Business lines of credit: a revolving operating limit

What a business line of credit is

A business line of credit is a revolving operating limit: the lender approves a ceiling, you draw what you need up to that ceiling, and the amount you repay becomes available again. Interest is normally charged only on the drawn balance, so the cost follows your use of the money rather than sitting on the entire approved amount for the full term.

That is the practical break from a term loan. A term loan advances one sum and amortizes it on a fixed schedule, so your balance falls whether or not the cash is working. A business line of credit loan behaves more like a utility: it covers a gap in the operating cycle, then idles. The trade-off is that a revolving limit is usually repriced against a floating benchmark, reviewed periodically, and can be reduced or withdrawn when the lender's view of the business changes.

The version described here is unsecured. Nothing is pledged against the limit, so the borrowing base is not an asset — it is the strength of the operating history behind it. That shifts the lender's attention to cash flow, filing quality and the personal covenant that usually accompanies the account.

loanmoose.ca is not a lender. It does not make loans, set rates, or make credit decisions. It is a matching and comparison service, and any limit, price or term is set by the licensed lender you deal with.

Who it suits

• Businesses with an operating history long enough to produce financial statements and tax filings a lender can review.
• Operations with uneven cash timing — an inventory build, seasonal revenue, or receivables that land after the payables are due.
• Borrowers whose need rises and falls, so a fixed amortization schedule would be a poor fit.
• Owners who can service interest and repay draws out of trading cash flow rather than out of a further draw.
• Businesses with an existing banking relationship and a credit file without recent defaults.
• Borrowers able to give a personal guarantee, since unsecured business credit usually rests on one.

What a lender checks

Income for a business is revenue with a margin attached, so the lender reads the trading history: financial statements, tax filings, bank statements, and, for a sole proprietor, the personal return that carries the business income. What it is looking for is coverage — whether the cash the business generates can carry the interest on a drawn balance, plus repayment of whatever was drawn, without stalling the rest of the operation.

Existing payments matter because the new limit is not judged alone. Term loans, equipment leases, vehicle payments, supplier obligations and personal debts all enter the same calculation, and the lender asks whether total obligations leave enough room. Because a limit can be drawn to its ceiling, many lenders assess the file as if it were fully drawn, not as if you will use only part of it.

The credit file comes next. Canada has two national credit reporting bureaus, Equifax Canada and TransUnion Canada, and a free copy of your credit report is available from each. The two files can differ, so it is worth reading both. Where a personal guarantee is required, your personal history is part of the decision. Prior insolvency is not permanent on the record — a consumer proposal stays on a credit report for 3 years after completion or 6 years from filing, whichever comes first, and a first bankruptcy stays for 6 years after discharge — but the lender will weigh the date, the cause, and the pattern since.

Security is the fourth question, and here the answer is thin. An unsecured limit pledges no asset, so the lender substitutes contractual protections: a personal guarantee, covenants, periodic review, and the right to reduce or withdraw the facility. Lending in Canada is licensed provincially, so the regulator and the rules differ by province and territory, and the documents you sign will reflect that.

What it costs to carry

Price is a stack, not a number. The first layer is interest, usually quoted as a spread over a reference rate that moves. The Bank of Canada publishes a policy interest rate, a prime rate, conventional mortgage rates and Government of Canada benchmark bond yields; these are benchmarks, not offers. Because the rate floats, your cost changes when the benchmark moves, which is why a limit can feel cheaper in one quarter than another without anything changing in your business.

The second layer is fees. A line of credit loan for small business often carries a standby or commitment fee on the unused portion of the limit, an arrangement or annual review fee, and transaction charges for transfers, statements or returned items. The third is insurance, frequently offered alongside the guarantee: life, disability or critical illness coverage. Ask plainly whether it is optional and how it is charged, because it can be bundled into a monthly payment that reads like interest.

The fourth layer is the difference between the headline rate and the total cost of borrowing. A quoted rate may exclude fees, may be stated on the drawn balance only, or may sit behind a minimum payment that covers interest and leaves principal untouched. Two offers at the same stated rate can cost different amounts once fees and insurance are counted. The Criminal Code sets the criminal rate of interest at 35% per year (s. 347), which is an outer legal limit in Canada, not a benchmark for what any product should cost. Add the components yourself, against your own expected draw pattern.

How it compares with the alternatives

These are different tools, and the right mix depends on your cash cycle, your balance sheet and what a lender is willing to price. A term loan and a revolving limit are not substitutes for each other so much as instruments for different jobs.

Before you sign

1. Identify the licensed lender and its regulator. Federally regulated financial institutions' consumer complaints go to the Financial Consumer Agency of Canada; provinces license and supervise most other lenders, so the escalation route depends on who you signed with.
2. Read the pricing schedule line by line: the interest basis and reference rate, the spread, any standby fee on the unused portion, review and transaction fees, and what triggers a default rate.
3. Confirm whether the limit is committed or repayable on demand, and how much notice the lender must give before reducing or cancelling it.
4. Establish exactly what you are pledging. Check the personal guarantee's scope, whether it is limited or all-obligations, and whether any security registration is being taken even though the facility is described as unsecured.
5. Pull your credit report from both Equifax Canada and TransUnion Canada before you apply, so you see what the lender sees and can correct an error before it becomes the reason for a decline.

Then compare at least two written offers side by side with fees and insurance included, and read the disclosure documents rather than the marketing summary. For questions about your own tax position, structure or solvency, speak to a professional who can see your full file.