Business Credit Cards vs. Line of Credit: What are the Differences?

Business Credit Cards vs. Line of Credit: What are the Differences?

Construction companies and contractors often need access to funds to complete projects, pay suppliers, and avoid any cash flow problems. In such times, companies require and use financial products such as bank loans, invoice factoring, business credit cards, and lines of credit.

The rising popularity and wide availability of business cards and lines of credit make them one of the most preferred means to access funds.

Although both products are similar in some ways, they share some differences. And it’s not uncommon for construction business owners to confuse their use cases.

To help you understand these two financial products, this article will delve into the definitions, similarities, and differences between a business credit card and a line of credit.

What is a Business Credit Card?

Business credit cards are a popular, quick, and convenient access to funds. They are a revolving credit option that lets you borrow cash, repay and use it again.

A business credit card works just like a personal credit card, but it is issued to a business rather than an individual. It typically offers a higher credit limit and a lower interest rate than a personal credit card.

Business credit cards have additional perks, such as employee cards on the same account, accounting integration, flexible payment options, interest-free grace periods, and travel rewards benefits.

Like personal credit cards help to build personal credit, business credit cards help to build business credit. Thus, when personal and business expenses are charged to different cards, customers can prevent damage to their business credit from personal expenses and vice versa.

Remember, maintaining good business credit is essential as this will allow you access to more credit facilities at favorable borrowing terms in the future.

Unlike other finance options, applying for a business credit card doesn’t require financial or income statements for approval. Nevertheless, your personal credit score is considered in determining the credit limit. For example, credit cards like the Chase Ink Business Unlimited credit card require a 700-749 credit score but other credit card providers like Toolbox require no credit check.

What is a Line of Credit?

A line of credit is another great way for a business to increase its cash flow. A business line of credit is a revolving credit facility provided by banks or other financial institutions from which a business can draw the funds it needs. It is an excellent tool for any company that needs to respond quickly to opportunities or emergencies.

A line of credit is accessible for a limited period, usually referred to as a draw period. The draw period can last as long as 1 to 5 years and as short as 12 to 24 weeks.

Also, the bank only charges interest on the amount a customer withdraws.

So if you get a $200,000 line of credit for a draw period of two years and withdraw $145,000, you’ll only pay interest on the $145,000 withdrawn.

And after you pay back the balance, you can once again withdraw cash whenever you want, within the 2-year draw period.

A line of credit can also be secured or unsecured. Banks usually require collateral for a secured line of credit to ensure that customers repay their balance.

Secured lines of credit often have lower interest rates and higher draw limits.

On the other hand, an unsecured line of credit doesn’t require collateral, making it risky for the lender. As a result, it attracts higher interest rates. As a result, financial institutions only offer unsecured lines of credit upon meeting strict conditions.

Some of these requirements are:

  • a good FICO score
  • a bank account
  • great financial history
  • and a good business credit score

Sometimes businesses must draw a clear plan for how they will use the line of credit. Such a plan will help both parties input necessary terms in their contract.

Finally, after getting approval for a business line of credit, You must file a UCC. This registers the charge and serves as an encumbrance on the property against subsequent interest from people who want to deal with the property.

An example is the Wells Fargo Business Line of Credit. It offers a $5,000-$100,000 at the prime rate plus 1.75%-9.75%.

Line of Credit vs. Business Credit Card: Similarities

There are a few similarities between lines of credit and business credit cards. These include

  • They are both financial products that you can use to manage your business’ cash flow. You can use them to finance short-term business needs, such as inventory or equipment, purchase supplies, pay employees, and cover other business expenses.
  • Both lines of credit and business credit cards typically have variable interest rates depending on the market conditions and government policies. For example, an increase in the Federal reserve’s interest rate may cause financial institutions to increase the interest rates of credit cards.
  • Business credit cards and lines of credit are revolving credit lines, meaning you can borrow against them as needed and pay the balance back and use them again. For instance, if you get a credit card with a $30,000 limit and spend $25,000, you can borrow another $25000 when you pay back the $25,000 you spent.
  • Finally, you can use both lines of credit and business credit cards to improve your business’ credit score. This will be helpful when you need to take out a loan or borrow money in the future.

Business Credit Card vs. Line of Credit: Differences

Although business credit cards and lines of credit share similarities, there are several key differences between them.

