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Business Line of Credit

Getting a business line of credit can significantly improve your cash flow and help you grow your business. It comes in handy when you need to make large purchases or pay for an unexpected expense but don’t want to use up all your personal funds.

This type of credit is a predefined loan limit that provides short-term financial solutions to businesses if used responsibly. You can secure one if you have a good track record as a business owner, are self-employed and have a steady income stream. Banks, independent institutions, and online lenders such as CIBC, Clearco, and Meridian provide the services.

Finding a provider might seem arduous if you don’t know where to look. But rest assured, getting a business line of credit in Canada is relatively straightforward. This article will walk you through the steps involved in obtaining this type of loan from a bank or other lender.

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What is a Business Line of Credit?

A line of credit is a flexible financial agreement with a predefined loan limit, accessible at any time by the borrower. It is ‘revolving’ because the borrower can access funds if the maximum amount has not been withdrawn. The good part is that only the used part of the fund accrues interest, not the entire fund.

A business line of credit is considered convenient, practical, and valuable because of its flexible options. Business owners can draw capital in small loans or up to their predefined limit. Interestingly, they are only required to pay interest on the amount withdrawn, not the unused balance.

Is a Business Line of Credit a Good Option for Small Businesses?

Yes, it is. Small businesses form the bedrock of an economy and often finance their businesses with loans. Whether the goal is to start a small business, expand it or make investments, a business line of credit is a valuable loan tool.

Although many enterprises often use it with other business funding platforms, it is an option to meet short-term business needs. A business line of credit (BLOC) is a viable option that facilitates the achievement of long-term business goals if well used.

Consider it a knight in shining armour, which you can call on to save you from an emergency crisis. A BLOC offers better repayment options than traditional loans and other business credit cards. It could be a recipe for success if used responsibly but getting a bad line of credit is not impossible.

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The Uses of a Business Line of Credit

You can see a line of credit as a revolving loan with different uses. It is a viable option for financial aid for small businesses. Some of the practical applications are:

Fulfilling Inventory Demands

Fulfilling purchase orders is one of the uses of business line credit. There are times when enterprises face an upsurge in order, but they lack the cash equivalents to fill them. In such a case, a BLOC helps to fill the inventory demands.

  • Immediate need: mechanical, technological, and otherwise issues that could cause a break in business operations or affect it in other ways can be easily solved with a BLOC. It is a good option for funding if an issue requires immediate financial attention. The ability to satisfy that immediate need facilitates long-term results and success.
  • Financial constraints: if a business experiences a dip in cash flow, the business owner can seek a BLOC to sort things out. An example is how business closures during the coronavirus pandemic caused a dip in cash flow and purchases. Whether the financial constraint was caused by a seasonal dip or other factors, a business LOC is a tool to resolve it.
  • Business expansion: Finance can be a concern if you want to expand your business. A BLOC can be applied upfront for business expansion and overall success.

How to Apply for a Business Line of Credit

Applying for a business line of credit is not rocket science. The step-by-step approaches are broken down below:

  • Seek out lenders: The first step toward applying for a line of credit is seeking a lender. Find different lenders and compare their loan limits, interest rate, etc.
  • Make an option: after comparing and contrasting lenders, settle for the one that best fits your business needs. A line of credit is known to offer flexible options, but not all lenders will satisfy your requirements.
  • Get your paperwork ready: Ensure to have the paperwork required ready and in order. Update any outdated documents. Essential information like proof of bank account, business permit, tax return of the business, cash flow history, etc. may be needed for the application.
  • Proceed to apply: now that you have prepared your documents, move on to apply. Most applications are currently made online, so exercise caution while filling out the application. Upload the required file format, and include relevant and up-to-date contact information, then submit.
  • Await the application outcome: the last step of the application process is awaiting the result. The duration varies from one lender to another; some operate a swifter response rate than others. If your waiting time is too long and giving you concerns, reach out to them directly and enquire about the standard waiting period.

Note: Lenders are different, and the requirements of one may vary from another.

Where Can I Get a Business Line of Credit?

