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What is the difference between a business line of credit, a business credit card, and a business loan? I get this question all the time from small and midsized businesses (SMBs) who know they need financing, but aren't sure what option they should choose.
Below, I'll help you decide which type of financing makes the most sense for you by going over how each form works, what each option truly costs, and who commonly uses each one.
All provide capital, but the cost and speed of funding vary.
| Financing type | How you receive the funds | Interest rate | Maximum amount | Time to receive funds | Repayment period | Collateral | Best for |
|---|---|---|---|---|---|---|---|
| Business loan | Lump sum paid upfront | Beginning at 6% APR | $10,000 to $5 million | As fast as same day | 6 to 36 months | None | Large planned purchase |
| Business line of credit | Draw whatever amount you need, repay, and redraw | Beginning at 6% APR | Up to $5 million | As fast as same day | Revolving, 6 to 36 months | None | Recurring financial shortfalls |
| Business credit card | Spend on a card provided to you or your staff members | Average APR of 21% | Usually up to $100,000, depending on the issuer | Minutes to several days | Ongoing monthly payments until the balance is repaid, no predetermined end date | None | Small daily purchases like fuel and office supplies |
| HELOC (home equity line of credit) | Draw against the equity in your home as needed | As low as prime, currently 6.75% | $750,000 or less, dependent upon home equity | As quickly as within one week | Variable, up to 30 years | Yes, your home | The longest payoff window |
Business Lines of Credit
A business line of credit lets you withdraw money as many times as you need. The lender determines an approved amount, you withdraw what you need to support your business operations, and that withdrawn amount is deposited directly into your company's bank account. Once you've made payments towards the borrowed amount, you can withdraw again.
The benefit of a line of credit is that you only pay interest on what you actually withdrew. For example, if you were approved for $100,000 and you withdraw $12,000, you would pay interest only on that $12,000.
Small and medium-sized business owners tend to use a line of credit for a slow month, an invoice received late, or inventory purchased before peak season.
Business Credit Cards
A business credit card is simply a card issued to you or your employees to make purchases on behalf of your company. It's identical to your personal credit card. You'll receive a spending limit on the card. You'll receive a statement each month outlining your charges for that month. If you fail to pay the entire outstanding balance in full on that statement, you'll pay interest on the remaining balance.
Credit cards are probably the easiest type of financing to get. Some issuers offer approval in a minute or two. But interest rates can be high. Rates for commercial credit cards typically range anywhere from 16.74% to 28.49% APR, and the average annual percentage rate (APR) on a standard commercial credit card sits near 21%.
One potential advantage of using credit cards for business-related expenses is the rewards programs. While none of the other three financing methods listed above provide cash back or reward incentives, commercial credit cards may offer these benefits for qualifying transactions. When used responsibly, commercial credit cards can be used for small day-to-day purchases such as fuel, office supplies, software licenses, travel expenses, and subscription services.
Business Term Loans
Unlike the other options on this list, term loans give you the full amount of money at once. After receiving the principal, you'll then repay it in regular payments over a specified timeframe.
Term loans are designed to meet a single large planned purchase. Examples include purchasing vehicles, building renovations, and acquiring a secondary facility.
Clarify Capital provides term loans ranging from $10,000 to $5 million with rates beginning at 6% APR for qualified applicants. The repayment schedule for term loans extends between six and 36 months. Term loan payments can occur either weekly, biweekly, or monthly.
Other types of term loans exist that function similarly to traditional term loans, but these have specific stipulations. Equipment loans are typical examples of term loans that are secured by machinery purchased. SBA loans, backed by the U.S. Small Business Administration, secure repayment over 10 to 25 years, but they require a minimum of two years in operation and extensive paperwork. SBA loans typically take anywhere from 30 to 90 days to fund.
Home Equity Lines of Credit
A home equity line of credit (HELOC) is not a business loan. Lenders will not evaluate your business; instead, they review your personal financial situation and determine eligibility based on your home equity. You can then use that money to finance your company.
Once approved for a HELOC, you can withdraw funds during the draw period, which can last up to five years. After the draw period ends, you must repay your outstanding balance. The repayment period associated with HELOCs can span as long as 30 years.
Interest rates on HELOCs can be as low as the current prime rate, which stands at 6.75% as of this writing. Interest rates on HELOCs are variable, so your monthly payments may fluctuate throughout the life of the loan. Lines of credit offered through HELOCs can be extended up to $750,000, dependent upon how much equity exists in your property.
For business owners whose companies don't qualify on their own merits due to limited revenues or insufficient time in operation, but who have sufficient equity in their homes, a HELOC offers one of the few available options to access funds for operational purposes.
