A business line of credit is a revolving pool of working capital that a lender makes available to a business, which the business can draw on as needed, repay, and then draw on again, up to an approved limit. It suits short-term cash flow gaps rather than long-term purchases, and it behaves quite differently from a term loan repaid on a fixed schedule.
What a business line of credit is
A business line of credit is an agreed maximum amount that a lender will let a business borrow against, usually for a set review period such as one year. Within that limit, the business decides when to draw and how much. Interest is normally charged only on the amount actually outstanding, not on the full approved limit, though some lenders charge a standby fee on the unused portion.
The limit is not a permanent guarantee of access. Many small business lines are demand facilities, meaning the lender can require repayment on demand, and most are subject to periodic review, where the lender reassesses the file and may raise, lower, or renew the limit. Terms sit in the credit agreement and vary widely between banks, credit unions, and alternative lenders.
How the revolving limit works in practice
Revolving means the limit replenishes as you repay. If a business has a $50,000 limit, draws $20,000 to cover a seasonal inventory purchase, and repays $12,000 after collecting from customers, the available balance returns to $42,000. That cycle can repeat without a new application each time.
In practice, a line of credit covers predictable timing gaps: paying suppliers before customer invoices are collected, covering payroll in a slow month, or bridging the wait between issuing an invoice and receiving payment. Because interest accrues on the drawn balance, the cost depends on how long the money stays out, not only on the rate.
Two habits matter. Keep the drawn balance within a level the business can clear during a normal cash cycle, since a line that stays permanently maxed out is effectively a loan that is not being repaid. And keep the lender informed of material changes to revenue, ownership, or security, because those can trigger a review or a change in terms.
How lenders assess revenue and time in business
Lenders underwrite a business line of credit on two questions: can this business generate enough cash to service the debt, and how reliably has it done so?
Revenue and cash flow. Lenders generally want documented, repeatable revenue. That usually means financial statements, corporate tax returns, recent interim statements, bank statements showing deposits and balances, and sales tax filings that corroborate reported revenue. One strong month proves little; a pattern across several months or years is more persuasive. Lenders also look at margins and the cash conversion cycle, because a business with healthy revenue and slow collections can still struggle to service a line.
Time in business. Operating history acts as a proxy for stability. Businesses with a longer track record and filed financial statements are easier to assess. Younger businesses are not automatically excluded, but they often face a smaller limit, a personal guarantee, additional security, or a different product. Some lenders start with a modest limit and increase it after a period of satisfactory performance.
Owners and credit. For sole proprietors, partners, and incorporated small businesses alike, lenders typically review the owners' personal credit history and often require a personal guarantee. A guarantee means the owner is personally responsible if the business does not repay. This is standard for small incorporated businesses and is worth understanding before signing.
Industry and concentration. Lenders also weigh the sector, seasonality, and whether revenue depends on one or two large customers. Exact thresholds and documentation requirements come from each lender's own credit policy, so ask directly rather than assuming.
Secured versus unsecured lines of credit
Secured. The lender takes a registered claim against business assets, often a general security agreement covering inventory, receivables, and equipment, and sometimes a mortgage on commercial property. Registration is typically made under the applicable provincial or territorial personal property security regime. Because the lender has a claim on assets, secured facilities often come with higher limits and lower rates, and they give the lender remedies if the business defaults.
Unsecured. No specific asset is pledged, but the lender usually still requires a personal guarantee from the owners. Limits tend to be smaller, rates higher, and approval harder for businesses without a long track record. Unsecured does not mean risk-free for the borrower: a guarantee can still expose personal assets.
Which applies depends on the lender, the amount requested, and the assets available. A business with substantial receivables and inventory may be able to pledge them, while a service business with few hard assets may be offered a smaller unsecured facility or a different structure.
How a business line of credit differs from a term loan
The core difference is shape. A line of credit revolves and interest is charged on the drawn balance, while a term loan advances a set amount that is repaid on a fixed schedule.
| Feature | Business line of credit | Term loan |
|---|---|---|
| Structure | Revolving limit, draw, repay, redraw | Single advance, amortised over a set period |
| Interest charged on | Outstanding drawn balance | Full principal, typically from the advance date |
| Repayment | Flexible, often interest plus a minimum payment | Fixed payment schedule |
| Typical use | Working capital, seasonal gaps, invoice timing | Equipment, vehicles, leasehold improvements, expansion |
| Cost predictability | Varies with how much is drawn | Predictable once terms are set |
| Review | Usually renewed or reassessed periodically | Runs to its own amortisation schedule |
Many small businesses use both: a line of credit for the working capital cycle and a term loan for assets used over several years. Matching the borrowing tool to the life of the asset is a basic principle of business financing.
Costs, legal limits, and preparing to apply
Costs
A line of credit can carry a fixed or variable interest rate, plus fees such as an annual or renewal fee, a standby fee on the unused portion, transaction fees, and the cost of registering security. Ask for the total cost of borrowing in writing, not just the headline rate.
Legal limits on interest
Under the Criminal Code, it is an offence to charge interest above the criminal rate of interest. The federal criminal rate is 35% APR, in force since 1 January 2025 under the Criminal Interest Rate Regulations (SOR/2024-114). That figure is an outer boundary rather than a benchmark, and a business line of credit is normally priced well below it.
Very short-term, high-cost credit is a separate category. In provinces with a payday lending regime, the maximum cost of borrowing is $14 per $100 borrowed, the maximum advance is $1,500, the maximum term is 62 days, and the maximum dishonoured-payment fee is $20. Nine provinces have a payday lending regime, and Quebec effectively prohibits payday loans. A business line of credit from a bank or credit union is not that product and should not be evaluated as one.
What to prepare before applying
Gather what a lender is likely to request: financial statements for the past two or three fiscal years, recent interim statements, corporate and personal tax returns, bank statements, an accounts receivable aging report, and a short cash flow forecast showing how the line would be used and repaid. Where owners are asked to guarantee, a personal net worth statement is often required as well.
Be ready to explain the need in cash cycle terms: what the money pays for, when the business gets paid, and how the drawn balance comes back down. A lender that understands the cycle can size the limit appropriately, and a limit that is too large can be as much of a problem as one that is too small.
Sources and further reading
- Financial Consumer Agency of Canada for plain-language guidance on credit, debt, and financial products.
- Criminal Interest Rate Regulations, SOR/2024-114 on the federal criminal rate of interest.
- Criminal Code section 347, which sets out the offence of charging interest above the criminal rate.
- Canada.ca business and industry services for federal programs, licences, and business information.
This article is general information only and is not financial, legal, or tax advice. Instalment.ca is a loan matching and comparison service, not a lender.