What’s the difference between a business credit card, loan and line of credit?

When exploring the different ways to get funding for your business, you might have come across business credit cards, business loans and a business line of credit. But what’s the difference between them, and how do you know which is the right option for your small business?

In general, a line of credit and a business credit card can offer more flexibility, allowing you to borrow for everyday expenses as and when you need to. A business loan, on the other hand, can work better for larger one-off purchases, and help you spread the cost over a longer period. 

This guide explains these differences in more detail so you can make the right decision for your business.

Business loan vs line of credit vs credit card

What is a business loan?

Business loans work by giving you access to a lump sum of cash that you then repay in monthly instalments over a set term. Your lender adds interest to your loan repayments, and you need to keep up with these repayments to ensure you repay your loan on time. 

You can choose from both secured and unsecured business loans. Secured business loans require you to use an asset, such as property, as collateral. If you don’t repay your loan on time, the lender can take possession of your asset and sell it to recoup its money. 

Unsecured business loans don’t require security, but these loans tend to have higher interest rates and smaller borrowing amounts.   

Pros 

• Better for budgeting: Some business loans have fixed interest rates, meaning your monthly repayments stay the same for the duration of the loan, making it easier to budget.

• Higher borrowing amounts: You can typically borrow more with a business loan than with a business line of credit or credit card.

• Lower interest rates: Business loan interest rates tend to be lower than business credit card and line of credit rates, saving you money.

• Lengthy repayment terms: You can usually spread the cost of your loan over several years – secured loans can have terms of up to 25 years. 

• Can help you improve your credit score: If you receive a loan and make your repayments on time, your business credit score should increase over time.

Cons

• Secured loans require collateral: If you apply for a secured loan, you need to use an asset, such as property, a vehicle or equipment, as security. If you default on your loan, the lender can repossess this asset to reclaim its money.

• Stricter eligibility criteria: Businesses often need a good credit score and an established trading history to qualify for a business loan. Lenders often like to see a business plan and financial projections before offering you a loan. 

• Longer application process: It can take longer to apply for a business loan, as lenders need to check the relevant documentation. If you apply for a secured loan, lenders need to value your asset before accepting your application. This means it can take several weeks before you receive your funds. 

• Fees: Some business loans charge high penalty fees if you repay your loan early, and others charge application fees. Secured business loans also come with valuation and legal fees. 

• Longer terms cost more: Paying back your loan over a longer term means you pay more in interest overall, making it more expensive.

Read more about the advantages and disadvantages of business loans. 

What is a business credit card?

A business credit card works like a personal credit card but tends to come with a higher credit limit. You can use your business credit card to help manage cash flow and pay for day-to-day expenses, as well as give additional cards to employees to help them manage their expenses. 

Your lender sends you a monthly statement to tell you how much you owe. As long as you meet at least the minimum repayment, you can choose how much you want to pay off each month. If you don’t repay the whole balance, you usually pay interest on the remaining amount. 

Pros

• Flexibility: Business credit cards don’t have fixed monthly repayments. You can draw on your funds as and when required, so you only use what you need.

• Possible to avoid paying interest: If you pay off your balance in full each month, you won’t pay any interest on your balance. Plus, unlike loans, you only pay interest on the credit amount you’ve used.

• Perks and rewards: Some business credit cards offer rewards, such as cashback or air miles, or even 0% spending periods (though these aren’t as common as they are for personal credit cards).  

• Fast application process: You can usually apply for a business credit card online and often receive a decision instantly. There’s no need to state what you need the funds for, and you won’t usually need to provide as much information as you would when applying for a business loan.

• Expense tracking: Business credit cards also help you to track your business expenses, simplifying bookkeeping and saving time. 

• Employee spending control: You can usually give additional business credit cards to employees and set spending limits for each so that you have more control over business spending. 

• Can help you build credit: If you’re a new business, a business credit card can help you build a business credit score, provided you make your repayments on time. This can help you access other financing options in the future.

