A business line of credit solves a different problem from a term loan. Instead of borrowing a fixed amount for one purchase, the business gets standing access to money it can draw on when cash flow is tight, and pays interest only on what it uses. For businesses with seasonal swings, slow-paying clients or uneven expenses, a line arranged before it’s needed can cover the gaps. This guide is part of the personal loans, lines of credit and business borrowing hub; term loans and government-backed programs are covered in small business loans in Canada.
Business Line of Credit vs Term Loan
| Business line of credit | Business term loan | |
|---|---|---|
| How funds are provided | Revolving: draw as needed up to a limit | Lump sum upfront |
| Repayment | Interest on the amount drawn; repay and redraw | Fixed instalments over a set term |
| Typical use | Ongoing or unpredictable cash flow needs | One-time purchases (equipment, property, expansion) |
| More funds | Redraw within the existing limit | A new loan |
| Rate | Variable, tied to prime | Fixed or variable, set at approval |
Rates and Limits by Lender Type
| Lender type | Typical rate | Typical limit | Secured? |
|---|---|---|---|
| Big banks | Prime + 1-4% | $10,000-$500,000+ | Often secured at larger limits |
| Credit unions | Prime + 2-5% | $5,000-$250,000 | Varies |
| BDC | Prime + 2-6% | $10,000-$500,000+ | Varies; more flexible on business type |
| Online business lenders | 8-25%+ (often flat-fee or factor-rate pricing) | $5,000-$150,000 | Usually unsecured |
Bank and credit union lines usually cost the least for a business that qualifies, but they ask for the most documentation and history. Online lenders approve faster with less paperwork, at a real cost premium; a flat fee or factor rate should be converted to an annual rate before comparing it with a prime-based line. Under the federal Canada Small Business Financing Program, a bank or credit union can also offer a working capital line of credit of up to $150,000, at no more than the lender’s prime rate + 5% (CSBFP details).
How Lenders Decide
Lenders generally weigh:
- The owner’s personal credit score, especially for a business under two or three years old with little credit history of its own; owners with weak personal credit have other routes, covered in business borrowing with weak personal credit
- Time in business, with most banks preferring at least one or two years of operating history
- Revenue and cash flow, from business bank statements or financial statements
- Existing debt, since lenders assess the business’s capacity to service debt alongside the owner’s finances
- Industry, as some lenders are more cautious with seasonal businesses, restaurants and other sectors with high failure rates
Secured vs Unsecured Business Lines of Credit
A secured business line of credit is backed by collateral: business assets, accounts receivable, inventory or, in some cases, a personal guarantee backed by home equity. With a specific asset to fall back on, the lender can offer a lower rate and a larger limit, the same trade-off that applies to secured and unsecured loans generally.
An unsecured line doesn’t require pledging a specific asset but almost always requires a personal guarantee from the owner. Without collateral, lenders charge more and set smaller limits. A business owner comparing this with a personal line of credit can find personal rates on the line of credit rates page; keeping business borrowing separate from personal borrowing also keeps the business’s records clean.
Common Uses
- Covering payroll or rent in a slow month
- Bridging the gap between sending an invoice and getting paid
- Buying inventory ahead of a busy season
- Handling unexpected repairs without disrupting cash flow
- Standing by as backup working capital until it’s needed
Larger one-time purchases of machinery or vehicles are usually financed with a term loan or lease instead; equipment financing compares the two.