Letter of Credit vs. Line of Credit: Which Does Your Business Need?

Quick Answer: The names sound almost identical, but letters of credit and lines of credit serve different purposes. A letter of credit helps guarantee payment to a third party, usually a supplier, while a line of credit gives your business flexible access to funds for cash flow needs. One helps secure a transaction, and the other helps fund day-to-day operations.

What Is a Letter of Credit?

A letter of credit is a financial institution’s promise to pay a seller for a buyer’s purchase once agreed-upon requirements are met.

Businesses commonly use letters of credit for international trade, large equipment purchases, or new supplier relationships. A commercial letter of credit supports a specific transaction, while a standby letter of credit generally serves as a backup payment if the buyer does not meet its obligation.

What Is a Business Line of Credit?

A business line of credit gives you access to a set amount of revolving funds. You can draw what you need, repay it, and use the available credit again. You generally pay interest only on the amount you borrow.

Businesses may use a line of credit to cover payroll during slower months, purchase seasonal inventory, or bridge the gap between sending invoices and receiving payments.

The Key Differences

Think of it this way:

• Purpose: A letter of credit supports a specific transaction; a line of credit provides flexible working capital.
• Who gets paid: A letter of credit protects a third-party seller; a line of credit gives your business access to funds.
• Costs and requirements: Letters of credit may include issuance fees and collateral requirements. Lines of credit typically involve interest and may have additional fees.

Which One Fits Your Business?

A letter of credit may make sense when a supplier requires proof of payment, especially for an overseas or large one-time purchase. A line of credit may be a better fit when your challenge involves timing, such as seasonal cash flow, unexpected expenses, or growth that outpaces receivables.

Some businesses may need both, and your financing needs can change as your business grows.

Why Business Owners Work With Create CU

Create Credit Union offers Letters of Credit and Unsecured Revolving Lines of Credit, along with equipment financing, construction loans, and SBA 504 loans. Our experienced commercial lending team provides personalized service and local support to help you find the right financing for your business.

Create CU was also recognized as Nevada’s top SBA 504 lender, reflecting our commitment to helping local businesses grow. If you need assistance, our team is here to answer your questions, discuss your needs, and help you find the right financing option. Visit www.createcu.org or call 702-228-2228 to get started.