Business line of credit: What every entrepreneur should know.

Sep 30 2020 | PayPal Editorial Staff

Entrepreneurship is alive and well in America, with more than 30 million small businesses operating in the country, according to the US Small Business Administration.Still, cash flow management is a common concern for entrepreneurs, leading many businesses to apply for a line of credit to help them invest in new projects, run their day-to-day operations, and more.

While business lines of credit are common, they can also be confusing, so it's important for potential borrowers to understand how they work before using one. Here's what you need to know.

What's a business line of credit?

A business line of credit is similar to a personal one: You're able to borrow a certain amount of money when you need it. If you're in a delivery business and a car breaks down for example, you can tap into your line of credit to pay for that repair. Owners of seasonal businesses may need to use a line of credit to pay for merchandise in July to sell in December.
A business loan can help entrepreneurs invest in both new projects and day-to-day operations.
Typically, lenders only charge interest on what you use, so if you borrow $10,000, you'll only have to pay interest on that amount even if your line of credit is $50,000. Lines of credit are also revolving lines of credit, which means you can tap into one over and over again as long as you pay back what you owe.
 
But there's one big difference between business and personal lines of credit. Business lines of credit usually come with a much higher borrowing amount, since businesses typically need more money than households to operate, and it can range from $5,000 to $150,000.

The benefits of a business loan can be more favorable interest rates and higher lines of credit.

How to apply for a business line of credit.

When you apply for a business line of credit, banks and other traditional lenders usually want to view your revenue history, tax returns, bank account information, a balance sheet, and a profit-and-loss statement. And generally speaking, your business will need to be up and running for six months and will require at least $25,000 in annual revenue. You typically also need a credit score of 500 or more, as lenders want to know you'll pay them back.

A list of additional fees to watch out for.

Watch out for fees.

Many people think that lines of credit come with an interest rate and that's it. Unfortunately, there are often additional fees that can increase the total loan cost. For example, some banks charge origination fees, which are costs to set up a loan. Depending on the type of loan, there can also be administration fees, pre-payment fees, annual fees, and more.
 

Then there's the interest rate, which some banks determine based on your credit score. If you have an excellent credit score, lenders are more likely to consider you a trustworthy borrower and will feel more comfortable loaning you money at a lower rate. If you have a lower score, prepare to pay more – rates can range from a few percent to about 20% or more, depending on the lender.
 
Rates are also determined by the Federal Reserve's Fed Funds rate. When it rises, as it has over the last three years, borrowing costs climb too.


The differences between a secured loan and an unsecured loan.Secured versus unsecured.
While lines of credit or working capital-related loans are essential to helping business owners manage their day-to-day cash flow needs, there are other types of loans too.
 
A popular option for companies is the traditional, fixed-term business loan, which allows people to borrow much more than they can with a line of credit. It works in a similar way to a mortgage – you borrow a lump sum and then pay it back over time. This is ideal for capital-intensive projects where you need a large cash infusion to get something off the ground.
 
Loans can also be secured or unsecured. A secured loan is when you put up collateral, such as a piece of equipment or a building, that a lender can then take possession of if you don't pay back the loan. Secured loans typically come with lower interest rates because it's less risky for the lender. If something goes awry, they can seize that asset to recoup any losses.
 
With unsecured, you don't have to put any assets up for collateral, but an institution may charge a higher rate for the additional risk.


How fast can you access the funds?
Once a lender approves you for a line of credit, you can usually start using it right away. But use the money wisely – it's easy to get deep into debt, to the point where it becomes difficult to pay the outstanding amount back. If you're only covering the minimum monthly payment, then the interest you owe will only keep growing.

 
Learn more about PayPal Working Capital loans.Was a business line of credit the right move?
Usually, companies will have an idea as to what they want to use a line of credit for, but for many businesses, it just sits there until they need it. But if your business is thriving because of it, and you're able to pay it off in a reasonable time, then applying for one was the right decision.
 
As long as there are businesses operating in America, there will be lines of credit to help them manage their expenses and cash flow. It's a key tool in the entrepreneur's toolbox and one that can be a big factor in fueling business growth.
 
About PayPal for small businesses.
More than just payment processing, PayPal has helpful solutions for every stage of business. Get tools to build your business, services and support for your day-to-day operations, or help finding the financing to expand into new markets. PayPal is the partner that grows with you. So, whether you’re selling at a local farmer’s market or to our more than 267 million accounts in over 203 markets around the globe, PayPal has you covered.
 Learn more.
 
1 2018 Small Business Profile, United States Small Business Administration, 2018.

The content of this article is provided for informational purposes only. You should always obtain independent business, tax, financial, and legal advice before making any business decision.
 

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Frequently asked questions.

