Managing Your Business

The Advantages and Differences of a Business Credit Card and Line of Credit

October 26, 2022
5 minute read
The Advantages and Differences of a Business Credit Card and Line of Credit
The Advantages and Differences of a Business Credit Card and Line of Credit

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Swyft Filings is committed to providing accurate, reliable information to help you make informed decisions for your business. That's why our content is written and edited by professional editors, writers, and subject matter experts. Learn more about how Swyft Filings works, our editorial team and standards, what our customers think of us, and more on our trust page.

Starting a business is both a rewarding and challenging experience. For most business owners a significant source of stress (especially initially) can be balancing monthly expenses while making the business profitable at the same time.

Business owners have a plethora of options when it comes to managing financial pain points. These can include opening a line of credit or applying for a business credit card. Check out the differences between the two options and what you need to know when choosing the best option for your business. 

Setting Up a Business Credit Card and Line of Credit

You can apply for a business credit card and LOC through a bank, credit union, or online lender. 

Applying for a business credit card is a similar process to a personal card. Lenders don’t need as many prerequisites to allow your business to obtain a credit card. You’ll have to have a formal business structure, either an LLCS corp, sole proprietorship, or C corp.

The lender will check your personal credit to see if you can pay off expenses because if your business fails to come up with the money, it will fall onto your credit to cover it. Assess different APR ratings when choosing your card based on the expenses you’re hoping to use it on. 

For a line of credit, you’ll want to determine how much funding you’re searching for and the timeline of when you need it. Lenders will consider different characteristics of your business, including personal credit scores, your business’s age, and proof of revenue you bring in, when deciding if you qualify for their offerings. 

You may have to provide collateral (other assets) or a guarantee to protect this line of credit to ensure you will pay the amount back. Because of these beginning steps, this LOC application process can take a while.

Advantages of a Business Credit Card

Earn Valuable Rewards

Many prominent vendors, such as office supply stores, partner with credit card companies to offer price breaks and cashback to customers who shop with them using their credit cards. It’s a win-win. Those companies increase their business, and you benefit from the rewards points of the credit card AND the price break with the vendor. 

Some credit card companies offer cash back, airline points, or other great incentives. If you’re smart with your business credit card and pay off your monthly balance, you can come out ahead by racking up these points.

Pay Frequent Costs Quickly

You’ll want a business credit card specifically for smaller bills that come about periodically, so you can pay them off promptly. 

Provides Accessibility

For newer businesses without an established line of credit, using this business card helps you build up and prepare a more established line of credit for larger purchases down the road.

Keep Account As Long As You’d Like

You can keep your business credit card account open and in use for as long as you’d like. This is different from a LOC, where you have a draw point where you must stop taking money out eventually. 

Advantages of an LOC

Access Higher Credit Limits

LOCs allow you to take out more money than a business credit card to pay off big purchases over time. It can cover unknown slow periods, extensive inventories, and payroll costs.

Set Interest

With a business line of credit, you only pay interest on what you use. The amount remaining in your credit account doesn’t determine the interest rate.

Ease Uncertainty

LOCs provide an excellent benefit for unexpected expenses. You set up a direct draw time in which you pay them off and aren’t forced to sink when confronted with them.

Benefits of Both

Here are six advantages that a business credit card and line of credit offer that make handling your business expenses more manageable.

Obtain Credit Faster 

If you’re not part of the lucky few business owners to obtain enough capital to fund your company for a year or longer, having access to a line of credit while establishing your business in the market can help.

Small business loans usually offer a lower interest rate, but the application and approval process can be complicated and lengthy. Banks may be less inclined to provide you with a loan until your business has a strong credit history and a proven record of success.

On the other hand, applying for and being approved for a business credit card is relatively straightforward. Establishing a line of credit requires a few more details than a credit card, but it’s still a helpful solution for significant expenses over a short period. 

There’s no pressure for your business to blow up the competition because credit companies typically only look at the owner’s credit score as a basis for setting up a business credit card account.

Unlike a small business loan, you only pay interest when you use the card or the money is taken out of your LOC. You can use the card for monthly purchases (and accrue reward points) or save it for a rainy day and use your LOC for more extensive purchases in a short timeframe.

Build Your Credit History

Your business won’t have a credit history when you form it. Like your personal credit reputation, it’s essential to establish a positive credit history for your business.

Aside from being approved for a business loan, your company’s credit rating can make or break potential relationships with future vendors and clients. A small business credit card and line of credit are some of the easiest ways to lay a sound financial foundation.

Streamline Your Accounting Process

Having your business purchases on one credit card or through one line of credit can streamline your accounting processes. The ready-made monthly statement from the credit card company clearly outlines your business purchases. 

You or your bookkeeper may better identify business-related and tax-deductible purchases without the hassle of combing through a mountain of different transaction methods.

Dispute Charges 

One benefit of using your business credit card for routine business purchases is access to dispute resolution protection. Your LOC will also have options for reporting errors on your credit report.

Suppose you ordered six cases of copy paper for the office, and one case arrived with extensive water damage. You can contact the credit card company and dispute the charge if the vendor doesn’t offer a refund. The credit company may not replace your copy paper, but this action can force your vendor to resolve the issue. (Your next step would be to find a new vendor.)

Access Account Management Tools

Once you’ve signed up for a business credit card or LOC, most credit companies offer access to online tools to help manage your finances. It’s in the company’s best interest for you to be on top of your expenses because that ensures they get their money back. 

They sometimes grant the business owner tools like Excel or Quickbooks for yearly summaries and tracking to achieve that goal. This is an excellent benefit for preparing your business for tax season. 

Some credit companies also use their tools to provide reports and tracking, so you have the information at your fingertips without putting in the work. 

Separate Personal and Business Finances

A common struggle for business owners is creating a work-life balance. One of the biggest benefits of owning a business is making your own hours and putting so much of yourself and your time into something you love. Certain boundaries can help keep your personal life and business life separate. Your finances are one of them. 

A business credit card and line of credit allow you to keep any business-related expenses in one area and many other living expenses in another. You can avoid confusion and stress by keeping your two lines of finances separate.

Choosing Between the Two

Considering both the shared benefits and each method’s specific strengths, you can analyze your business situation and see if there’s one you might want over the other. 

Business credit cards will usually be the first choice for businesses getting off the ground without an established line of credit. An LOC requires some more setup requirements and usually works best for businesses paying off large purchases.

Now that you know the differences between the two solutions and the benefits they can bring to your business, you can select the correct type of financing for your situation. 

Even with the streamlined process that comes with a business credit card or line of credit, having a professional accounting service like 1-800-Accountants handle your books will give you back even more time and cut back on the stress you already have to endure.

Originally published on October 26, 2022, and last edited on August 30, 2023.
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