This article contains general information and is not intended to provide information that is specific to American Express, or its products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.

Small business owners may need funding to grow their business and to pursue new opportunities. With so many variables to running a business, it’s helpful to explore the pros and cons of different types of small business funding. Here’s a look at two common choices for small business owners: a business credit card vs. a line of credit.

Differences between a line of credit and a credit card

At a high level, both a line of credit and a credit card essentially lend you money and require you to pay it back with interest and/or fees. Both lending products involve revolving credit, meaning you are approved for a certain amount of borrowing. You then use your line of credit or your credit card as you need them, as long as you remain under your borrowing limit. As you repay your line of credit or credit card, this frees up room for new borrowing, subject to your credit limit (which your lender may change).

Explore the differences between the two types of options before deciding which may be best for your business.

Accessibility

An important difference between a credit card and a line of credit is how you use each product. With a credit card, you can make purchases wherever the credit card is accepted, in person or online. With a line of credit, you borrow funds directly from your lender.

With many lines of credit, once you transfer the funds you’ve drawn from your line (in the form of an individual loan) to your bank account, you can write checks, or use your debit card, or withdraw cash from your bank.

Interest Rates and Fees

Credit cards charge varying interest rates. According to the Federal Reserve, the average Annual Percentage Rate (APR) for credit card debt was 20.68 percent as of May 2023. The interest rates and/or fees on a small business line of credit can vary from lender to lender and may be higher or lower when compared to a credit card. Applicable interest rates or fees can be based on various factors, including your credit score.

Some small business lines of credit do not have fees for early repayment. Late payment fees for lines of credit and credit cards vary.

Credit Limits

Credit limits between lines of credit and credit cards will vary. Some lenders may offer more credit with a line of credit, but that could come with different application requirements. Be sure to check the amount of available credit an option will provide you before applying and know that you may not be approved for the full amount a lender is able to offer.

Is it better to have a line of credit or credit card for business?

Credit cards and a business line of credit are both effective tools for small business owners to access funding. Many businesses use both to cover various expenses, which can be a powerful pairing.

The important thing to analyze is the type of payment, how much you need to cover the expense, and how much time you need to repay it.

When to use a business line of credit

If your business credit card has a credit limit that is too low for your business needs, you may want to explore applying for a line of credit that may have a higher limit. Available limits for these products vary from lender to lender.

Be prepared to provide additional documents to your lender to support any application for credit.

When to fund a business with a credit card

A business credit card can help cover smaller expenses and purchases that don’t require cash payments. For instance, if you’re paying for travel expenses on an upcoming business trip for multiple employees, you will need a credit card to secure a hotel room and at check-in to cover incidental expenses during your stay.

Credit Card or Line of Credit: Which is right for your business?

Both types of funding options have advantages and disadvantages, and many businesses will have both a business credit card and a line of credit to cover certain expenses, depending on their needs. Be sure to talk to your lender to understand the features of their products.

Business Line of Credit vs. Credit Card: FAQ

Is a line of credit helpful for a small business?

A small business that’s looking to improve their cash flow or wants to invest in their business may find that a line of credit for a small business could help them reach these goals. With a line of credit, a business can get access to funding on an as-needed basis up to their approved credit limit, and in most cases, can pay it back earlier with no prepayment penalties.

Make sure to study the features and costs of any loan product before you decide.

The material made available for you on this website is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.