Business owners can be excused for confusing business credit cards and business lines of credit. Despite the similar wording, the products have different characteristics and are not intended for the same purpose.
In this article, we’ll explore the differences between business lines of credit and business credit cards so you can determine whether your business needs one or the other (or both).
What is a business line of credit?
A business credit is a revolving business loan with a predetermined credit limit. Approval for a corporate LOC is based on a company’s financial picture, creditworthiness and, in some cases, its collateral. LOCs are designed to cover a company’s daily operating costs and other major expenses that exceed most credit card spending limits. Examples of this are the purchase of equipment, raw materials and taking care of the payroll administration.
Depending on the business LOC a company has applied for, repayment terms, interest and rates may vary. For example, Chase offers a business LOC for commercial needs starting at a minimum of $500,000, and the balance is payable in full on the bank’s designated due date.
Related: The Best Business Credit Cards Without a Personal Guarantee
What is a business credit card?
A business credit card is similar to a personal credit card in that it gives borrowers access to a predetermined line of credit at a specific annual percentage rate. Most business credit cards are unsecured and do not require proof of assets or collateral for approval.
Some business cards offer rewards when you make purchases with your card. Examples include a statement credit for office supply stores (registration required) when using the American Express® Business Gold Card and earning 3 points per dollar spent on travel purchases (on the first 150,000 spent on combined purchases in each account anniversary year), and then 1 point per dollar on all other purchases when using the Ink Business Preferred® Credit Card.
Business credit cards require you to make a minimum monthly payment toward the outstanding balance. Most business credit cards allow you to carry a balance from month to month depending on the current APR. However, some business credit cards, such as the Capital One Venture X Business, require the balance to be paid in full each month to avoid incurring a late fee.
Business credit cards also offer tools like expense monitoring and employee cards to help businesses manage their finances and spending options.
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Related: Best business credit cards with no annual fees
How to apply for a business loan
The application process for a business LOC can be more extensive than applying for a business credit card. Unlike business credit cards, most business LOC applications must be made in person at a bank branch or over the phone.
When you apply for a business LOC, the bank requires you to provide several items. So it’s best to have all your paperwork in order before applying. This may include financial statements, tax returns, a list of business and personal assets, and employee information. Qualification criteria for a corporate LOC can also be strict. Your business may need to be in business for a minimum number of years with an annual turnover requirement.
How to Apply for a Business Credit Card
Applying for a business credit card is quite simple and can often be done online. You can apply for a business credit card using your Social Security number and an employer identification number if you have one. Your creditworthiness can often be based on your personal credit score. As long as it has a good reputation, approval shouldn’t be difficult.
If you have a side hustle, freelance work, or work as a contractor, you qualify as a business owner and can take advantage of business credit cards and their associated benefits.
Related: How to Choose the Right Credit Card for Your Business Expenses
Business line of credit vs. business credit card
Here’s an overview of how business LOCs and business credit cards compare.
Because the limit for a corporate LOC is generally high, they are used to finance day-to-day operations or as a short- or medium-term financing tool for large purchases that will be paid off over time. For example, a construction company that needs $200,000 to purchase raw materials such as concrete and steel would benefit from a business LOC.
In my experience, you rarely see a business credit card with such a high limit. A business LOC would be an ideal solution, and the APR on an LOC is usually lower than the interest on credit cards.
On the other hand, if your business plans to spend reasonable amounts on travel one month or an extra $2,000 on advertising the next, then a business credit card is the better option.
Unlike a business LOC, business credit card purchases are typically much smaller and payment is not due until the statement due date. This allows business owners to enjoy an interest-free grace period on their purchases before the statement closes. A business credit card only begins to accrue interest if the balance is not paid in full by the due date.
You need to consider the potential benefits and rewards your business will miss out on if you only use a business LOC. Most business LOCs do not offer cash back or travel rewards, unlike business credit cards.
Additionally, Business Cards can offer credits to offset expenses, such as up to $400 back on US purchases on Dell purchases or access to Amex Centurion lounges with The Business Platinum Card® from American Express. Registration is required.
Related: The Best High Limit Business Credit Cards
In short
Business lines of credit and business credit cards are two separate financial products, with the former useful for large companies that require large capital and the latter for people with regular spending needs. For a large business, it may make sense to have both, with the business line of credit used for large purchases and a business credit card used for smaller purchase transactions.