What is a business line of credit?

What is a business line of credit and how can you use it for your business?

Every small business owner knows that in order to compete, you need to be able to quickly adapt to new challenges and take hold of opportunities as they arise. Whether you are experiencing periods of growth or irregular cash flow, having fast access to additional funds can make all the difference.

A small business line of credit could provide the solution you need, allowing you to stabilize and invest at your own pace, without needing to tie yourself to a long-term financial commitment.

What is a small business line of credit?

A small business line of credit is a short-term financing option that enables businesses to borrow funds as and when they need. It works as a revolving line of credit that allows you to use credit in the same way as a credit card. This means you gradually repay the used credit each month, while still having access to the remaining amount up to the credit limit.

For example, if you have a credit limit of $25,000 and draw down $10,000 in one month, you will still be able to access the remaining $15,000 at a later date, even as you start to repay the $10,000.

Depending on your circumstances, this may offer more flexibility compared to a small business term loan, and because borrowers are not given a lump sum, they are not obligated to use all the credit that is made available to them. With a line of credit for a small business, you only pay interest monthly on the amount you borrow, unlike a term loan which requires you to re-pay principal and interest monthly on the entire loan amount.

What can you use a small business line of credit for?

The versatile nature of a small business line of credit allows it to be used for a variety of purposes, such as:

• Managing cash flow – cover cash flow gaps while you are waiting for receivables to be collected, or to cope with seasonal fluctuations or when funds are low.
• Buying inventory – use a business line of credit to meet increased demand or if you are running low on stock.
• Paying suppliers – the funds can help to pay off suppliers, and depending on your terms, some may even offer discounts if you make an early payment.

Because it works as a revolving line of credit, the funds can be accessed at any time, which is an ideal solution for small business owners. Growing your business is a demanding task which typically throws up a lot of unexpected financial challenges. Having access to a business line of credit can help to overcome them, whilst allowing for more manageable payment installments.

Customers Bank Small Business Line of Credit

Our small business lines of credit  helps you unlock the potential of your business, giving you fast and easy access to funds when you need them most.

You only pay for what you use, and because you are not tied into a rigid loan structure, you get more flexibility and the opportunity to grow your business at your own pace.

The application process is simple and hassle-free, and we’ll let you know if you’ve been approved in no time at all.

Learn more

Differences Between Secured vs. Unsecured Lines of Credit

There are two types of lines of credit – secured and unsecured. They each offer distinct benefits depending on your financial circumstances, which we explain in more detail below.

Secured Lines of Credit

A secured business line of credit involves providing assets of value which are used as security by the lender, which usually includes things like:

• Equipment
• Business property
• Receivables
• Inventory

The amount of credit offered by the lender is usually based on the value of the asset provided. Using an asset as a collateral gives the lender more security if the borrower defaults on the loan, which allows them to seize it to recover the debt.

The key features of a secured business line of credit tend to include:

• Lower interest rates compared to an unsecured business line of credit due to the security provided by an asset.
• Higher credit limits compared to unsecured lines, which is again also due to the asset being used as a collateral.
• Businesses that have a limited credit history can increase their chances of getting approved.
• If you default on the loan the lender may look to seize and sell the asset – although this is usually the last resort.

Secured lines of credit are often ideal for businesses that own valuable assets that can be used for collateral. Companies requiring flexible terms or borrowing power, may also find it is a more suitable option.

Unsecured Lines of Credit

An unsecured line of credit does not require you to provide an asset, with the lender basing their decision solely on the financial profile of the applicant. A lender will typically assess things like your:

• Business credit report – FICO SBSS or Dun & Bradstreet score is taken into account.
• Payment history – your record of payments to suppliers, vendors and other lenders.
• Business financials – cash flow and revenue stability, which helps to determine your ability to repay any money drawn down.
• Time in business – lenders tend to prefer companies that have been operating for at least 2 years. New businesses may still be able to get a line of credit, (but it would most likely be secured) although there may be added requirements involved.

Applicants usually get a faster answer compared to a secured line of credit for small businesses as there is no asset valuation and less legal work involved, so the process is more straightforward.

The main features of an unsecured business line of credit include:

• No asset required – the lender will make a decision based on the financial health of your business.
• Higher interest rates – this is compared to a secured line of credit, as the absence of an asset increases the risk for the lender.

Businesses that have a strong credit profile and stable revenue that have short-term financial needs may be more suited to unsecured lines of business credit. It can still be possible to get a line of credit if you have a less-than-perfect credit history, although you may need to submit additional information and documentation.

Secured vs Unsecured at a glance

Unsecured Lines of Credit with Customers Bank

When exploring line of credit options, it’s important to understand each lender’s specific parameters. For example, Customers Bank offers unsecured business lines of credit up to $25,000, with secured options available for businesses seeking higher limits.

What is required to obtain a small business line of credit?

