While a business line of credit works best for certain types of expenses, other forms of financing may work better in some scenarios.
Business Line of Credit vs. Small Business Loan
Unlike a business line of credit, lenders issue small business loans as a lump sum of cash. After you receive funds, you’re required to repay the loan, including interest on the entire balance, in fixed installments over a set period of time—typically between six months and 25 years.
Small business loans are best for making large purchases and covering the cost of doing business while business lines of credit are handy as a rainy day fund.
Business Line of Credit vs. Business Credit Card
Similar to a business line of credit, a credit card provider issues you a credit limit you can borrow from as needed. However, business credit cards typically have significantly smaller credit limits. As a result, credit cards are better suited for smaller, day-to-day business expenses.
Business credit cards also have different qualification requirements. When you apply for a business credit card, your provider typically focuses on your personal credit score, making them a great option for startup owners or sole proprietors without a lot of business history.
However, business credit cards often come with higher interest rates than business lines of credit. But if you have good to excellent credit, you may qualify for an interest-free promotional period on purchases and/or balance transfers. As long as you pay your balance off in full before the period expires, you can avoid all interest charges.