A business line of credit works differently from a term loan, and that difference matters when cash flow gets tight. With a term loan, you borrow a fixed amount and repay it on a fixed schedule. A line of credit gives you a borrowing limit you can draw from whenever you need it, repay, and draw again. You only pay interest on what you've actually used.
For Canadian SMB owners managing uneven revenue cycles, seasonal slowdowns, or unpredictable supplier costs, a line of credit is often the more practical tool. This guide explains how they work, what lenders look for when approving one, and how alternative lenders differ from banks on this product.
How a business line of credit actually works
Think of a line of credit as a pool of funds your business can dip into as needed. A lender approves you for a maximum limit, say $75,000. You draw $20,000 to cover a payroll gap in March. You repay $20,000 in April when a major client pays their invoice. In May, the full $75,000 is available again.
That revolving structure is the key difference from a term loan. You're not locked into a repayment schedule tied to a lump sum you may not have fully used. You borrow what you need, when you need it, and interest accrues only on the drawn amount.
Secured vs. unsecured lines
Most small business lines of credit fall into one of two categories. A secured line is backed by an asset, typically accounts receivable, inventory, or real property. An unsecured line carries no collateral requirement, which usually means a smaller limit and a higher cost. Canadian banks almost exclusively offer secured lines to small businesses. Alternative lenders can work with either structure depending on the file.
How interest is calculated
Interest on a business line accrues daily on the outstanding balance. If your limit is $50,000 and you've drawn $15,000, you're paying interest on $15,000, not $50,000. Repay $10,000 and you're paying on $5,000. This makes lines of credit cost-efficient for short-term needs, as long as the balance isn't left sitting at the limit for months.
What lenders look for when approving a line of credit
Approval criteria for a business line of credit depend heavily on the lender type. Banks and alternative lenders are measuring different things, even if they ask for some of the same documents.
What banks typically require
A Canadian chartered bank will generally want two to three years of financial statements, a strong business credit score, a personal guarantee, and collateral. The Office of the Superintendent of Financial Institutions sets capital adequacy requirements that shape how conservatively banks underwrite revolving credit. If you're under two years in business, or if your personal credit score sits below 680, most banks will decline outright.
What alternative lenders look for
Alternative lenders evaluate a business line of credit application differently. The primary underwriting signal is cash flow, specifically three to six months of business bank statements showing consistent deposit volume and manageable NSF activity. Credit score matters, but a file with strong revenue history and a 590 score can qualify where a bank would not look twice.
Two other signals matter: time in business and average monthly revenue. Most alternative lenders want to see at least six months of operating history and $10,000 or more in average monthly deposits. These aren't hard rules for every lender, but they're the most common thresholds in the Canadian alternative lending space.
The personal guarantee question
Most business lines of credit, bank or alternative, require a personal guarantee from the business owner. This means that if the business defaults, the lender can pursue your personal assets. It's a standard term, not a red flag. Know what you're signing before you sign it.
When a line of credit makes more sense than a term loan
Not every cash flow problem calls for a term loan. The choice between the two depends on what you're actually solving for.
A term loan makes sense when you have a specific, one-time need: buying equipment, funding a renovation, or making a strategic hire. The amount is defined, the purpose is defined, and a fixed repayment schedule is manageable.
A line of credit makes more sense when the need is recurring and unpredictable. A landscaping company in Ontario that invoices in May but carries costs from March through April is a classic example. So is a food distributor waiting 45 days for retailer payments while paying suppliers in 15. The problem isn't a capital gap. It's a timing gap. Lines of credit are built for timing gaps.
Here's the honest version: most small businesses that think they need a term loan actually need a line of credit. A term loan solves a capital problem. A revolving line solves a cash flow problem. Those are different things, and choosing the wrong tool costs you more in the long run.
If you're not sure which fits your situation, the Solid Capital business financing team reviews both options when you apply. The five-minute application covers your full file, not just one product type.
How to apply for a business line of credit in Canada
The application process varies by lender, but the documents required are fairly consistent. Getting these ready before you apply speeds up the review significantly.
Documents most lenders request
Three to six months of business bank statements is the baseline for alternative lenders. Banks will typically add two years of financial statements, a business credit report from Equifax Canada or TransUnion, and a personal tax return. Have these ready before you start the application.
What the review process looks like at Solid Capital
The Solid Capital review process starts with a five-minute application that does not affect your credit score. A Canadian advisor reviews your file personally, typically within one business day. If your file qualifies, you'll receive an offer with the limit, draw terms, and cost structure laid out clearly. Funding for approved files can happen in as little as 24 hours in many cases.
What affects your limit
Limit size is usually tied to average monthly revenue. A business averaging $30,000 a month in deposits might qualify for a line between $15,000 and $45,000 depending on the lender, credit profile, and time in business. Higher revenue, lower NSF activity, and longer operating history all push the limit up. There's no universal formula, but those three factors are the primary levers across most Canadian alternative lenders.
More context on how alternative lenders evaluate your full file: Solid Capital blog.
Frequently Asked Questions
What is a business line of credit in Canada?
A business line of credit is a revolving credit facility that lets you borrow up to a set limit, repay it, and borrow again. Unlike a term loan, you only pay interest on the amount you've actually drawn. It's designed for recurring, short-term cash flow needs rather than one-time capital purchases.
How much can I borrow with a business line of credit?
Limits vary by lender and business profile. Alternative lenders in Canada typically offer lines from $10,000 to $250,000 for small businesses. Limit size is usually based on average monthly revenue, time in business, and overall credit profile. A business averaging $25,000 per month in deposits might qualify for a line in the $15,000 to $50,000 range.
Can I get a business line of credit with bad credit in Canada?
Yes, in many cases. Alternative lenders evaluate cash flow as the primary signal, not just credit score. A business with consistent monthly deposits and a credit score below 650 can qualify where a bank would decline. The limit and cost structure will reflect the credit profile, but approval is possible for many businesses that banks turn away.
What is the difference between a secured and unsecured business line of credit?
A secured line is backed by a business asset, such as accounts receivable, inventory, or real property. An unsecured line requires no collateral, but typically comes with a smaller limit and higher cost. Most Canadian bank lines are secured. Some alternative lenders offer unsecured lines for businesses with strong revenue history.
How quickly can I access funds from a business line of credit?
Once approved, draws from a business line of credit are typically available within one business day, and sometimes same-day. At Solid Capital, the initial review and approval process for qualified files can be completed in as little as 24 hours in many cases. Subsequent draws after approval are faster since the underwriting is already done.
