Business Term Loan vs Business Line of Credit

A business term loan gives you one lump sum that you repay on a set schedule. A business line of credit gives you a pool of money you can draw from, repay, and draw from again. If your need is a single, identifiable purchase — equipment, a renovation, a vehicle, a fit-out — a term loan usually fits better. If your need is timing — invoices that land later than your bills, seasonal swings, a gap you can't predict — a line of credit usually fits better. That is the short answer. The rest of this guide is the honest detail behind it.

One thing up front: LoanGoose is a loan matching and comparison service, not a lender. We don't make loans, set rates, or make credit decisions. What follows is general explanation, and your own numbers will depend on your business, your industry, and the lender you're talking to.

How a business term loan works

A term loan is closed-end borrowing. You and the lender agree on an amount, a term, and a repayment schedule. The money arrives once. Each payment chips down the balance, and when the schedule ends, the loan is finished and the relationship on that facility is done.

Because the lender is committing the full amount up front, term loans tend to be underwritten carefully. Expect questions about revenue, contracts, order books, and exactly what the money buys. If the loan funds an asset, the lender can often take security against that asset, which can change what you're offered. The trade-off is real: you pay interest on the whole lump sum from the day it lands, even if you don't need all of it for months. If you're funding a purchase you've already planned, that's a fair trade. If you're borrowing "just in case," you're paying for money to sit in an account.

Term loans are also the better structure when you want a payment you can budget around. The number doesn't move when the prime rate moves. That predictability is worth something when you're planning hiring or a lease.

How a business line of credit works

A line of credit is revolving. The lender approves a limit, you draw what you need, and interest is charged on the outstanding balance rather than the full limit. As you repay, the room comes back. That is why a line of credit is the usual tool for working capital: you buy inventory in March, get paid in June, and the cost of borrowing tracks the gap rather than the whole year.

The catch is on the other side of the paperwork. Many business lines of credit are repayable on demand or reviewed on a set schedule, which means the limit and the terms can change. If your operating cash quietly depends on that room, a reduction hurts. Read the terms you're actually given rather than the summary a salesperson gives you.

There's a behavioural risk too. A line of credit that never gets paid down is a term loan with worse discipline. You keep paying interest and the principal never retires. If you find yourself rolling the same balance for years, that's a signal the structure doesn't match the need.

Term loan vs line of credit, side by side

What lenders look at — including your personal credit

For a small Canadian business, lenders rarely look at the business alone. They look at the owner. That often means a personal credit check, and it frequently means signing personally to back the debt, so the business's obligations become yours if the business can't pay. Your personal credit report is available free from each of Canada's two national bureaus, Equifax Canada and TransUnion Canada, and it's worth pulling both before you apply so you know what a lender sees — see FCAC — credit reports and scores for how to get them.

If you're asked to secure business borrowing against your home, that stops being only a business decision. Federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44% and apply a qualifying stress-test rate above the contract rate, under OSFI Guideline B-20 — residential mortgage underwriting. 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%, as outlined in FCAC — mortgages. Those rules protect the household, but they also mean an owner who pledges the house may have no room left to borrow later. Decide that one with a licensed professional, not with a lender's pre-filled form.

What it costs, and the ceiling the law sets

Business loan pricing is negotiated, not posted. It moves with the lender's cost of funds, which is why variable-rate borrowing tends to follow the policy rate that the Bank of Canada — rates publishes. Rather than chase a headline number, read total cost: interest, any fee to set up the facility, any fee to renew or discharge it, and what happens if you pay early. A slightly higher rate with no renewal fee can beat a lower one that charges you every year.

There is an outer limit on how expensive borrowing can legally get. The Criminal Code s. 347 — criminal rate of interest is 35% per year, calculated by a defined method that aggregates interest and certain charges. That ceiling doesn't make expensive borrowing clever. It just marks where the line is.

A note on very short-term products, because they get pitched to business owners: a payday loan is generally up to $1,500 for a term of 62 days or less, and it is a consumer product rather than a tool for financing a business, as FCAC — payday loans explains. Where a province operates a licensed payday lending regime, federal regulations cap the cost of borrowing at $14 per $100 advanced, and a province may set a lower cap, in which case the lower figure applies. Quebec does not license payday lending, which effectively prohibits the model there. For a business gap, a working capital conversation is the more sensible route.

Which one fits your situation

• You're buying a specific asset with a clear payback period — a term loan.
• Your gap is recurring or hard to predict — a line of credit.
• You want a payment that doesn't move when rates do — a term loan.
• You want to pay interest only on what you actually use — a line of credit.
• You have a project with a start and an end — a term loan.
• You want room that stays open and renews as you repay — a line of credit.
• You're genuinely unsure — ask the lender to quote both, and compare total cost over the same period.

Before you apply anywhere, read FCAC — debt and borrowing and FCAC — personal loans. They're written for consumers rather than businesses, but the questions they suggest are the right ones to ask any lender.

When neither is a good idea

If the business can't cover the payment out of cash flow, no structure fixes that. Borrowing to cover a chronic shortfall usually moves the problem forward and adds interest to it. Same if the money is for something with no clear return, or if you'd have to pledge assets to a level that leaves you no cushion at all.

If you're already behind on debts or weighing insolvency, the order of operations changes. Only a licensed insolvency trustee can administer a consumer proposal or bankruptcy, and trustees are regulated by the Office of the Superintendent of Bankruptcy Canada. Talk to a licensed professional before signing anything in that situation. This article is general information, not financial or legal advice.

If something goes wrong

If you have a complaint about a federally regulated financial institution, consumer complaints are handled by the FCAC — complaints process. Provinces license and supervise most other lenders, and each has a consumer protection office — the list is at FCAC — provincial and territorial regulators.

LoanGoose is a loan matching and comparison service, not a lender. The lowest rates are only available to the most qualified applicants.