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          4 min read

          What is a Business Line of Credit & How Can I Get One?

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          Develop an understanding of what a business line of credit is and how to apply for one.

          A business line of credit can be helpful in situations where businesses require immediate access to funds.

          Learn more about business lines of credit, how to get one in Canada, and how the Cubeler Business Hub™ helps match SMEs with the best borrowing options for their business needs.

          Register your business today


          What is a Business Line of Credit?

          A business line of credit (or a bank operating loan) is a revolving loan that allows business owners to borrow money regularly on a predetermined amount of credit.

          A business line of credit can help bridge brief cash flow gaps. It can help business owners pay for unexpected day-to-day expenses, such as repairs, payroll, supplies, inventory, or any other business expenses that may arise.


          How Does a Business Line of Credit Work?

          A business line of credit allows you to withdraw funds up to an approved limit, with various repayment options, such as fixed-interest payments on a percentage of the amount used on the limit. Lines of credit often carry variable interest rates and can change at the lender’s discretion.

          The rate of a line of credit can change over time when the Bank of Canada adjusts its overnight rate. The overnight rate is the lowest interest rate a bank can lend or borrow from another bank.

          Rates are broken-down as the lender’s prime rate plus a specified margin. 

          A line of credit is a revolving credit product, similar to a credit card, meaning it will not come to maturity following repayment.

          When the borrower draws a certain amount and pay-off later, they have the right to proceed with another drawdown from the same line of credit.

          In addition, the borrower must minimally pay the monthly interest to avoid a penalty that might imply an increase in the approved interest rate.

          Some line of credit options may require the borrower to pay a registration or administrative fee. Every financial institution has specific terms and conditions.


          Types of Business Lines of Credit

          There are two types of business lines of credit in Canadasecured and unsecured

          Secured Business Line of Credit

          A secured business line of credit requires short-term collateral. Suitable forms of collateral can include your business inventory or accounts receivable. If the borrower defaults on a secured line of credit, the creditors may have the right to repossess and liquidate any or all collateral placed against the line credit.

          Terms and conditions around secured lines of credit tend to have stricter application requirements but can come with a lower interest rate and allows the borrower to have a larger credit line.

          The borrower of a secured line of credit needs to be confident that they can make every monthly payment, as defaulting on the loan can have severe consequences on their business, such as interest rate increases or a negative impact reports to the credit bureau.


          Unsecured Business Line of Credit

          An unsecured business line of credit does not require collateral and relies more on the strength of the borrower's credit profile, a general lien, and a personal guarantee to qualify.  

          This line of credit often comes with a higher interest rate and offers a lower credit limit than a secured credit line. Still, it provides an interest rate lower than most small business loans or credit cards with the same flexibility as a secured credit line. 


          How to Get a Business Line of Credit 

          Like any loan or credit product, a business line of credit requires the applicant to meet specific criteria and submit an application. Below, you'll find a step-by-step guide on how to get a line of credit for your business.


          1. Identify Your Borrowing Needs

          Before applying for a business line of credit, you'll want to assess your financial situation and identify the reason you're borrowing money in the first place.

          Understanding and reason for opening a credit product is a crucial first step, as applying for the wrong credit product can cost you money and time. 

          Are you borrowing to address working capital needs, such as inventory, account receivables, or account payables? Or is it related to purchasing or improving assets, such as equipment purchases or leasehold improvements? 

          This step is critical in ensuring that the line of credit is the solution that best fits the need, as a business loan might be more suitable for specific scenarios requiring borrowed capital.

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          2. Assess Your Financial Situation

          Applicants should know their business's financial standing, including their credit score and the amount of debt they owe if any.

          Start-ups and new businesses may face difficulties receiving a line of credit as some evidence of your business financing history are required to cover losses on past operations and for companies with business expenses that will only lead to profits. 

          Typically, the stronger the applicant's credit profile, the better the terms and rates available to the borrower.


          3. Prepare the Required Documents 

          Creditor will assess the creditworthiness, the capacity to repay and sometimes the personal net worth of the owner. Be ready to provide relevant documentation when prompted, including (but not limited to):  

          • Your business license

          • Tax returns

          • Two to three months of bank statements

          • A business bank account

          • Standard financial documents such as account receivable, accounts payable, cash flow, etc.

          The financial institution that offers a line of credit may have its own terms and conditions, so be aware of their requirements before applying.

          Be prepared to discuss the financial situation of your business with the lender.


          4. Submit Your Application

          After comparing rates and ensuring you’ve met the qualifications of the line of credit option you’d like, submit your application and wait for a response from the lender.

          Alternatively, you can apply for financing using the Cubeler Business Hub™. This ecosystem allows business owners who have connected their accounting software to view pre-approved financing options, including lines of credit and business loans.


          Final Thoughts: Small Business Line of Credit 

          A business line of credit can act as suitable financial leverage for SMEs in Canada. Using one effectively can help your business prosper.

          However, it’s important to note this borrowing tool isn’t versatile to all businesses and their needs. Different situations may call for different products.

          Knowing the difference between products is crucial, as selecting the wrong type of financing can hinder the progress of your business or even cause you to end operations.

          Financial literacy is key here. Understanding what products are available and how they work, along with their advantages and drawbacks can all greatly impact your business, both positively and negatively.

          Register your business today


          FAQs About Business Lines of Credit

          Can a new business get a line of credit?

          It depends. Usually, receiving any loan can be difficult for new businesses or startups. However, more and more lenders are offering support to new SMEs with typically lower loan amounts.


          Does a business line of credit affect my personal credit score?

          A business line of credit will only affect your personal credit score if you open a credit product in your name. You and your business have separate credit scores.


          Is a business loan better than a business line of credit?

          Business loans offer a lump sum of capital and do not replenish as you make payments. On the other hand, lines of credit give business owners more flexibility. The two borrowing products are different from one another and can be better suited to different business needs depending on the circumstances.


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