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Business Line of Credit vs. Credit Card: How to Choose

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Updated November 6, 2023​

5 min. read​

There are several funding options available for small businesses. If you’re seeking working capital to cover operating expenses, looking to expand or need a safety net, you may be torn between a business line of credit or a credit card. 

Both could work for your company and meet your funding needs. Here’s what to know about each option and how to decide which is most ideal. 

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What is a Business Line of Credit, and How Does It Work?

A business line of credit operates like a credit card. It’s a revolving account you can pull funds from as needed, up to a preset credit limit. You’ll only pay interest on the amount you withdraw and can borrow from the line again if you make payments toward the principal balance. 

This type of account can be secured or unsecured. You’ll also have a draw period during which you can pull funds. Once it ends, the outstanding balance is converted into a loan and payable over several months or years, depending on the lender. Or you may have the option to renew the line of credit if you’ve managed it responsibly. 

What is a Business Credit Card, and How Does It Work?

A business credit card also functions like a traditional credit card. You’re allowed to spend up to the credit limit, and a minimum monthly payment is required to keep the account in good standing. 

But unlike a business line of credit, there’s no draw period. Instead, the card will generally remain open until you decide to close it, assuming it’s managed responsibly. That said, this form of credit could be more costly if you max out the card and can only afford to make the minimum each month.

How to Choose Between a Business Line of Credit vs. a Credit Card

Business lines of credit and credit cards are available through traditional banks and credit unions. Many online lenders also offer credit lines for small businesses. Consider these factors when deciding which is best for you. 

Requirements and Difficulty to Qualify

  • Business line of credit: Most lenders have a minimum credit score, time in business and annual revenue requirements. This could make qualifying for a business line of credit challenging if you’re starting out or have a lower credit score. 
  • Business credit card: There’s no minimum time in business or annual requirement for most business credit cards, so having a startup won’t necessarily hurt your approval odds.

Term Length 

  • Business line of credit: You could get a draw period of up to 35 months or longer. 
  • Business credit card: There is no preset term on business credit cards. 

Credit Limit

  • Business line of credit: You could be eligible for a business line of credit of up to $5 million, but most small businesses access up to $250,000.
  • Business credit card: Most business credit card issuers cap limits at $50,000.

Interest Rates and APRs

  • Business line of credit: The most competitive rates are reserved for creditworthy borrowers. But if your credit score is on the lower end, expect a higher APR. 
  • Business credit card: You’ll generally need good or excellent credit to qualify for a credit card with a reasonable APR. Still, it’s likely higher than you’ll get with a business line of credit.

*Note: Both products typically come with a variable interest rate that changes over time with market conditions. 

Cost and Fees

  • Business line of credit: You could be subject to a draw fee each time you pull funds from a business line of credit. Some lenders also charge an origination fee when you open an account and maintenance fees as long as the business line is open.
  • Business credit card: If you have bad credit and are approved for a business credit card, expect a steep APR and, in some cases, an exorbitant annual fee. And if you need to withdraw funds through a cash advance, it could be costly, and the amount you pull will likely be subject to a higher APR. Some credit card companies also assess late fees and over-limit fees.
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  • Business line of credit: This form of credit is universally accepted since the withdrawals are in cash. Some lenders also permit borrowers to write checks to make purchases.
  • Business credit card: Depending on the credit card issuer, you may find that select vendors and suppliers aren’t willing to accept credit cards to cover purchases.

Expense/Transaction Tracking

  • Business line of credit: The responsibility for tracking your spending generally falls on the accountant or business owner if they don’t have one. 
  • Business credit card: You may be able to merge your transaction activity with your accounting software to simplify expense tracking and bookkeeping.

Effect on Your Personal Credit 

  • Business line of credit: It’s possible to access a business line of credit without a personal credit check if you’ve been in business for some time and your company’s financials are up to par. In this case, applying wouldn’t impact your personal credit score. Otherwise, you could see a slight dip when you apply. Your personal credit score could also be affected if the lender reports account activity to the consumer credit reporting agencies. 
  • Business credit card: In most instances, your personal credit is pulled when you apply for a business credit card. However, credit reporting varies by the credit card company. Some report to both personal and business credit bureaus, but others don’t.

*Note: Both products can help build your business credit if the card issuer reports to the business credit bureaus. 

Perks and Rewards

  • Business line of credit: You generally won’t enjoy the perks or rewards that come with select business credit cards. 
  • Business credit card: Some business credit cards feature incentives, like generous cash-back rewards, miles or points when you spend on everyday purchases. Some cards also come with interest-free periods of up to 18 months. Plus, there are complimentary purchase and travel protections with select credit card issuers.

When to Use a Business Line of Credit

It’s sensible to use a business line of credit if: 

  • You need funds to help fill cash flow voids. 
  • You need to access a large amount of funding. 
  • You need to purchase inventory
  • You need to make purchases or payments with a supplier or vendor that doesn’t accept credit cards. 
  • You want a funding source with lower borrowing costs. 
  • You want to cover the cost of a large one-time purchase over time. 
  • You need to access cash and prefer to avoid steep cash-advance fees and APRs. 
  • You have the collateral required to access a larger pool of funds. 

When to Use a Business Credit Card

  • However, a business credit card could be more suitable if: 
  • You need to make small, everyday purchases for your business. 
  • You have a lower credit score and have trouble qualifying for a business line of credit. 
  • You want to start rebuilding your business credit. 
  • You need to set up automatic payments for operational expenses. 
  • You want to take advantage of the promotional APR period and can pay the balance off before it ends. 
  • You haven’t yet opened the doors to your business or are just starting out
  • You often travel for business, qualify for a travel rewards card and would like to earn perks for your travel-related purchases. 
  • You plan to pay the balance down significantly or in full each month to minimize interest costs.

Should You Get a Business Line of Credit or a Credit Card?

It depends on your company’s needs and financial health. Both give you access to the funds needed to access working capital, fill cash-flow voids, invest in your company or expand. Develop a detailed list of reasons you need funding and evaluate the features of business lines of credit and credit cards to make an informed decision. 

Getting the Funds for Your Business 

Upon deciding which funding option is suitable for your company, research several lenders to identify which offers the best financing terms. Then, contact your top three selections to learn more about their eligibility guidelines, application process and documentation requirements. Also, ask if they have an online prequalification tool you can use to gauge your approval odds. 

(If you’re considering a business credit card, it’s typically as simple as filling out an online application. However, the credit card issuer may request supporting business and income documents based on your inputs). 

Another option is an online lending marketplace or platform that lets you view multiple potential loan offers in one sitting without impacting your credit score. That way, you’ll know which lenders are worth applying with or if you need to take a step back and improve your credit rating or your company’s financial health before moving forward.

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