [$5,000 principal x (1/6 months)] + ($5,000 principal) x (2% monthly fee) = $1,100. The second draw is repaid monthly from April to September with the same initial monthly amount of $1,100.
This means that your monthly payments will overlap for the months of April to July. However, you can pay back your borrowed amount at any point during the predetermined payback period without paying a prepayment fee.
Since you only pay a fee during the months you have an outstanding balance, Kabbage customers can save money by paying early. This can make a line of credit’s cost of capital lower than a business credit card. Below is a breakdown of minimum repayment schedules for Kabbage’s 6- and 12-month lines of credit.
3. Fees and Rewards
The final major differences between a business credit card vs line of credit are the fees and rewards. A business credit card typically has a rewards program where businesses can earn cash back or points redeemable for travel and other expenses. By comparison, a line of credit may not come with these perks.
Business credit cards with significant rewards programs will typically have an annual fee associated with each card. This is to compensate for the rewards that the card offers. Kabbage, on the other hand, doesn’t charge an annual fee. Although, some lines of credit might have an early repayment penalty or an annual service fee if you don’t draw on your credit line.
When it comes to APR, prime borrowers are able to get an effective line of credit APR around 20%. However, the typical range of APRs is between 30% – 50%, depending on the monthly fee and the repayment schedule. For a line of credit, the higher the fee and the longer the repayment, the higher the APR.
By comparison, the APR on a typical business credit card is around 21% – 24%. However, while APRs are an industry standard and useful for comparing lending products like mortgages, it’s important to consider the total cost of borrowing when you’re considering a short-term loan.
To help you get the best understanding of a business credit card vs line of credit, check out the side-by-side comparison below. After the table, we’ll dive into the specific instances when you’d want to use a line of credit, business credit card, or both at the same time.
Breakdown: Business Credit Card vs Line of Credit
Maximum Credit Limit
(prime borrowers 20%)
Time to Approval
Time to Funding
Minimum Credit Score
Minimum Annual Revenue
When to Use a Business Line of Credit
A business line of credit is a short-term and flexible financing option that’s used for most working capital needs. The benefits that set it apart include the ability to use it as cash or to write checks. Further, if you’re a prime borrower, it’s possible to get an effective APR that’s lower than what you’d get on a business credit card.
“Many small businesses find it valuable to have their line of credit for purchasing inventory, funding payroll or marketing campaigns to increase their sales. Some appreciate the security of a line of credit, available for unexpected expenses or during their busy season when they may need to hire seasonal employees.”
— Jon Parise, Head of Customer Marketing at Kabbage
Specifically, there are 3 situations where it makes sense to use a line of credit:
1. When Borrowing Needs are Unknown or Vary
The beauty of a revolving line of credit is that it’s a hybrid between a loan and a business credit card. This means that it’s more flexible than a loan but typically has a higher limit than a business credit card. For these reasons, a line of credit is a great choice when your borrowing needs vary or are unknown.
For example, seasonal businesses are a great candidate for a line of credit. In down periods when revenue is expected to be low, a business can draw on a line of credit to cover such things as rent or payroll. Like a loan, the amount used is repaid over a defined period of time with a fixed monthly fee.
However, the benefit here is that there are typically no requirements to use a line of credit. So, unlike a more traditional working capital loan, you don’t have to use it if revenue ends up being higher than expected. For example, the average Kabbage customer draws on a line of credit 4 times every 12 months, using only the amount of funds they need at a time.
2. When You Need Access to Cash or Checks
Access to capital is a great reason to use a line of credit. A line of credit can be used as credit or can be used as a cash advance up to 100% of your credit line. This cash can then be used to write checks or pay vendors who might not accept credit. You can think of a business line of credit kind of like a fast business loan that’s on-demand.
Conversely, a credit card only offers a limited cash advance amount that’s typically charged at your APR rate plus ~7%. This means that a line of credit is a good option for covering such working capital needs as payroll, rent, leases, insurance, and more.
3. If You Have a Low Personal Credit Score
The minimum personal credit score requirements with a line of credit can be lower than that of a business credit card. It’s fairly common to find lines of credit with a 550 minimum personal credit score for approval. By contrast, business credit cards typically have a minimum personal credit requirement around 640+.
However, it’s possible to get a secured business credit card with similar minimum qualifications to a line of credit. It should be noted that these secured cards are simplified versions of more robust business credit cards and typically don’t have certain benefits such as rewards and balance transfers.
If you’ve been in business for 1 year, have a credit score above 550, and generate at least $50k in annual revenue, you may qualify for a line of credit from Kabbage. There’s no cost or obligation to draw funds if you qualify, and you pay only for the funds you actually use. Prequalify online for up to $150k.
When to Use a Business Credit Card
A business credit card is a standard financing option that is used by business owners to manage employee expenses and earn various rewards. This is because the benefits of a small business credit card include multiple cards under a single account and the ability to earn cash back or points redeemable for things such as business travel.
“Like many small business owners, Kabbage finds that business credit cards are valuable for in-store purchases for smaller expenses. A line of credit can be used for these transactions as well, however, most business owners will use these funds for bigger expenses such as funding payroll or a marketing campaign.”