Q1. Is PayPal facilitating new, first time Paycheck Protection Program (PPP) loans and PPP Second Draw loans to PPP loan borrowers, under the Covid Relief Bill?

PayPal is participating in the PPP to provide businesses access to additional PPP loan funding. This includes both first time PPP loans for those who have not previously received a PPP loan, as well as Second Draw loans for those who have received a prior PPP loan. In either case, all SBA PPP requirements must be met.
 
The best place to get additional information and updates on the availability of PPP loans through PayPal is at PayPal.com/PPPloan.
 

Q2. How long will PayPal offer access to PPP loans?

Congress recently extended the PPP. The SBA will now accept PPP loan applications through May 31, 2021. PayPal will continue to process applications for submission to the SBA through May 31, 2021, (unless PPP loan funding is depleted before that date), but intends to stop accepting new applications prior to May 31st.  
 
The best place to get additional information and updates on the availability of PPP loans through PayPal is at PayPal.com/PPPloan.
 

Q3. What can PPP loans be used for?

Loans can be used to help fund payroll costs, including benefits. Loan funds can also be used to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.
 
We recommend visiting the SBA PPP website for all details.
 

Q4. Who will be eligible for the new PPP loans?

PPP loans for first time borrowers are generally available to businesses that have not previously received a PPP loan, have 500 or fewer employees, and meet all other eligibility requirements.

PPP Second Draw loans are generally available to businesses with no more than 300 employees that have used the full amount of their first PPP loan for permitted purposes and can demonstrate at least a 25% reduction in gross receipts in the first, second, third, or fourth quarter of 2020 relative to the same 2019 quarter or for calendar year 2020 as compared to calendar year 2019. Special rules apply for businesses formed in 2020. All other eligibility requirements must also be satisfied.

We recommend reviewing the first time PPP loan Borrower Application FormSecond Draw Borrower Application Form and other program information on the SBA PPP website for more details.
 
Businesses, including self-employed individuals and independent contractors, are able to apply through PayPal by going to PayPal.com/PPPloan.
 

Q5. If I received a first time PPP loan, but have not applied for forgiveness, am I still eligible to apply for a Second Draw PPP loan?

Yes. Borrowers who will have used the full amount of their first PPP loan for eligible purposes under the SBA rules before the disbursement of the Second Draw loan are eligible to apply for a Second Draw loan. However, the borrower is not required to have applied for or received forgiveness on their initial PPP loan in order to apply for a Second Draw loan. Other eligibility rules apply.  
 
We recommend reviewing the Second Draw Borrower Application Form for all Second Draw loan eligibility requirements.
 
Businesses, including self-employed individuals and independent contractors, are able to apply through PayPal by going to PayPal.com/PPPloan.
 

Q6. If my first PPP loan is with another lender, can I apply through PayPal for PPP Second Draw loan?

Yes. If you have an existing PPP loan with a different provider, you can apply for a PPP Second Draw loan through PayPal. You will need your 10-digit SBA/E-Tran number from your first loan to complete the PPP Second Draw loan application.
 
Businesses, including self-employed individuals and independent contractors, will be able to apply through PayPal by going to PayPal.com/PPPloan.
 

Q7. Is PayPal supporting the revised loan amount calculation formula for applicants who file taxes using IRS Form Schedule C?

Yes. PayPal is supporting the changes published by the SBA on March 3, 2021, that are designed to increase the amount of PPP funding reaching America’s smallest businesses.
 
The changes include a new PPP loan amount calculation formula for sole proprietors, self-employed individuals, independent contractors and single member LLC applicants who file taxes using IRS Form 1040 Schedule C. The new formula allows applicants to use 1040 Schedule C line 7, Gross Income, as the basis for including owner salary and wages in the computation of their PPP loan amount, instead of line 31, Net Profit, up to a maximum amount of $100,000.
 
Sole proprietors, self-employed individuals, independent contractors and single member LLC applicants who file taxes using IRS Form 1040 Schedule C are able to apply through PayPal by going to PayPal.com/PPPloan.
 

Q8. Where can I get more information about the new PPP loans?

To get additional information and updates on the availability of these loans through PayPal visit PayPal.com/PPPloan.
 
Application forms, overviews and detailed rules can also be accessed directly from the SBA PPP website.
 

Q9. Who is the lender for the PPP loans provided through PayPal?

The lender for the PPP loans available through PayPal is WebBank, Member FDIC. 

 
IMPORTANT NOTE: 
The SBA continues to produce new and revised guidance on the Paycheck Protection Program. The information on this web page is provided to assist in generally understanding the PPP loan program. The information on this web page should not be relied upon as legal, tax, or financial advice. Please check the SBA website for published guidance and details. 
 

The lender for the Paycheck Protection Program Loan through PayPal is WebBank, Member FDIC. 

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