Business line of credit: What every entrepreneur should know.

Oct 19 2021 | 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.

OverviewGetting PaidHow it WorksMarketing Pay Later in the US 

What Buy Now, Pay Later products does PayPal offer?

In the US, PayPal Pay Later includes the following options that customers can use to buy now and pay later, while you get paid in full, up front. Pay Later is included in PayPal Checkout at no additional cost to you.
  • Pay in 4*: A short-term installment offering that lets customers pay for purchases of $30-$1500 in 4 interest-free payments.
  • PayPal Credit**: A revolving line of credit that shoppers can use to pay over time, with a promotional offer of 6 months special financing on purchases of $99+.
Pay Later offers are also available in several countries in Europe and Asia-Pacific.

As of November 2021

How much does it cost for me to offer Pay Later?

Pay Later offers are included with PayPal Checkout as part of your standard PayPal transaction rate. There's no additional cost to you to offer or market Pay Later.


When do I get paid for purchases made with Pay Later?

Once the order is processed, you get paid in full, up front. We take care of collecting the payments from your customers who have the flexibility to pay over time.

What if the customer doesn't pay on time or at all, do I still get paid?

Yes, you get paid in full once the order is processed. We’ll take care of collecting the payments from your customers. There's no additional cost or risk to your business.  

What if a customer wants to return something they purchased with Pay Later – how do refunds work?

When a customer returns something they purchased with Pay Later, our standard returns process is followed. You would send a request to us with the amount to be refunded, and we’ll credit the customer’s account accordingly. 
 

When customers make a purchase with Pay Later, does it include the total transaction amount (taxes, delivery, and other line items outside of the actual product cost)?

Yes, both Pay in 4 and PayPal Credit let consumers pay for their entire purchase over time including tax and any delivery costs. 

Can Pay Later be used to purchase all types of products?

Pay Later can be used for purchases of tangible/physical goods as well as most intangible/digital goods. Pay Later is subject to the PayPal Acceptable Use Policy.

Can customers outside of the US use Pay in 4 or PayPal Credit to purchase from my site?

No, but they may be able to use the PayPal Pay Later offer available in their country of residence.
Pay Later offers are available in several countries in Europe and Asia-Pacific.

Which currencies are accepted for Pay Later (Pay in 4 and PayPal Credit) transactions?

Pay Later purchases can be made in all currencies that we support, not just USD. For transactions not in USD, we automatically convert the transaction amount to USD at checkout. Currency conversion charges will apply as outlined in the PayPal User Agreement.

Which ecommerce platforms does PayPal Pay Later work with?

Pay Later is available on the following ecommerce platforms in the US with more being added regularly.
  • BigCommerce
  • WooCommerce
  • Magento
  • Salesforce Commerce Cloud
  • Shift4Shop
  • Miva
  • OpenCart
  • XCart
  • AmeriCommerce
  • Centarro
  • Pinnacle Cart
  • Solidus
PayPal Pay Later is also available on popular ecommerce platforms in several countries in Europe and Asia-Pacific.

Visit the Commerce Platforms page on the PayPal Developer Site for step-by-step instructions on how to activate and promote Pay Later on the platforms above and to see the current list of our ecommerce platform partners by country.

Is a credit check required for customers?

Pay in 4 is an installment solution. Approval decisions are made using PayPal customer data and scoring models but may require a soft credit check when not enough information is available to make an approval decision. There's no impact to the customer’s credit score.
 
PayPal Credit is a revolving line of credit that requires a hard credit check.
 

What tools are available for me to market Pay Later offers on my website?

Dynamic Pay Later messaging and a Pay Later button are available for you to market Pay Later on your site - available at no extra cost to you.
 
Letting customers know early in their shopping process that options are available for them to buy now and pay later gives them more purchasing power, and can help you grow sales, increase average order amounts, and increase customer loyalty.

What is dynamic messaging and how do I add it to my site?

Dynamic messaging enables you to display multiple Pay Later offers on your website through a single integration and helps ensure that the most relevant Pay Later offer will automatically be displayed to your customers as they're browsing your site.
 
You can get started by adding dynamic Pay Later messaging to your website on product detail, cart and checkout pages (and passing the amount parameters) so that shoppers can see that Pay Later offers that are available.
 
To add dynamic messaging to your site:
  • If your site is on a commerce platform: Visit the Commerce Platforms page on the PayPal Developer Site for step-by-step instructions for your platform.
  • If you update your own site: Add dynamic messaging to your site through the Pay Later Messaging Center.

What are the benefits of adding dynamic Pay Later messaging to my website?

Adding dynamic messaging lets customers know they can buy now and pay later while they're browsing your site. Showing customers Pay Later offers early in the shopping process gives them more purchasing power, and can help you grow sales, increase average order amounts, and increase customer loyalty.

Where should I add Pay Later dynamic messaging on my site?

Here are a couple of best practices to help optimize the impact of dynamic messaging on your site:
  • Add Pay Later messaging to product detail pages near prices or the “add to cart” button so customers know they can buy now and pay later when they’re deciding what to purchase.
  • In checkout, remind customers that they can buy now and pay later by including Pay Later messaging on cart and checkout pages near cart subtotals.

Why should I add a Pay Later button? I already have a PayPal button at checkout.

Having a Pay Later button at checkout makes it easier for customers to choose between and apply for available Pay Later offers in the checkout flow providing a better customer experience.

How do I know if my business is eligible to promote Pay Later offers in the US?

You’re eligible to promote Pay Later offers if you're a US-based merchant with a US-facing website, and a one-time payment integration. Certain categories, like Real Money Gaming, aren't eligible to promote Pay Later offers. We may also periodically identify additional merchant categories that aren’t eligible to promote Pay Later offers.


*About Pay in 4: Loans to California residents are made or arranged pursuant to a California Finance Lenders Law License. PayPal, Inc. is a Georgia Installment Lender Licensee, NMLS #910457.
**PayPal Credit is subject to consumer credit approval.
 
PayPal Smart Connect is a line of credit that you can use to make purchases through PayPal. PayPal Smart Connect can be used anywhere that PayPal is accepted.


- PayPal Smart Connect - 866-571-3012, Mon - Sat from 4am - 10pm PT, Sun from 7am - 7pm PT
Welcome to PayPal Credit!  Thank you for signing up. PayPal Credit is a revolving credit line that’s attached to your PayPal account. You can set PayPal Credit as your default payment type when you shop with PayPal, and you’ll get more time to pay on every qualifying purchase.

Whether you’re on your computer or on your mobile device, PayPal Credit gives you the flexibility to check your statements, make payments and more right from your PayPal account.

You can find more information about automatic payments, payment posting timeframes, and promotional purchases in our Help Center.
PayPal Credit is an open end (revolving) credit card account that provides a reusable credit line built into your account with PayPal giving you the flexibility to pay for your purchases right away or pay over time. It’s easy to apply, easy to use and there whenever you need it. PayPal Credit is subject to credit approval and is offered by Synchrony Bank.

Learn more about how to apply for and use PayPal Credit.

You can use PayPal Credit just about anywhere PayPal is accepted. Simply checkout using PayPal and select PayPal Credit as your payment method.

At this time, PayPal can’t make any payment plan adjustments due to COVID-19. Please contact Synchrony Bank at 844-373-4961, Mon-Fri 8am-11pm ET, and Sat-Sun 9am-9pm ET to make those adjustments, but note that wait times may be longer than usual.

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