Cons

• High interest rates: If you don’t pay off your credit card balance in full each month, you pay interest on the remaining balance. Rates can be higher than for other forms of financing (like business loans) and the interest rate is usually variable, so the cost of your debt could increase.

• Fees: You might have to pay an annual fee for your business credit card, plus fees can apply to cash withdrawals, foreign transactions and late payments.

• Can negatively impact your credit score: If you don’t make your repayments on time or exceed your credit limit, you risk damaging your credit score. This can make it harder to get credit again in the future.

• Easy to overspend: Business credit cards can make it easy to spend more than you can afford. Building up debt in this way can make it difficult to repay and put more financial pressure on your business. 

• Personal guarantee: Some business credit cards ask you to sign a personal guarantee, meaning you become personally liable for repaying the debt if your business can’t. 

What is a business line of credit?

A business line of credit is a flexible loan for businesses. You can borrow funds as and when needed, up to your set credit limit. Your lender only charges interest on the amount you use. 

You can choose from both secured and unsecured lines of credit. Like a secured loan, with a secured line of credit, you must use an asset as security against the amount borrowed – and this usually gives you access to better interest rates. However, if you fail to repay the amount borrowed, your lender can sell the asset to recoup its money. 

You can usually choose how much you wish to repay and when, as long as you repay the full amount by the date agreed with your lender. 

Pros 

• Flexibility: You can borrow funds up to your credit limit as and when required and make flexible repayments. With a revolving credit line, you can draw upon the funds again once you’ve repaid them, without going through the application process for a second time. 

• No early repayment penalties: You can pay back the amount borrowed as soon as you like without penalty.

• Fast application: You can typically apply online, with a decision often made on the same day, and you can access your funds soon after.

• Financial safety net: Gives you a financial cushion to fall back on when cash flow is tight.

• Only pay interest on the amount borrowed: Like credit cards, you only pay interest on the credit used.

Cons

• Higher interest rates or transaction fees: Some lenders charge an interest rate on the amount of credit drawn, while others charge a flat rate fee – often called a per transaction flat rate fee. Your lender adds this to the amount you need to repay.

• Secured lines carry risk: If you use a secured line of credit, your lender could repossess the asset used as collateral if you fail to repay your loan.

• Not suitable for long-term borrowing: A business line of credit best suits short-term borrowing rather than long-term funding.

• Stricter eligibility criteria: Expect lenders to ask to see balance sheets, income statements and bank statements. Some lenders also ask that you have been trading for a few years and meet a minimum turnover level.

Business loan vs line of credit vs credit card: how to choose

There’s a lot to weigh up when deciding whether a business loan, credit card or line of credit is best for your business needs. Consider what you need the funds for, how much you need to borrow, whether you need a lump sum, and how quickly you need the money. 

You might prefer a business loan if:

• You need to borrow a large sum to invest in new equipment, business premises or consolidate existing business debts

• You like to know how much you need to repay each month 

• You want to spread the cost of your borrowing over a longer term

You might want to consider a business credit card if:

• You prefer the flexibility of being able to borrow funds as and when to help cover expenses

• You want to better manage company and employee expenses 

• You want to take advantage of rewards such as cashback and air miles 

• You have only recently started trading and need to build a business credit history

You might prefer a business line of credit if:

• You want the flexibility of borrowing and repaying funds as and when 

• You need access to funding fast to help pay for unexpected expenses

• You’re happy to secure your borrowing against an asset to access better interest rates and higher borrowing amounts

Whichever option you prefer, be sure to check the eligibility criteria to ensure you qualify. Also, make sure you understand how much you need to repay each month and whether this is affordable for your business. Check the small print for fees and other charges and speak to your lender directly if anything is unclear.

Finally, keep in mind that you may start out with just a business credit card, but as your business expands and your business credit score improves, there’s nothing to stop you from applying for a business line of credit or a business loan on top. The key is to check if you can still afford your repayments and pay back the total amount borrowed on time.