Several financial institutions focus on providing this revolving loan to businesses. Some notable providers include online lenders, banks, and independent institutions. Below is some information on financial institutions that offer a business line of credit:

  • Meridian: This regulated financial industry in Ontario offers quality financial services like personal banking, financial counselling, and business banking. Meridian business banking services include accounts, credit cards, Loans and lines of credit. They also offer different business solutions and resources, financing and investing options to help SMBs scale effortlessly. It operates a 100% online security protocol that ensures funds are safe.
  • Loop: A business banking platform that provides financial support to Canadian e-commerce. They provide a range of services focusing on small businesses and e-commerce. Loop is committed to ensuring the safety of funds.
  • Canadian Imperial Bank of Commerce (CIBC):  this is a leading North American financial institution committed to offering quality and client-driven personal, commercial, and business banking services. They offer business lines of credit options that are friendly to both existing businesses and start-ups.
  • Smarter Loans: This is a provider of simple and fast financial aid for Canadians. They are top-rated and reputable providers of expert-reviewed loans to businesses.
  • Clearco: A finance brand that offers business financing solutions for small or medium-sized Canadian businesses.

Note: For new businesses to secure unsecured loans, their owners may need good personal credit. An established relationship between the lender and the applicant could also help ease the processing of small loans.

A Question Guide to Compare Business Line of Credit Options

The answers to these questions can help you make wiser and safer decisions. Some of the questions are:

  • Does my business need this? It’s important to borrow for business based on the need. Borrowing just because you can, is not a good idea.
  • How much can I borrow? Lenders offer varying fund limits. Factors like your business credit history, requested amount, assets and liabilities, cash flow, etc., are considered to make this decision.
  • Can my business afford it? You are not under any duress to exhaust your credit limit. If the amount your business can afford is less than the offered limit, stick to using what is affordable. The good news is that you don’t get to pay interest on the fund you didn’t use, and you can always reuse it after paying up.
  • Are there other costs? Check whether or not there are other costs aside from the interest rate. That will help you make a safer choice.
  • What are the repayment options? Repayment options are usually flexible, but it’s better to be sure. Ask if you can pay up your balance at once, should you decide to.

Constraints of Business Line of Credit

A topmost advantage of a BLOC is that it offers favourable loan and payment options. One advantage is that you can borrow a smaller amount without paying interest on the amount you don’t utilize. However, it has some constraints, and borrowers should exercise caution when drawing a loan as a line of credit.

  • Though the service provided by LOC and credit cards are similar, the regulatory protection is not the same. Exceeding the pay period and exceeding the predefined limit of LOC can attract serious consequences.
  • LOCs are mostly Unsecured loans and often require a higher interest rate. An unsecured loan means no collateral to back it.
  • There is no fixed interest rate for LOCs. The rate varies among lenders and should be enquired about before an application is made. It doesn’t necessarily mean you’d get one for the same rate if you know someone who got a LOC for a particular interest rate.
  • Using a business line of credit irresponsibly can negatively impact a borrower’s credit. A lower credit score can lead to expensive purchases that are difficult to achieve and could lead to paying higher interest rates.
  • An open-end credit like LOC can result in unnecessary spending, which further attracts the inability to pay back loans.
  • The market is not predictable; thus, lenders reserve the demand for immediate payment of a LOC without forewarning. This impromptu notification could cause a setback to a business solely dependent on it. Businesses should entertain such likelihood to avoid putting their eggs in one basket.
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Common Types of Business Line of Credit

Typically, a BLOC can either be secured or unsecured.

  • A secured business line of credit requires using an asset as collateral. Borrowers are not often required to pledge capital assets since a LOC is a short-term loan. Regardless of the acceptable collateral pledged, if the borrower can’t meet the payment agreement, the lender claims the collateral and liquidates it to pay off the line balance.
  • On the other hand, an unsecured BLOC does not require the pledging of assets as collateral. Note this type of LOC requires positive business history and a higher credit score. In addition, it often offers smaller credit lines, and the interest rate may be higher than the secured type.
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How Does a Business Line of Credit Work?

