Two of the most common business financing products in Canada are the term loan and the business line of credit. They solve different problems, and choosing the wrong one can cost you in interest, fees, and flexibility.
What Is a Business Term Loan?
A term loan gives you a lump sum upfront, which you repay in fixed instalments over a set period, usually one to ten years. Rates may be fixed or variable, and the payment schedule is predictable.
Best for:
- Buying equipment or vehicles
- Renovations or expansion
- Purchasing another business
- Large, one-time investments with a clear return
What Is a Business Line of Credit?
A line of credit gives you a limit you can draw from as needed. You only pay interest on the amount you use, and as you repay, your available credit is restored.
Best for:
- Covering seasonal slowdowns
- Bridging gaps while waiting on client payments
- Buying inventory
- Handling unexpected expenses
Key Differences
Cost structure. Term loans charge interest on the full amount from day one. Lines of credit charge interest only on what you draw, though rates are often higher or variable.
Flexibility. A line of credit is revolving, so you can borrow, repay, and borrow again. A term loan is a one-time disbursement.
Repayment. Term loans have fixed payments. Lines of credit often require interest-only payments on the balance, with flexibility on principal.
Approval requirements. Lenders typically look at revenue, time in business, and credit history for both. Larger term loans may also require collateral or a personal guarantee.
Which One Should You Choose?
Ask yourself three questions:
- Is this a one-time or ongoing need? One-time purchases fit a term loan. Recurring cash flow gaps fit a line of credit.
- Do I know exactly how much I need? If yes, a term loan works. If the amount is uncertain, a line of credit gives breathing room.
- What will generate the return? Match the repayment period to the lifespan of what you’re buying. Don’t finance a ten-year asset on a revolving line, or a short-term gap with a five-year loan.
Using Both Together
Many Canadian businesses use both. A term loan funds a big purchase like a truck or machinery, while a line of credit smooths out day-to-day cash flow. This keeps your working capital free and avoids dipping into your line for long-term investments.
Watch Out For
- Annual fees and renewal fees on lines of credit
- Prepayment penalties on term loans
- Variable rate exposure, since payments can rise when rates do
- Personal guarantees, which put your personal assets at risk
How to Prepare Your Application
Have these ready:
- 6 to 12 months of business bank statements
- Recent financial statements and tax filings
- A clear explanation of how you’ll use the funds
- Details on existing debts
The Bottom Line
Use a term loan for planned, large purchases and a line of credit for flexibility. Compare at least two or three lenders, including banks, credit unions, and online lenders, and look at the total cost of borrowing, not just the advertised rate.
This article is general information only and not financial advice. Confirm current terms with your lender.