What a revolving operating limit is, and what it is not
A business line of credit is a revolving facility: an operating limit you draw against, repay, and draw against again without reapplying from scratch each time. Owners commonly use a business line of credit loan to bridge the gap between paying suppliers and collecting from customers, to smooth a seasonal build in inventory, or to cover an expense that will be repaid within a few months.
It is not a lump sum advanced once. Interest is normally charged on the outstanding balance rather than on the whole limit, so the cost of the facility moves with how much room you are actually using. That is the structural difference between a line and a term loan, and it is why the two are often used together rather than treated as alternatives.
Lending in Canada is licensed provincially, so the regulator and the rules differ depending on who is lending to you. A provincially licensed lender answers to a provincial regulator. A federally regulated financial institution answers to federal rules, and complaints about its consumer services go to the Financial Consumer Agency of Canada. Knowing which category you are dealing with is the first useful step in comparing offers.
How a small business line of credit in Canada is assessed
There is no national limit, no published formula and no single ratio that decides the size of an operating line. Every lender sets its own policy, which is why any page that prints a specific dollar figure as "your limit" is guessing. What the assessment generally weighs falls into four groups.
- Repayment capacity. The lender wants evidence that operating cash flow can service the facility through a normal year and through a slow one. Financial statements, interim results, tax filings and bank statements are used to see whether revenue is steady, seasonal or lumpy, and whether margins leave enough room for interest once the rest of the bills are paid.
- The working capital cycle. How long your money is tied up matters as much as how much money there is. A business that pays suppliers in thirty days and collects in sixty needs a different limit than one that collects on delivery, even at the same revenue. Aged receivables, inventory turns and payables terms are the evidence lenders use.
- Collateral and guarantees. An unsecured line may rest on a personal guarantee. A secured line is often tied to a borrowing base, where the available limit is calculated from eligible receivables or inventory on a reporting cycle, with ineligible items excluded from the calculation.
- History and sector. Time in business, the owner's credit history, customer concentration, supplier dependence and how cyclical the industry is all influence both the size of the limit and whether it is offered on an unsecured basis at all.
A lender will usually review both the business file and the owner's personal credit file, because most small operating lines are supported by a personal guarantee. Canada has two national credit reporting bureaus, Equifax Canada and TransUnion Canada, and a lender may pull one or both. A thin or damaged personal file does not automatically end the conversation, but it changes the structure the lender is willing to consider: more collateral, a smaller limit, or a secured facility in place of an unsecured one.
The Government of Canada's business financing guidance sets out the main categories of business financing and the kind of information lenders tend to ask for. It is a reasonable checklist to work through before you start submitting applications, because repeated applications in a short window can themselves become part of the picture a lender sees.
How draws and repayments work
Once the line is open, the mechanics are usually straightforward.
- Draws. You move money out of the limit by transfer, cheque, or an attached card, up to the available room. A draw increases the balance and reduces the room left.
- Interest. Interest accrues on the outstanding balance, typically calculated daily and charged on a monthly cycle. Many business lines are priced as a margin over a published benchmark, which means the cost of a draw moves when the benchmark moves. The rate you are offered depends on the lender's assessment of your file, not on a rate you can look up in advance.
- Repayments. Deposits into the operating account reduce the balance and free up room again. Many facilities are set up so that collections sweep automatically against the line, which keeps interest down but also keeps the limit fully available only when receivables are current.
- Reporting and monitoring. Secured lines tied to receivables or inventory usually require periodic reporting, and the available limit is recalculated from that reporting. Falling behind on reporting can freeze the limit even when the underlying business is healthy.
- Review and demand features. Many business facilities are repayable on demand or are reviewed on a set cycle. A review can change the limit, the rate, the covenant package, or the security required, and it is worth asking at the outset what the review cycle looks like and what triggers it.
The Bank of Canada publishes the policy interest rate, the prime rate, conventional mortgage rates and Government of Canada benchmark bond yields. These are benchmarks, not offers, and no lender is obliged to lend at them. A line priced off a benchmark still carries the lender's own margin, plus any fees disclosed in the agreement.
