Business Credit Card Vs Line of Credit: A Complete Guide for Business Owners

Managing business expenses often requires flexible financing. Over 65% of small and medium-sized enterprises in India rely on short-term credit facilities to maintain smooth operations. Two of the most popular tools are business credit cards and lines of credit. Each tool offers distinct benefits. 

For example, a business may pay supplier bills of ₹3 lakh using a credit card with a ₹1 lakh limit and cover the remaining ₹2 lakh through a line of credit.  Let us explore this guide to understand the differences between a business credit card vs line of credit, their fees, eligibility factors, and more.

Business Credit Card Vs Line of Credit: Key Differences

Choosing between a business credit card vs line of credit is not just about comparing fees and limits. This is mostly about matching the tool to your type of expense. Let us look at the table to understand the difference in detail.

How Does a Business Credit Card Work?

A business credit card functions in a way similar to personal credit cards. However, these are specially designed for small business owners, who can use these cards for cash advances, purchases and balance transfer.

Business credit cards can be secured or unsecured based on the issuer’s criteria. These credit cards have a fixed limit which users can use for spending.

Moreover, business owners need to pay a minimum amount on the outstanding balance. The used amount attracts a financing fee. The card issuer determines this fee and the minimum amount.

For instance, if the outstanding balance for a billing cycle is ₹10,000 for a cardholder, the minimum amount might be approximately ₹1,000. Notably, the business credit card account remains active as long as the cardholder wants.

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Types of Business Credit Card Fees

5 Pros of Business Credit Cards

1. Easy credit approval with less documentation.
2. Gives rewards, cashback, and travel points on spending.
3. Establishes business credit history for future funding.
4. Provides tracking of expenses and detailed monthly statements.
5. Usually offers interest-free credit periods (also known as grace periods).

5 Cons of Business Credit Cards

1. Increased interest charges if the balances are not paid on time.
2. Lower credit limits compared to other financing options.
3. Annual charges and hidden fees can mount.
4. Overuse can damage a credit score and repayment ability.
5. Limited appropriateness for big or ongoing business expenses.

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How Does a Business Line of Credit Work?

Banks and financial institutions allow borrowers to borrow money up to a pre-approved limit, typically in the form of a line of credit (LOC), if a business requires cash flow or working capital. It can be unsecured or secured by business assets. Usually, banks set a specific tenure during which borrowers can use funds from a LOC.

Notably, the borrowed amount attracts a financing fee. However, borrowers can use the fund using cards, a cheque or a dedicated mobile app. Based on the business's credit history and financial health, banks determine the credit limit of a LOC.

The lender sets the minimum monthly payment and the due date. In case any amount is outstanding for repayment after the draw period, the lender sets instalments for a specific tenure.

Types of Business Line of Credit Fees

5 Pros of Business LOCs 

1. Flexible availability of funds as required up to the approved amount.
2. Generally, lower interest rates compared to credit cards.
3. Pay interest only on the borrowed amount actually used.
4. Appropriate for meeting bigger or seasonal cash-flow shortfalls.
5. It may be secured or unsecured, depending on the business profile.

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5 Cons of Business LOCs

1. Will need significant financial documentation for approval.
2. Interest rates may be variable and difficult to predict.
3. Can be secured by collateral or personal guarantees.
4. Setup and maintenance fees can add to the overall cost.
5. Risk of over-borrowing if mishandled.

Business Credit Card Vs Line of Credit: Which Is Better?

As a business owner, you can take both a business credit card and a line of credit. However, before applying, consider the type of payment, the repayment tenure, and the funds or expenses you need to cover.

Although the limit of a line of credit varies among lenders, a line of credit mostly offers a higher credit limit compared to a business credit card. If you need a higher credit limit, you can consider a line of credit.

However, if you have business expenses that do not need cash expenditure, you can use your business credit card. For instance, if you have to pay ₹10,000 for hotel rooms for multiple employees and your credit card limit is ₹1 lakh, you can use your credit card without any issues.

Conclusion

If you are in a dilemma between a business credit card vs line of credit, you can easily resolve it by considering the expenses that you need to cover. In case you have fees that cannot be paid in cash, you can choose a business credit card.

Alternatively, if you need cash payments and have higher expenses, you can choose a line of credit. Ensure you repay both your outstanding credit card amount and the money borrowed with a line of credit to establish a good credit history for your business.

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