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.
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