Comparing the structures side by side
| Structure | How the limit is set | How it is repaid | Best suited to |
|---|---|---|---|
| Unsecured revolving business line | Lender policy, based on cash flow, time in business, owner credit history and a personal guarantee where required | Interest on the balance drawn, usually monthly; principal repaid as cash allows | Short gaps in working capital and expenses repaid within months |
| Secured operating line (receivables or inventory) | A borrowing base formula applied to eligible receivables or inventory, recalculated on a reporting cycle | Collections sweep against the balance; ongoing reporting required | Businesses with predictable invoicing and a steady collection cycle |
| Business credit or charge card | Set at underwriting from the business and owner file | Balance due monthly; any revolving portion carries interest | Small, frequent purchases and short-term float on expenses |
| Term loan | Fixed amount approved once, based on the purpose, cash flow and security | Amortized schedule of blended principal and interest | One-time purchases that produce returns over several years |
| Asset-backed financing | Set against the specific equipment or vehicle being purchased | Fixed schedule matched to the asset's useful life | Equipment, vehicles and other depreciating assets |
When a term loan fits the need better
A revolving line is built for money that comes back. A term loan is built for money that goes out once and earns its return over time. If you are buying a machine, a vehicle, or renovating a space so it can serve more customers, the spending happens now and the benefit arrives over the following years. An amortized term loan matches that pattern, gives you a known payment, and takes the pressure off the operating line.
The practical failure mode with a line of credit is using it to fund a long-term purchase. The balance never fully clears, the interest keeps running, and the room you needed for ordinary working capital is gone. The failure mode on the other side is taking a term loan for a short gap that would have cleared in weeks, which leaves you paying interest on money you no longer need.
Many businesses use both: a line for the operating cycle and a term loan for assets. That combination keeps the operating limit available for its intended purpose and gives the asset purchase a schedule that matches its life.
What the rules do and do not cap
The Criminal Code criminal rate of interest is 35% per year (s. 347). That is a ceiling on the cost of borrowing, not a target, and it says nothing about what any particular business will be offered.
If a business owner pledges a home to support borrowing at a federally regulated lender, different, consumer-facing rules come into play. At federally regulated lenders, a home equity line of credit is generally limited to 65% of appraised property value, with total secured lending usually capped at 80%. Federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44%, and qualify an uninsured mortgage at the greater of the contract rate plus 2 percentage points and 5.25% under OSFI Guideline B-20. Canadian fixed-rate mortgages are compounded semi-annually by law. These rules govern the mortgage side of a secured borrowing arrangement, not a business operating line, but they affect how much room a home can provide.
Payday-style products are a separate world entirely and are not a substitute for working capital. Where a province operates a licensed payday lending regime, the federal Payday Lending Regulations (SOR/2024-114) cap the cost of borrowing at $14 per $100 advanced. Some provinces set a payday cap lower than $14 per $100, and the lower cap applies. A payday loan is generally up to $1,500 for a term of 62 days or less. Quebec does not license payday lending, which effectively prohibits the model there.
Where loanmoose.ca fits
loanmoose.ca is not a lender and does not make credit decisions. We do not set rates, approve applications, or fund anything. Our role is to match and compare, so you can see the structures that fit your situation and deal directly with the lender that sets the terms. The lowest rates are only available to the most qualified applicants.
Where an owner's personal finances are also in difficulty, that is a separate question from business borrowing, and only a licensed insolvency trustee can administer a consumer proposal or bankruptcy. A consumer proposal stays on a credit report for 3 years after completion, or 6 years from filing, whichever comes first, and a first bankruptcy stays on a credit report for 6 years after discharge.
No figure on this page is a quote, an offer, or a promise of terms. Rates, limits, fees and reporting requirements are set by each lender and depend on your own file, so the right answer for your business is the one you get from a lender after an assessment, ideally with the help of a regulated professional adviser for anything significant.