When applying for a small business line of credit, you’ll need to meet criteria set by the lender. While requirements are generally similar across banks, they can vary based on the type of credit and your business profile. Lenders will typically consider how long you’ve been in business, as well as the overall strength of your financials. For newer businesses, an SBA-backed line of credit may be a more appropriate option, as it is designed to support companies that may not yet qualify for traditional financing.

As part of the review process, lenders will evaluate business financial information such as balance sheets, income statements, bank statements, and business and personal tax returns to better understand cash flow and repayment ability. Both personal and business credit profiles are also considered, with personal credit playing an important role regardless of how long the business has been operating. In addition, ownership and legal documents such as your Employer Identification Number (EIN), business licenses, and organizational documents will also likely need to be submitted.

Rate Considerations

Interest rates are one of the most important things to consider when taking out a line of credit for a small business. For lines of credit, the interest rates are typically variable, as there will not be fixed payments.  The interest rate for a line of credit is usually expressed as an APR (annual percentage rate) which represents the cost of borrowing across one year, including interest and other fees.

If you are unsure whether to apply for a business line of credit, business loan or a business credit card, in addition to the interest rate, also consider things like repayment terms, how much you can borrow and whether you need to provide collateral for security.

Maintaining and Building Credit with a Small Business Line of Credit

A small business line of credit can become a valuable tool to support long-term financial health. Many small business advisors recommend starting with a modest credit limit and repaying your balance quickly, as this creates a positive credit history.

When used responsibly, it can help to build or improve your credit score by making timely payments and keeping your utilization rate below 30%, which demonstrates you are a dependable borrower. This can also make it easier to obtain further credit in the future, whether it’s increasing your credit limit, or taking out a business loan or credit card. The effective use of a line of credit for a small business can help to stabilize business finances while supporting steady growth at a pace that works for you.

Connect with Customers Bank

Take the next step toward flexible, reliable financing. Reach out to Customers Bank and let our specialists help you find the business line of credit that fits your needs.

FAQs

What would make a line of credit a better financing option than a business term loan?

Choose a line of credit when you need working capital to manage fluctuations in cash flow to cover short-term expenses, supplier payments, and routine business needs. Conversely, opt for a term loan if you require a substantial, upfront lump sum of funds for more significant business purchases.

What factors can affect my eligibility for a small business line of credit?

Lenders typically evaluate the stability and financial health of your business when deciding whether to offer a business line of credit. Key considerations often include:

• How long the business has been operating
• Recent financial performance
• Stability of ownership structure
• Debt to credit ratio etc.

Is there an inquiry in your credit report when applying for a small business line of credit?

Yes, there is typically an inquiry in both personal and business credit reports.

What documents are generally required to apply for a business line of credit?

Lenders typically require a package of documents to verify your business’s identity, legal status, and financial health. While the exact requirements can vary based on the amount you request, it’s best to prepare the following categories of documentation:

1. Business Financials

• Most recent Business Financial Statements
• Recent Business Bank Statements
• Business and Personal Tax Returns (usually the most recent one to two years).

2. Business Legal & Registration

• Your Taxpayer ID (EIN) or Social Security Number
• Articles of Incorporation/Organization to confirm legal structure.
• Evidence of Good Standing with the Secretary of State (or relevant governing body).

3. Personal & Administrative

• Identification details for principal owners (e.g., name, address, SSN).
• Data related to the business’s operations, such as the number of workers (employees and contractors).

What is the difference between a line of credit and a term loan?

A business Line of Credit provides flexible, revolving access to capital. You are approved for a certain amount, and you can draw funds, pay them back, and draw again as many times as you need over the agreed-upon period. You only pay interest on the money you actually use.

A business term loan is a single, lump-sum funding solution. You receive the total amount at closing, and you repay it over a fixed term through scheduled monthly principal and interest payments until the debt is fully paid off.

What are the fees for a business line of credit?

Customers Bank keeps your costs straightforward. Our business line of credit offers competitive rates, and you only pay interest on the funds you use. While there is no application fee, a documentation fee applies and borrowers are responsible for applicable closing costs. 

How can I use my line of credit?

You can use your business line of credit whenever you need quick access to working capital. Many businesses use it to cover short-term expenses such as managing cash-flow gaps, purchasing inventory, paying suppliers, or taking advantage of unexpected opportunities. Because it’s a revolving credit line, you can draw funds as needed, repay them, and use the available credit again—giving you ongoing flexibility to support your day-to-day operations and growth.

Do I have to personally guarantee the line?

In most cases, a personal guarantee is required for a small business line of credit. This helps the lender assess repayment security, especially for newer or smaller businesses. At Customers Bank however, a personal guarantee is required for all small business lines of credit. Your loan specialist will walk you through the details and clearly explain the guarantee requirements before you move forward.

Does Customers Bank offer both secured and unsecured lines of credit?

Customers Bank offers business lines of credit that may be structured as either secured or unsecured, depending on your business’s qualifications and financing needs. Secured lines may use business assets or other collateral to help you access higher limits or lower rates, while unsecured options rely on the strength of your business’s financial profile. Your lending specialist will walk you through the options and help determine which structure is the best fit for your business.