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.

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

Q1. Where can I find information about the new Covid Relief Bill provisions for small business?

A "Fact Sheet" on the new Bill is available on the House of Representatives Small Business Committee website. We also recommend visiting the US Department of Treasury PPP website where you can access PPP program updates as soon as they're published by the SBA.

Q2.  Will PayPal be facilitating new first time PPP loans and PPP Second Draw loans to PPP loan borrowers, under the new Covid Relief Bill?

PayPal is participating in the PPP to provide businesses access to additional PPP loan funding. This includes 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 PayPal.com/PPPloan.


Q3.  When will the new one-page PPP loan forgiveness application for loans of $150,000 or less become available?

PayPal is reviewing the new Covid Relief Bill, including how it impacts the loan forgiveness process for existing PPP loan borrowers. We're unable to provide any more detailed information or answers to your specific questions until the Bill is officially enacted, and the SBA issues detailed rules, guidance, forms and instructions on its implementation. The SBA has 24 days from the Bill’s enactment to release the updated loan forgiveness form and related guidance. 

We'll provide updates on our PPP Loan Forgiveness Information page and through other PPP loan borrower communications as more information becomes available. We also recommend visiting the US Department of Treasury PPP website where you can access PPP program updates as soon as they're published by the SBA.
 

Q4.  I’ve already applied for loan forgiveness, but my loan is under $150,000. Should I stop my pending forgiveness application and reapply using the new Covid Relief bill one-page PPP loan forgiveness application form?

PayPal is reviewing the new Covid Relief Bill, including how it impacts the loan forgiveness process for existing PPP loan borrowers. We're unable to provide any more detailed information or answers to your specific questions until the Bill is officially enacted, and the SBA issues detailed rules, guidance, forms and instructions on its implementation. The SBA has 24 days from the Bill’s enactment to release the updated loan forgiveness form and related guidance. 

If you qualify for full loan forgiveness under one of the existing Forgiveness Application Forms (3508S, 3508EZ or 3508) and can satisfy all the applicable documentation requirements, you may wish to proceed with your current loan forgiveness application, rather than waiting for the new loan forgiveness application form to be released and then reapplying.  

We'll provide updates on our PPP Loan Forgiveness Information page and through other PPP loan borrower communications as more information becomes available. We also recommend visiting the US Department of Treasury PPP website where you can access PPP program updates as soon as they're published by the SBA.
 

Q5.  I’ve not yet applied for loan forgiveness but am ready to do so, and my loan is under $150,000. Should I wait to apply using the new Covid Relief bill one-page PPP loan forgiveness application form?

PayPal is reviewing the new Covid Relief Bill, including how it impacts the loan forgiveness process for existing PPP loan borrowers. We're unable to provide any more detailed information or answers to your specific questions until the Bill is officially enacted, and the SBA issues detailed rules, guidance, forms and instructions on its implementation. The SBA has 24 days from the Bill’s enactment to release the updated loan forgiveness form and related guidance. 

If you qualify for full loan forgiveness under one of the existing Forgiveness Application Forms (3508S, 3508EZ or 3508) and can satisfy all the applicable documentation requirements, you may wish to proceed with one of the currently available loan forgiveness application forms, rather than waiting for the new loan forgiveness application form to be released. 

We'll provide updates on our PPP Loan Forgiveness Information page or through other PPP loan borrower communications as more information becomes available. We also recommend visiting the US Department of Treasury PPP website where you can access PPP program updates as soon as they're published by the SBA.
 

Q6.  I’ve already received loan forgiveness and my EIDL amount was subtracted from my PPP loan forgiveness amount. Under the new Covid Relief bill, the EIDL deduction was eliminated and the SBA is required to make borrowers whole if their EIDL balance was deducted from their requested forgiveness amount. When and how will I be made whole by the SBA?

PayPal is reviewing the new Covid Relief Bill, including how it impacts the loan forgiveness process for existing PPP loan borrowers. We're unable to provide any more detailed information or answers to your specific questions until the Bill is enacted, and the SBA issues detailed instructions and guidance regarding the handling of EIDL loan forgiveness amount reductions.  

We'ill provide updates as additional information becomes available. We also recommend visiting the US Department of Treasury PPP website where you can access PPP program updates as soon as they're published by the SBA.
 

Q7.  I’ve already applied for PPP loan forgiveness and my EIDL amount was subtracted from my PPP loan forgiveness amount. Under the new Covid Relief bill, the EIDL deduction was eliminated and the SBA is required to make borrowers whole if their EIDL balance was deducted from their requested forgiveness amount. My loan payments have now begun for the unforgiven loan amount tied the EIDL balance. Do I need to make payments on my remaining PPP loan balance?

PayPal is reviewing the new Covid Relief Bill, including how that bill impacts the loan forgiveness process for existing PPP loan borrowers. We'd recommend that you continue to make payments on your PPP loan balance until the SBA provides details regarding the handling of EIDL-based loan forgiveness amount reductions. If a credit balance results from your payments, we'll issue a refund to you.

We'll provide updates as additional information becomes available.
 

Q8.  I’ve already applied for PPP loan forgiveness, but my application was declined, or I did not qualify for loan forgiveness in the full amount of my PPP loan. Can I reapply for forgiveness using the new Covid Relief bill one-page PPP loan forgiveness application form? Can I reapply and include the new categories of forgiveness eligible expenses? 

PayPal is reviewing the new Covid Relief Bill, including how it impacts the loan forgiveness process for existing PPP loan borrowers. We're unable to provide any more detailed information or answers to your specific questions until the Bill is officially enacted, and the SBA issues detailed rules, guidance, forms and instructions on its implementation. The SBA has 24 days from the Bill‘s enactment to release the updated loan forgiveness form and related guidance.

We'll provide updates on our PPP Loan Forgiveness Information page or through other PPP loan borrower communications as more information becomes available. We also recommend visiting the US Department of Treasury PPP website where you can access PPP program updates as soon as they're published by the SBA.


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, including the process by which PPP loans may be forgiven, in whole or in part. 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.

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.

To use PayPal Credit, 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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