— Jon Parise, Head of Customer Marketing at Kabbage
Specifically, there are 4 scenarios where it makes sense to use a business credit card:
1. When You Need to Manage Employee Expenses
Unlike a line of credit, business credit cards can be issued to multiple individual employees under the same corporate account. This can help you manage employee expenses with real-time oversight, financial controls such as spending limits, as well as expense reporting that doesn’t require the submission of employee expense reports.
For example, there are robust cards such as corporate credit cards that offer business owners scalable financial controls that can service a team of 15+ cardholders. However, these cards are typically used by companies with at least $4 million in annual revenue and with an established corporate credit card policy.
There are other business credit cards that offer similar perks for smaller teams, which you can read more about on our best small business credit cards.
2. When You Need to Float Expenses
A business credit card only has a minimum monthly payment requirement. This means that businesses aren’t required to pay off their credit card balances using a predetermined payment schedule. Instead, business owners can float expenses on their business credit cards, which helps them better manage cash flows.
This is an important benefit for businesses who offer net payment terms to customers and suppliers. For example, if a business has to pay its suppliers up front but is paid by its customers on net-30 terms, it’s possible to use a business credit card to float inventory purchases until the cash is received from the customer.
3. To Earn Cashback or Rewards Points
One of the major benefits of a business credit card is the fact that a business can earn rewards in the form of cash back or redeemable points. It’s common to find business credit cards with cash back between 1% – 5% and rewards points equal to $0.01 – $0.05 per dollar spent. This is effectively seen as a discount or rebate on card purchases and saves a business money.
There are a large number of business credit cards that offer these types of rewards. For example, there are small business fuel cards as well as larger fleet cards that offer discounts and rebates on gas purchases made at the pump. Other cards such as airline travel cards and cash back rewards cards offer their own perks.
However, some small business lenders, like Kabbage, are now offering rewards programs for their lines of credit. Kabbage has a new beta loyalty program that aims to reward the most active customers with incentives, such as a lower monthly fee.
4. If Your Business Has Little-or-No Revenue
Finally, a business credit card is a good short-term financing option if your business doesn’t meet the minimum revenue requirements of a line of credit. It’s common for a line of credit to require either $50k in annual revenue. If your business is new or small, a business credit card might be the only option.
This is because small business credit cards generally require a personal guarantee. What this means is that you the business owner will be held responsible for any outstanding or delinquent expenses on your company’s business credit card account. For this reason, business credit card providers can extend credit based, in part, on personal credit and income.
Benefits of Having Both a Business Credit Card and a Line of Credit
A business credit card and a line of credit both have unique benefits that are helpful to business owners. Since it’s possible to find business credit cards and lines of credit without any annual fees, there’s no downside to having both. This gives you greater access to capital and lets you take advantage of multiple product-specific benefits.
The 3 benefits of having both a business credit card as well as a line of credit include:
1. Increased Business Credit
Your business credit score is a business-specific score that assesses the creditworthiness of your company. You typically have up to 4 major business credit scores, each of which uses their own business credit reporting to calculate your score. However, one of the factors that affects all your scores is your business’s credit limit and credit utilization ratio.
This is why having both a business credit card and business line of credit can help increase your business credit score. When you have both, it naturally increases your business’s total credit limit as well as lowers your credit utilization ratio (as long as you don’t tap into them too much). Both of these factors will positively affect your business credit reports and business credit scores.
2. Greater Payment Flexibility
Having a business credit card is great. It often offers you cash back and rewards for money you spend on the card. This means that as long as you don’t exceed your limit, it might always be better to use a business credit card vs line of credit. However, a line of credit can be used as cash and to write checks, which a business credit card can’t do.
You can solve this problem by having both. This way you can use your business line of credit to cover overhead such as rent or payroll and your business credit card to cover other costs such as employee incidentals. The result is that you can pay for and earn rewards on your employees’ incidentals and still finance rent and other cash-required expenses.
3. More Access to Capital
One of the downsides of relying only on a business credit card is that the credit limit is often lower than a business line of credit. This means that while you might be able to earn rewards when you use a credit card, you might soon hit the credit limit. If this is the case, it makes sense to have both a business credit card and line of credit.
If you need to pay for expenses using credit, you can use your business credit card up until the point you reach your limit. From there, you can rely on your line of credit to pay for the rest. Further, if you know you have a large expenditure that’ll exceed your business credit card limit, you can put the entire amount on your line of credit.
What’s more, if you know that you can pay for an expense using credit but will have to float it for a few months, it’s more cost effective to use a line of credit instead. Even though you’ll forgo some rewards, the line of credit repayments schedule is better than making minimum payments and getting charged a high APR until you can pay it off.
Overall, a small business credit card and a business line of credit are both good short-term financing options for small businesses. Since you can often find both of them without any fees, it never hurts to have both. This way, you have a higher total credit limit that you can rely on when you need to smooth out cash flow or take advantage of a sudden opportunity.
If you’ve been in business for 1 year, have a credit score above 550, and generate at least $50k in annual revenue, you may qualify for a line of credit from Kabbage of up to $150K. There’s no cost or obligation to draw funds and you pay only for the funds you actually use. Apply online in minutes and know right away how much funding you can access.