The downside of a HELOC is that you're placing your home at risk. If you fail to repay your HELOC, you could lose your home.
Costs Associated With Each Type of Financing
Below are estimates of costs related to each type of financing, assuming you borrow $50,000 over a two-year period.
Remember, these are just examples. Your actual interest rate will depend upon your individual credit history, along with your company's historical performance and length of time in operation. Your Clarify Capital lending advisor can show you specific payment scenarios based on your qualifications.
| Financing type | Sample rate | Estimated monthly payment | Total interest over two years |
|---|---|---|---|
| Term loan | 6% APR, fixed payments | About $2,216 a month | About $3,185 |
| Line of credit | 6% APR, interest only on the full draw | About $250 a month | About $6,000 if you never pay down the balance |
| Credit card | 21% APR, balance carried | About $875 a month | About $21,000 if you never pay down the balance |
| HELOC | 6.75% (prime rate), interest only during the draw period | About $281 a month | About $6,750 if you never pay down the balance |
Head-to-Head Comparisons Between Each Type of Financing
Below, I've laid out how each of these financing options compares.
Term Loans vs. Business Lines of Credit
Here are some of the common differences between term loans and business lines of credit, plus scenarios where each one makes more sense.
Term loans make sense for single, large planned purchases. You know exactly what number you're working with, you know what you're going to buy, and you want to access that entire amount now.
Lines of credit help cover recurring gaps. This includes seasonal slumps, delayed invoices, and payroll emergencies that don't happen just once.
You can repeatedly draw on a line of credit. You won't need to submit another application each time.
Business Lines of Credit vs. Commercial Credit Cards
This is the combination that I see the most confusion around. Both of these financing options revolve, but how the funds are treated in each situation differs.
Lines of credit deposit cash directly into your business bank account. You can use cash deposited from lines of credit to cover payroll, rent, or vendors via ACH transfers. You can only use a credit card at a vendor that accepts credit card payments.
Paying your credit card off every month means you won't pay any interest. You'll also earn rewards. If you can't pay the full amount off each month, the interest rates on lines of credit might be more appealing.
Lines of credit give you access to more money than a commercial credit card. Lines can extend up to $5 million, while commercial credit cards generally have top limits of about $100,000.
Term Loans vs. Commercial Credit Cards
Here's a simple example to see the difference between these two: You need $20,000 for an equipment purchase. A commercial credit card may issue approval in minutes at an interest rate of 21%, while a term loan may take a couple of days to process with an APR of 6%.
When carrying a balance, credit cards generate more interest. Carrying $20,000 on a credit card at 21% APR for one year generates about $4,200 in interest. Repaying that same $20,000 on a term loan at 6% APR over 12 months incurs about $660.
Business credit cards give you more access to rewards. They also win if you clear balances completely within the applicable payment period.
Use a term loan if you need to make a one-time purchase; credit cards are better for recurring, smaller purchases. For example, an equipment purchase suits term loans, while daily operating expenses suit commercial credit cards.
Business Lines of Credit vs. HELOCs
Both are revolving lines of credit, but they differ in terms of backing and length of repayment.
You're evaluated for a business line of credit based on your company's operating history. Your company's revenue and your time in operation determine this option.
HELOCs are evaluated based on your individual finances. This includes personal income, residential property values, and equity.
HELOCs often have longer repayment periods. While maximum repayment periods are limited to 36 months for business lines, repayment periods for HELOCs can run up to 30 years.
Tips for Combining Multiple Forms of Financing
You don't necessarily need to select one financing option. Many successful businesses use multiple simultaneously, with each option serving a different purpose.
For example, credit cards handle daily operating expenditures. Lines of credit absorb swings or gaps in cash flow. Term loans finance large planned purchases. HELOCs sit beneath all other options for business owners who have sufficient equity in their home.
These tips can help you manage multiple financing options:
Clear monthly balances on credit cards. Carrying a balance on your business credit cards can mean significantly higher monthly payments. Pay this off before you add on more debt.
Use lines instead of credit cards for absorbing recurring gaps in cash flow. The rate difference between the two can be significant.
Monitor usage levels on everything you carry. Both lines and credit cards report to business credit and often personal credit. Running any of them near their maximum utilization levels drags down your credit score, which raises the cost of financing you apply for later.
Minimum Qualifications
$10,000 in monthly revenue
Your business must earn at least $10K per month in a business bank account.
500+ credit score
You can get approved with any credit score. But the better your credit rating, the better interest rates lenders offer. Your FICO score should be above 500.
Minimum six months in business
Your company should be operational for a minimum of six months. This shows business lenders that your company is sustainable and won't go out of business.
