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Do I need a business line of credit?

Payoneer CommunityPayoneer Community
December 1, 2022

A growing business needs access to funds to stay competitive and take advantage of opportunities.

For some, a business loan is the best option, providing a regular repayment schedule and diminishing debt. For others, a line of credit provides flexible and convenient financing for covering day-to-day operating costs or pursuing a time-sensitive business opportunity such as stocking up on inventory for the busy Holiday Season.

What is a business line of credit?

A business line of credit is a simple and flexible financing solution providing revolving capital that gives you access to cash.

The lender may approve your business for a certain dollar amount, known as your “credit limit”. You can borrow what you need, when you need it, without having to go through any further applications or approvals.

When you withdraw funds, your remaining available credit is reduced accordingly the interest starts to accrue. Unlike a loan, however, you only pay interest on what you have withdrawn to use at any given time.

For example, if you have a $20,000 credit limit, and you spend $5,000, you now have $15,000 still available. A business line of credit is revolving credit, so when you pay back that $5,000, you once again have access to the full $20,000 and no further interest is charged.

Because a business line of credit is so flexible and convenient, you might want to get it in place before you actually need the funds, so it’s ready and waiting when opportunity knocks. This allows you to quickly invest in additional stock, take advantage of volume discounts, expand into new product lines, ramp up your marketing, and even pay for part-time help – it’s entirely up to you.

What types of business lines of credit are there?

There are two kinds of business Lines of Credit: secured and unsecured.

1. Secured Business Lines of Credit

Your assets back secured lines of credit. These assets, such as your equipment, are collateral for the line if you default on repayments.

Applying for and getting approved for a secured line of credit may take longer than the process for an unsecured line, as the value of your assets may need to be appraised by the lender as a source of repayment.

While this may sound daunting, discuss with the lender how a secured versus unsecured line would impact your credit limit and the interest rate you would be charged. Then you can make the best decision for your business based on your finances and goals.

Like any business decision, you should look into the options available from different providers. Before deciding, do your due diligence and only go with a lender with a solid reputation and track record.

2. Unsecured Business Lines of Credit

An unsecured business line of credit is one that is not backed with a collateral asset. It works similarly to a credit card account which allows a certain amount of funding as long as you have maintained the required credit score. The unsecured line is preferred by business ideas that do not want to leverage their assets as collateral or startups that do not have many assets. Although it seems a better option, there are certain catches.

Unsecured LOC is often more expensive and has more difficult terms and conditions than secured LOC.  You would have to sign a personal guarantee and have to pay higher interest fees and other charges. Furthermore, the repayment terms of the amount lent by unsecured LOC are also shorter. You would have to begin repayment sooner than the secured LOC, and the repayment amount would also be higher.

Disadvantages of Business Lines of Credit

Business Line of Credit can help you secure small loans on friendly terms and conditions, but there are some drawbacks to it as well. Let’s take a look at them.

Difficult To Qualify

Businesses must meet several conditions to become eligible for a loan from the line of credit. You would have to provide the lenders with financial statements that include cash flow and annual revenue generated by the business. Other documents, including business planning documents, checking account information, bank account information, and tax returns of businesses and owners, would also be required.

Low Borrowing Limits

Borrowing limits, especially with an unsecured line of credit, are very low compared to other types of lending. The amount would be enough for smaller expenditures like paying salaries or to suppliers but would not be enough to support expansion. Furthermore, if the business runs into a serious cash flow-related problem, the amount would not be enough to cover for more than a week or two.

Are there other options?

If you are not keen on borrowing funds, you might like to consider getting your own money faster so that you can purchase more inventory as needed. One way we recommend doing this is with a Payoneer Capital Advance. This service enables you to have cash in hand when you need it most – helping you negotiate better discounts from suppliers and improving your bottom line. It also gives you the flexibility to invest in a greater variety of items, so you can offer your customers more choices in purchasing their perfect gifts. You’ll stay well ahead of the competition by streamlining your cash flow to maximize your business.

Capital Advance – How does it fare against business lines of credit 

Capital Advance offers the same benefit as a business line of credit and also solves the problems associated with LOC. You do not have to leverage an asset to qualify for the required funding. You can get up to $750,000 or 140% of the account receivable at any time. Like the LOC, there is not much paperwork that the business has to go through.

Capital Advance also offers different packages that are suitable for different businesses. You can pick between express, grow, or plus, which are spanned across 1 month, 3 months, and 6 months respectively.

Furthermore, the terms and conditions of Capital Advance are quite simple. There are no hidden charges, and the service charges a fixed percentage of the funding amount. You would not get anything more than the business can repay easily. Plus, Payoneer deducts the amount automatically from the account when the collection begins. 

Payoneer customer? View your Capital Advance offers now!

New to Payoneer? Learn more about Capital Advance



What is the Difference Between an Unsecured and Secured Business Line of Credit?

The secured business line of credit requires a collateral asset based on the value of that asset. The lenders let the business borrow a certain amount. Unsecured lines do not require collateral and can be availed by businesses that are just starting out.

How Long do you Need to be in Business to Become Eligible for a Business Line of Credit?

It depends on lenders’ policies, and each has different policies. Most lenders would require at least two years of experience in the market to become eligible for borrowing. 

What is the Role of Credit Score in the Business Line of Credit?

Credit score matters a lot in the business line of credit. A business with a better credit score can secure a higher amount at friendly terms and conditions. A bad credit score can make the business ineligible for funding, and lenders generally have stricter terms and conditions. 

Is it Hard to Get a Line of Credit?

Yes, becoming eligible for a business line of credit can be challenging. There are several conditions that a business has to meet in addition to providing all sorts of financial documents. You can also be asked for personal and business tax returns while applying for a business line of credit.

The content provided in this article including any information relating to pricing, fees, and other charges is accurate and valid only as of the date it was published. In addition, changes in applicable regulations, policies, market conditions, or other relevant factors may impact the accuracy of the mentioned pricing and fees and other associated details. Accordingly, it is further clarified that any information regarding pricing, fees and other charges is subject to changes, and it is your responsibility to ensure you are viewing the most up to date content applicable to you. Payoneer will provide the most up to date and accurate information relating to pricing and fees as part of the account registration process. Registered customers can view this information via their online account.

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