Here we talk about the pros and cons of business credit cards and how they compare to a business line of credit. It is my belief that a small business would be better served if they activated a line of credit to supplement their business credit card usage. A business credit card and a line of credit are both useful tools for a small business to help ease cash flow crunches and extend payment terms to vendors.

Why Do Banks Advertise Credit Cards, Not Lines of Credit?

Banks make more money with credit cards than they do with a line of credit. Yes, credit card companies offer perks such as ‘cash back’ and introductory low rates, but the average American business owner is paying 17% Annual Interest Rate for a business credit card. This is 17% per year, but if you don’t pay off balances from purchases within a year, and allow them to carry over, this ‘cost’ increases exponentially. 

Now, with a line of credit, the annual interest rate that we see for American small businesses is anywhere from 8% to 4.5%. This is obviously a much better cost basis.

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Lines of Credit Offer Better Purchase Power

One thing to remember is that a line of credit is actual cash. This means that when you draw from the line of credit, your operational account receives this cash. With this cash you can pay for anything associated with your business. 

Conversely, with a credit card, you can only use it to purchase services, subscriptions and maybe pay suppliers/vendors. Most likely, you can’t pay payroll or rental payments with a credit card. And if you want a cash advance from your credit card, these rates are anywhere from 2 to 3 times higher than the Annual Interest Rate, with added fees.

Where can you get the largest amount of money from?

Generally speaking, we see that our small business clients may have multiple credit cards for their business, but these credit limits may be low (which is most likely why there are multiple credit lines). Based on 2020 data from Experian, the consumer’s credit limit was $31,015, while the average small business credit card limit was $56,100. 

The average line of credit facility that we activate for our customers is around 2 to 3 times higher than their business credit card limit.

Better Together

For everyday business purchases and ease of use, credit cards are a great option for businesses, especially if they stay on top of payments and use the card responsibly. Supplementing a credit card with a line of credit is the best of both worlds, offering you ease of payment and a cumulative higher credit limit.

To see the requirements for a line of credit in your State, visit our online tool here.