Small business line of credit in Canada: how it works, what it costs, and when to use one

Businesses usually look at a line of credit (LOC) as a solution when cash has to leave before it arrives. Think payroll, seasonal inventory, urgent repairs, and contract ramp-up all fit that pattern: the need is temporary, the repayment source is clear, and the business needs cash flexibility.

A line of credit is less clean when it becomes the default way to pay vendors while waiting on customer payments. That’s usually a timing or workflow problem, and it often calls for a different tool, since there are cheaper options.

A Canadian small-business line of credit is best for temporary cash gaps when there is a clear source of repayment. The right way to choose one is to evaluate its structure, underwriting requirements, and full cost stack, then compare it against factoring (invoice timing) and charge cards paired with bill pay (vendor-payment timing).

To choose the right tool for a cash gap, compare how Canadian lines of credit are structured, understand what lenders require, and what they cost. Then, evaluate whether an LOC is the right fit. At a glance, your options are:

• Line of credit for broad, temporary cash needs with a clear repayment source.
• Invoice factoring for cash trapped in issued invoices.
• Charge cards paired with bill pay for approved vendor bills that just need payment timing, not borrowing.

What is a small business line of credit?

A small business line of credit is a revolving credit facility. The lender approves a maximum limit; you draw from it, repay, and draw again, as long as the facility stays available and in good standing.

An LOC is different from a term loan. A small business loan is financing for business assets or expansion, with fixed or floating rates and payments tied to the loan term or amortization schedule. In comparison, a line of credit gives you an approved limit you can use repeatedly.

Most Canadian business lines of credit work the same way: you borrow up to an approved limit, pay interest only on what you use, and reuse the credit as you repay it. The structure helps a business manage uneven inflows and outflows without having to apply for a new loan every time cash gets tight.

The danger is that the flexibility can hide the real cost.

For example, if the balance keeps rolling forward, the company is often funding operations with variable-rate debt instead of fixing the payment cycle, margins, receivables process, or approval workflow underneath it.

What is invoice factoring?

Invoice factoring is a form of short-term financing where a business sells its unpaid invoices to a factoring company in exchange for cash upfront. The factor then collects payment from the customer and sends the remaining balance to the business, minus its fees.

Unlike a line of credit, factoring is tied directly to your receivables. The amount you can access depends on the invoices you have outstanding, rather than a pre-approved borrowing limit.

The trade-off is that you get cash sooner, but you pay a fee for the service. Factoring can make sense when customers take time to pay but the business needs cash before those invoices come due.

The two structural decisions: security and commitment

"Line of credit" sounds like a single product, but two structural choices change the risk: whether the line is secured and whether it's committed.

Secured vs. unsecured

A secured line of credit is backed by collateral. The lender can take security over business assets, equipment, inventory, receivables, cash, investments, or real estate.

A secured line can carry a larger limit or a lower rate because the lender has more protection. The tradeoff is complexity: more documentation, registrations, legal costs, and restrictions on what the business can and can’t do with pledged assets.

“Unsecured” can be misleading here. An unsecured line doesn't require specific collateral, but the lender can still require a personal guarantee, pull personal credit, or charge a higher rate. A general security agreement over business assets can also still apply.

Read the collateral, guarantor, and personal-liability language closely before you treat your line of credit as risk-free to the owner.

Demand vs. committed

A demand line puts the lender in control: if the agreement allows it, they can lower your limit, cut off further borrowing, or ask for the entire balance back immediately.

A committed line is available for a defined period as long as the business meets the agreement's conditions, which helps during a seasonal build, project ramp, or cash-conversion cycle. However, it involves more documentation, renewal dates, covenants, or fees to keep it available.

The credit agreement should answer five practical questions:

• Whether the lender can reduce, suspend, or call the line
• How often the facility is reviewed
• Which financial information the business has to provide after approval
• Whether covenants, clean-down requirements, or minimum-liquidity rules apply
• Whether a standby or unused-line fee applies to the available limit

"Approved" doesn't automatically mean committed. Know how dependable the facility is before building payroll, inventory, or vendor-payment assumptions around it.

What a business line of credit costs

Most business lines of credit carry a variable rate, usually structured as prime plus a spread. Some examples of this include: 

• BMO: BMO publicly lists its Credit Line for Business at BMO Prime +2% to BMO Prime +11%, depending on factors such as personal credit score, credit history, and collateral.
• TD: TD's line uses floating rates based on the TD Prime Rate or TD U.S. Prime Rate.
• CIBC: CIBC's rates are variable and move with CIBC Prime.

For lines of credit under the Canada Small Business Financing Program (CSBFP), the federal guidelines cap the rate at the lender's prime rate plus 5%.

Interest is only one cost. Ask about the full price stack. The table below will give you an idea of the costs, what each means, and what you need to ask.

There’s a simple formula you can use to estimate interest before fees: amount drawn × annual interest rate × days outstanding ÷ 365. The real issue isn’t the borrowing, but the time it takes to pay it back. A quick draw that clears in one cash cycle costs little; a persistent balance that rolls for months does not.

What lenders check before approving

Public lender pages point to the same evidence: revenue history, credit history, collateral or security, and a clear reason for the financing. Credit unions set their own criteria, so confirm requirements with your lender.