Have a business bank account
Your Clarify advisor will need three or four months of your most recent bank statements to verify income. This is just to see you're actually making $10K+ month in revenue.
What Type of Financing Fits Your Business?
| Financing type | Consider it when | What you get |
|---|---|---|
| Term loan | You're financing a single transaction and you know exactly how much you need and when you expect to pay it back | The entire amount upfront, with predictable fixed payments that let you budget accordingly |
| Business line of credit | You need to borrow funds regularly and would prefer to draw and re-draw as many times as you need without having to apply each time | An available pool of capital you can reach for as business needs change |
| Business credit card | Your business uses small dollar amounts frequently for day-to-day operations, such as office supplies, fuel, software, and travel | Reward programs such as miles, points, or cash back |
| HELOC | You own a home and your business doesn't generate enough revenue to secure traditional forms of financing | A revolving line of credit with longer repayment terms than any business financing on this page offers |
Get Financing That Fits Your Needs
Since our beginning, Clarify Capital has helped finance more than 50,000 small and midsize businesses.
When you're ready, you can apply today with our two-minute application. Checking your options won't affect your credit score.
Frequently Asked Questions About Comparing Business Financing
These are some of the most common questions I get asked about business financing.
What Is the Difference Between a Business Line of Credit and a Credit Card?
While both types of credit provide you with access to additional money for short-term operational needs, the differences lie in how funds are accessed, used, and repaid. Funds made available via a business line of credit are deposited into your bank account, which lets you cover operating expenses. Funds made available via a business credit card are used for purchasing goods or services from vendors that accept credit cards. Generally speaking, business lines of credit have significantly lower interest rates and significantly higher borrowing limits compared to business credit cards. However, business credit cards provide rewards, and approvals occur quickly.
Are Business Loans Better Than Credit Cards?
There is no universal answer. Both tools serve different purposes. Loans tend to fit when you need large sums of money, say $20,000 to $100,000 or more, for one-time transactions that'll be repaid over several months or years. Conversely, credit cards tend to fit when you engage in frequent small transactions, like office supplies and travel expenses, that'll be repaid entirely before the next billing cycle.
Which Is Better, a Small Business Loan or a Line of Credit?
Whether a small business loan or a business line of credit is preferred depends on whether the expense is one-time or recurring. A loan tends to fit when you can clearly define the expense, both type and price, you want to finance. On the other hand, a line of credit tends to suit companies whose expenses fluctuate or cannot be predicted. By providing access to working capital at any given time, a line of credit means companies only pay interest on what they actually draw rather than on money sitting idle.
Is It Easier To Get a Business Credit Card or a Business Line of Credit?
Getting approved for a business credit card is more straightforward. Many credit card issuers provide instant approval based on your personal credit history and with minimal documentation. Getting approval for a business line of credit requires more substantial documentation, including proof of revenue (typically a minimum of $10,000 per month), satisfactory personal credit history (a minimum FICO score of 600), a minimum of one year in business, and recent bank statement history (typically three to four months).
How Much Is the Monthly Payment on a $50,000 Business Loan?
Assuming an annual percentage rate (APR) of 6% and repayment over 24 months, your estimated monthly payment will be about $2,216. Assuming an APR of 6% and repayment over 36 months, your estimated monthly payment will be about $1,521. Total interest paid over the life of the loan would equal about $3,185 in the first example and about $4,759 in the second example.
Can I Use a HELOC To Finance My Business?
Yes. Many business owners use home equity lines of credit as an alternative method for financing their businesses. Unlike traditional small and midsize business loans, HELOCs are approved based on applicants' personal financial records rather than their business records. Some small and midsize businesses may qualify for a HELOC even though they don't generate enough revenue to qualify for traditional forms of financing. The downside is that your home serves as collateral for the line of credit, so failure to repay outstanding principal and interest on your HELOC may jeopardize your ownership.
What Is the Average APR on a Business Credit Card?
The typical average rate sits near 21%. While many credit card issuers offer introductory promotions with 0% APR for purchases made during promotional periods up to 21 months, once those promotional periods expire and you continue carrying balances, the regular APR applicable to remaining outstanding balances becomes effective.
Will My Financial Information Stay Confidential During the Application Process?
Yes. Clarify follows SOC 2 security principles, and all submitted financial information is treated confidentially.
Michael Baynes
Co-founder, Clarify
Michael has over 15 years of experience in the business finance industry working directly with entrepreneurs. He co-founded Clarify Capital with the mission to cut through the noise in the finance industry by providing fast funding and clear answers. He holds dual degrees in Accounting and Finance from the Kelley School of Business at Indiana University. More about the Clarify team →
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