  • Generally, lines of credit are used to finance large purchases, while business credit cards are often used for smaller purchases. Since it usually takes time to pay off large loans, it only makes sense to use a line of credit since it has longer repayment terms. On the other hand, using a business credit card to cover significant expenses will only lead to more debts due to interest.
  • Business credit cards are also less risky for lenders since they are backed by the business owner’s credit history and personal assets. Lines of credit, however, can be secured and unsecured. Hence, business credit cards usually have lower interest rates than lines of credit. While interest on business credit cards ranges from 13% to 25%, lines of credit can accrue 4% to 80% interest.
  • Also, business credit cards offer interest-free days while lines of credit do not. So if you consistently pay off your balances on time, you’ll be eligible for interest-free days on your business credit card.
  • Another difference is the repayment duration. With lines of credit, most institutions will give you only 24 months after each draw to pay back. But with business credit cards, you can continue to make payments until you do not owe any balance on the card.
  • Lastly, business credit cards have smaller credit limits than lines of credit. Most financial institutions allow customers to borrow more money with a line of credit than with a business credit card. This is because business credit cards are designed for smaller, short-term borrowing needs, whereas lines of credit are intended for larger, long-term borrowing needs. Generally, it is more feasible to make bulk purchases with lines of credit than with credit cards.

The fees accrued by business credit cards include:

  • an annual fee of $10 to $695
  • a late or returned payment fee of up to $40 or 2.99% of the past due amount
  • and a cash advance fee of $15 or 5% of the total transaction

Similarly, lines of credit include fees such as:

  • an origination fee of $0 to 0.5% of your line amount
  • an annual fee of $0 to $175
  • a draw fee up to 2% of the amount withdrawn
  • and a late fee of up to 5% of the past-due amount

Please note that these fees vary from one financial institution to another and from one credit product to another. Therefore, it’s always a wise idea to research and shop around for the best business credit product based on your needs.

Summary Table of Difference: Business Credit Card vs. Line of Credit

Features Business Credit Cards Lines of Credit Fees   $10- to $695 annual fee, late fees, cash advance fees, foreign transaction fees, and over-limit fees.  Origination fees of 0.5%-1% of the credit line, draw fees, late fees, and annual fees.   Interest Rates  Higher (13%~25%) Lower to Higher (4%-80%)

**depending on the bank and your credit history.

  Repayment duration  Until all balances are paid  24 months after each draw.  Purpose   Small purchases and business transactions. Larger purchases such as new machines and equipment.    Interest-free days (Grace Period) Payment before the end of the billing cycle carries no interest.   None.   Credit Limits Up to $50,000  Up to $250,000  Additional Features  Employee cards, accounting integration, purchase protection,  and complimentary travel insurance.   None.  Qualifications  A mínimum personal credit of 640  A mínimum personal credit of 600, a minimum revenue of $50,000, a UCC filing, and at least 6 months in business.  

The Benefit of Using a Charge Card Over a Credit Card

Charge cards are very similar to credit cards. They are often used interchangeably. However, they are pretty different. Unlike credit cards, a charge card holder must pay the total balance issued every month.

Here are some benefits of using a charge card over a credit card.

  • One of the most obvious is that charge cards typically have higher credits limit than credit cards. This is because charge cards do not often have preset spending limits. This means it allows businesses to spend as much as they need without worrying about hitting a cap.
  • Charge cards also have a lower interest rate than credit cards. This means you’ll save money on interest payments if you carry a balance on your card. With charge cards like the Toolbox charge card, you’ll never have to worry about interest payments.
  • Charge cards typically have higher approval rates than credit cards. Charge cards are often seen as a sign of financial responsibility, whereas credit cards are often associated with overspending and debt.
  • Charge cards usually offer customers more favorable terms and conditions than credit cards.

Should You Choose a Credit Card or a Line of Credit?

Business credit cards and lines of credit have unique benefits, so deciding which is right for your business can be challenging.

Business credit cards are a great way to get started. They’re easy to apply for, and you can usually get approved even with bad credit.

Plus, business credit cards come with various rewards and benefits, like cash back, travel rewards, and discounts on purchases.

On the other hand, lines of credit are a bit more flexible than business credit cards. They can be used for various purposes, like financing a new business venture or covering unexpected expenses. Lines of credit also tend to have lower interest rates than business credit cards, making them a more affordable option in the long run.

So, which is right for you?

Well, the answer depends on what your business needs- the amount of cash it needs to run effectively, how often you want to make purchases, your ability to pay back on time, and other costs.

Overall, a charge card is an excellent option for those who want to build their credit history, avoid overspending, and save money on interest payments.

And while shopping around for a suitable one, you’ll find that toolbox charge cards are the best option for you. We require no personal guarantee and let you track your expenses.

You can apply for one in a few easy steps and begin to enjoy excellent benefits with every transaction.