Revenue history and cash-flow evidence

Lenders want proof that revenue exists, repeats, and can support repayment. A common benchmark is positive revenue over the past 12 to 24 months.

Depending on the lender, facility size, and purpose, be ready to discuss financial statements, bank activity, tax filings, customer concentration, receivables aging, and seasonality.

Predictable monthly revenue is easier to explain than the same annual revenue concentrated in a few irregular contracts.

Time in business

Operating history gives lenders more to assess. A business with several years of sales, filings, and repayment behaviour is easier to evaluate than a new company with a forecast.

Newer companies can still qualify, but lenders often lean harder on owner credit, collateral, personal guarantees, or government-backed programs when the history is thin.

Personal credit and guarantees

Small-business credit is closely tied to owner risk. Lenders often review personal credit, request a personal guarantee, or ask owners, directors, or shareholders to support the facility.

Since guarantees may be required, confirm before signing:

• Whether any owner or officer faces a personal credit check
• Who is guaranteeing repayment
• Whether the guarantee is capped or unlimited
• Whether the lender can collect from the guarantor before exhausting business assets
• What happens to the guarantee if ownership changes

Don't assume that an incorporated business alone separates the owner's risk from the facility.

Collateral, receivables, and inventory

Working-capital lenders look closely at current assets, and they discount them when sizing the line. Receivables from strong customers support more credit than stale, related-party, or disputed invoices; slow-moving or specialized inventory supports less. For government-supported financing, the rules are more specific. Under the CSBFP, the lender must take security on business assets for a line of credit.

The reason for the draw

A clear, near-term cash reason is easier to support than a vague request for "flexibility." The stronger the use case, the smoother the approval, which leads to where a line of credit actually fits.

When a line of credit is the right fit for your small business

A line of credit works best when the cash need is real, temporary and repayable from a known source. When these criteria align, a line of credit can be the right solution for a number of small business issues. 

Payroll gaps with reliable receivables

Payroll can't wait because a customer payment is five days late. If the receivable is reliable, a line of credit bridges the gap without forcing the company to hold idle cash all year. The discipline is that the line gets repaid when customer cash arrives. If payroll draws become permanent, the business likely has a margin, headcount or collections problem.

Seasonal inventory that turns quickly

Retailers, wholesalers, food businesses and tourism operators often build stock before a peak season. A line of credit fits when inventory turns into sales quickly and the balance falls after the season. A term loan or inventory financing fits better if the purchase is large, long-lasting or tied to expansion.

Equipment purchases and repairs

A line can fund a replacement laptop fleet, a vehicle repair, a machine part or a POS upgrade so the business keeps operating instead of having to pause entirely while dealing with the equipment issue. For a major purchase with a useful life measured in years, match the financing to the asset. In these cases, a term loan, lease, or equipment financing is cleaner than carrying a revolving balance.

Contract ramp-up before payment

A new contract may require labour, supplies, travel, subcontractors, and deposits before the first payment lands. If payment follows delivery, a line bridges the ramp. Lenders will expect the customer, contract, invoice timing, and repayment source to be clear.

Emergency working-capital buffer

Some companies keep a line as a backstop for lumpy cash flow. The limit shouldn't replace cash planning. A facility that can be reduced, reviewed, or called is not the same as cash in the account.

When a small business line of credit isn't the right tool

Some draws signal that credit is masking an operating problem rather than bridging a real cash gap. A lender may still approve the line of credit, but approval isn't the test. It’s worth questioning a draw when it’s used:

• As a cushion when collections are unpredictable
• To pay vendors whenever the bills are due
• To cover recurring losses
• To fund a long-term purchase with no repayment plan

When the cash gap is really a timing or workflow issue (not a true borrowing need), it’s a signal to compare an LOC against other options.

Where lines of credit get overused: vendor-payment timing

The riskiest pattern is using a small business line of credit to pay vendors while waiting for customer payments to arrive. That sounds like working capital, and sometimes it is.

But if the same pattern repeats every month, the line is doing the work of accounts payable timing, collections discipline, and spend controls, which means the business is paying interest because cash is moving through the company in the wrong order.

What this looks like in practice:

• Vendor bills are paid from the line even when approved invoices are due soon
• The balance rarely returns to zero
• The line covers routine software, travel, or card spend without department-level controls
• Draws happen because approvals, bill intake, or accounting exports are slow
• Finance can't see upcoming payments until they're already urgent
• Customer collections are treated as an external problem instead of an operating process

In those cases, the company usually needs both a line of credit for actual cash needs and a payment workflow that prevents avoidable timing friction from turning into debt.

That gap is narrow enough that a charge-and-pay workflow, like Float Charge, can cover it without an interest-bearing draw. Here's how that compares to a line of credit and to factoring.

Line of credit vs. factoring vs. Float Charge

Each of these three tools solves different problems:

1. A line of credit solves cash availability.
2. Factoring solves receivables timing (cash trapped in invoices that customers haven't paid yet).
3. Float Charge plus Bill Pay addresses the narrower vendor-payment timing gap from the last section: approved bills due before customer cash arrives.