A business line of credit is one of the most flexible and useful financial tools available to Canadian small business owners. Unlike a term loan where you receive a lump sum and repay on a fixed schedule, a line of credit works like a revolving pool of funds you can draw from, repay, and draw again. This guide explains how business lines of credit work in Canada, what they cost, and how to get one.
When a lender approves a business line of credit, they set a maximum credit limit. You can draw any amount up to that limit at any time, for any legitimate business purpose. Interest accrues daily on the outstanding balance. As you repay, the available credit replenishes. Most business lines of credit in Canada are demand facilities — the lender can technically demand full repayment at any time, though in practice this only happens when there is significant credit deterioration.
Approved based on the creditworthiness of the business and its owner without requiring specific collateral. Typically available in amounts of $5,000–$100,000 for most small businesses. Higher interest rates than secured facilities. Personal guarantee from business owner almost always required. Best for service businesses, professional practices, and businesses with strong credit but few physical assets.
Backed by specific business assets pledged as collateral — most commonly a General Security Agreement (GSA) over all business assets, accounts receivable, real estate, or equipment. Secured lines offer higher limits and lower interest rates because the lender has recourse to specific assets if you default.
Rates are variable and tied to the bank prime rate. When the Bank of Canada raises rates, your line of credit cost increases. This variable rate exposure is an important consideration for businesses that rely heavily on their line.
A common mistake is using a revolving line of credit for permanent financing needs. Drawing on your line and never repaying because the funds went to a long-lived asset converts a short-term facility into a long-term one, which creates problems at annual review.
For businesses with significant accounts receivable, an AR-based revolving facility can be highly effective. The lender advances a percentage of eligible receivables — typically 75–85% of current, undisputed AR under 90 days. As you collect receivables the balance decreases; as you generate new invoices you can draw again. Particularly useful for B2B businesses with slow-paying clients, staffing firms, wholesale distributors, and government contractors.
Most business lines of credit require annual review. Your lender will request updated financial statements and review account activity. Strong performance is an opportunity to request a limit increase. Prepare by having year-end financial statements ready and being able to explain how you used the credit over the year.
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