After a business owner applies for a business line of credit and has met all the requirements, access is given to a predefined amount of funds for use. A monthly statement of use of the fund is issued to the borrower. That statement of the line will show the line used so far and the interest rate. LOC demands interest on only the used fund.

Once payment for the lines has been made by the borrower before reaching the credit limit, access is still given to the unused fund. The payment plan varies from lender to lender. It could be weekly, monthly, or otherwise.

Aside from the interest charges, it is not rare for lenders to charge annual fees. Transaction fees may also apply to businesses that access it frequently.

Responsible Ways of Using a Business Line of Credit

Despite the flexibility and convenience the BLOC offers, it is still pertinent to note that irresponsible use can cost you a lot in the long run. Here are some cautions to take against losing your business to debt:

  • Borrow based on need only: it can be tempting to borrow more than your business needs, especially if the offered credit limit is more. Think twice before doing so, as that could lead your business into a serious financial crisis.
  • Use what your business can afford: It is easy to borrow more than your business can afford. Especially if your credit limit allows you more. Borrow what your business can afford, and endeavour to pay more than the stipulated minimum to reduce your outstanding balance. That way, you get to pay up earlier than the deadline.
  • Don’t delay payment: interest rates will keep rising when a balance is left unpaid. Delay in payment also prolongs your debt term, which could harm your credit profile.
  • Don’t fund operation loss: It’s not advisable to cover operation loss with a business line of credit. That approach makes it hard to repay your line, even though it initially seems like a good idea.

Business Line of Credit Final Thoughts

Business Line of Credit is a flexible and valuable tool that can fuel the success of a business and other profit-based enterprises. For a positive outcome, use the fund responsibly.

In addition, resist the urge to borrow more than your business needs or can afford. Before making a final decision, it is essential to compare and contrast the options of different lenders.

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Offers shown here are from third-party advertisers. We are not an agent, representative, or broker of any advertiser, and we don’t endorse or recommend any particular offer. Information is provided by the advertiser and is shown without any representation or warranty from us as to its accuracy or applicability. Each offer is subject to the advertiser’s review, approval, and terms. We receive compensation from companies whose offers are shown here, and that may impact how and where offers appear (and in what order). We don’t include all products or offers out there, but we hope what you see will give you some great options.

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September 21, 2022
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FAQs about Business Line of Credit

Who can offer a BLOC?

Banks, independent institutions, and Online lenders can render a business line of credit services.

How does the business line of credit affect my credit score?

After applying for a BLOC, the lender will perform a background credit check and a deep inquiry into your credit report. This can negatively impact your credit score in the short term. Using more than 30% of the borrowing limit can also result in your credit score dropping.

When should I consider seeking a BLOC?

Managing the day-to-day short-term capital needs of your business requires access to funds. Also, when you need to cover an unexpected cost or desire to expand your business.

Can I get a business line of credit to start a business?

Most lenders require borrowers to meet a minimum requirement that start-ups may not meet. However, a few lenders are willing to give a business loan to start-ups.

Why is it so hard to get a BLOC for a start-up?

Most lenders take calculated risks in giving out a business loan. Factors like the business's financial stability are considered, but a start-up has no such established financial record.

Can I pay off my business line of credit early?

Yes, you can. That is a good idea but be sure to discuss the prepayment option with your lender. That saves you from paying an unplanned prepayment penalty (if any).

What is the difference between a BLOC and a personal line of credit?

A difference between the two lines of credit is that the business line of credit deals with business needs. However, a personal line of credit concerns an individual.

Is a BLOC different from a business loan?

Yes, it is. One difference is that a BLOC allows you to repay and borrow when needed but with a predefined fund limit. A business loan, however, does not support this.

Can I use a business line of credit for personal use?

No, you cannot. There is no doubt that some business owners do this, which can lead to problems with harsh consequences if caught.

What should I consider before applying for a BLOC?

Before applying for a business line of credit, understand the eligibility requirements, such as interest rate, loan conditions, and fees. Compare and consider your business, budget, and cash flow to decide if it is a wise step.

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