How a business line of credit works
The lender approves a limit. You draw what you need, when you need it, and pay interest only on the outstanding balance. As customers pay you, you pay the line down and the room opens up again. Most lines are reviewed regularly, often once a year, and the lender can adjust the limit based on how the business is doing.
Line of credit or term loan?
- Choose a line when the need comes and goes: a seasonal build-up, a gap between paying suppliers and getting paid, or payroll while a big invoice clears.
- Choose a term loan for a one-time project with a clear payoff, like a renovation, an acquisition or a second location.
- Choose equipment financing for anything with a serial number you'll use for years.
Using a line for a long-term purchase tends to leave it permanently drawn, which defeats the point and can make the lender nervous at renewal.
Types of business credit lines
- Unsecured lines. Based on your cash flow and credit, usually with a personal guarantee. Limits tend to be smaller.
- Secured lines. Backed by business assets or sometimes personal real estate, which can mean a larger limit and a lower rate.
- Asset-based lines. The limit moves with your receivables and inventory, which suits growing distributors and manufacturers whose assets outpace their profits.
- Government-backed lines. The Canada Small Business Financing Program includes a working capital line of up to $150,000 through participating banks and credit unions.
When a line isn't available
Lines are among the harder products to qualify for, because the lender is committing money without knowing exactly when you'll use it. If you sell on terms, invoice financing or factoring can do a similar job, with approval based largely on your customers' credit. Be careful with daily-payment cash advances as a substitute: here's what they really cost.
What lenders look at
Steady deposits, a healthy average balance, few or no NSFs, and receivables from customers who pay. Here's how lenders read your bank statements. For larger and secured lines, they'll also want financial statements and a list of receivables.
Using a line well
Size the line to your actual cash cycle and pay it down every time money lands. Contractors, for example, can size a line to the gap between spending on a job and receiving the progress draw, as our guide to holdbacks and prompt payment explains. A line that never comes down is a sign you need a term loan instead.
How Straightline helps
Your advisor can compare credit lines, asset-based facilities and invoice financing side by side, so you see the real cost of each for the way your business actually collects money. One application, one advisor, many lenders. Check your options.