Quick answer: A business line of credit (LOC) is a revolving facility you draw from when expenses pop up, then repay and reuse. It’s designed for short-term operating needs , not long-life assets.
A business line of credit (LOC) is a revolving facility you draw from when expenses pop up, then repay and reuse. It’s designed for short-term operating needs, not long-life assets. If you want the full overview, start here: Business Line of Credit.
Common uses (Canadian SMEs)
- Inventory & supplier deposits: Buy stock before sales convert; secure volume pricing.
- Payroll & staffing gaps: Cover weeks where receivables haven’t paid yet.
- Repairs & rush purchases: Keep trucks, machines, and POS systems running.
- Seasonality & project ramp-ups: Front materials and labour for contracts, bridge slower months.
- Marketing bursts: Fund campaigns with short, measurable payback.
- Bridging slow A/R: When clients pay in 30–60 days, the LOC fills the timing gap. For invoice-heavy businesses, also compare Invoice/Freight Factoring.
When a LOC beats a term loan
| Need | Line of Credit (LOC) | Term Loan |
|---|---|---|
| Cash that comes and goes | Draw/repay anytime; interest on what you use | Lump sum; fixed payments regardless of use |
| Recurring short gaps | Reusable limit for inventory/payroll cycles | Less flexible; risk of idle principal |
| One-off project or purchase | Works for staging expenses | Predictable repayment for defined costs |
If your need is a single, large expense with multi-year benefit (e.g., machinery), a term facility or Equipment Loan usually fits better. For mixed needs, see Working Capital Loans.
Secured vs. unsecured lines
- Secured LOC: Backed by A/R, inventory, or a GSA; tends to offer larger limits and lower cost. Consider Secured Loan or Asset-Based Lending if you’re asset-heavy.
- Unsecured LOC/loan: Faster, simpler, smaller limits and higher cost; useful for newer or light-asset firms. See Unsecured Loan.
How lenders size your LOC
They look at bank statements, deposit stability, A/R quality, margins, and existing obligations. Limits often grow with performance. If you already carry short, higher-cost debt, you may consolidate later via Business Refinancing.
Practical tips to use a LOC well
- Match draws to near-term cash conversion. Don’t finance long-term assets on a revolving line.
- Right-size the limit. Start modest; increase as turns prove out.
- Track true cost. Interest accrues only on drawn amounts—model it in the calculator.
- Pair tools smartly. Example: LOC for inventory + Term Loan for a one-off upgrade; or pair with Invoice Factoring if customers pay slowly.
FAQ
Is a LOC better than a loan for payroll?
Often yes—payroll is recurring and short-term. Use a LOC; use a term loan for defined, one-time costs.
Can I use a LOC for equipment?
For small, quick fixes maybe; for major purchases, use Equipment Loans to avoid tying up your revolving limit.
How fast can I get a LOC?
With a clean file (bank statements, A/R), boutique programs can move quickly. Start with Working Capital Loan to explore options.
Do I need collateral?
Not always. Unsecured options exist; secured lines typically price better and scale larger.
What if my clients pay in 45–60 days?
Blend a LOC with invoice/freight factoring to accelerate collections.
Can I refinance later?
Yes—once cash flow stabilizes, consider Business Refinancing to reduce cost.
Want a quick, tailored number? Run a scenario in the calculator and feel free to contact our credit analysts via Contact Us. Explore industry specifics here: Industries.
Authoritative references
- Innovation, Science and Economic Development Canada — Canada Small Business Financing Program:
The Canada Small Business Financing Program makes it easier for small businesses to get loans from financial institutions by sharing the risk with lenders.
Program eligibility, lender criteria, tax treatment, and product terms can change. Verify current official guidance and the final financing documents before making a decision.
Source perspective
BDC distinguishes a revolving operating facility from a term loan when explaining cash-flow financing.
“A line of credit is appropriate for short-term financing needs”
Match the repayment structure to when cash is expected to arrive. Confirm whether the facility revolves, how repayments work and which security and renewal conditions apply.