A business line of credit in Canada is a revolving facility where the lender approves a limit, you draw what you need, and interest applies only to the outstanding balance. Because most small business lines are unsecured or lightly secured, lenders assess the owner as closely as the business, which is why a personal guarantee usually forms part of the deal.
A business line of credit in Canada is a revolving facility: the lender approves a limit, you draw only what you need, and interest accrues on the outstanding balance rather than on the full limit. Because most small business lines are unsecured or lightly secured, lenders assess the owner almost as closely as the business — and a personal guarantee is usually part of the arrangement.
What a business line of credit actually is
A line of credit differs from a term loan in three practical ways. It revolves: repay $10,000 against a $50,000 limit and the full $50,000 is available again, which suits businesses with uneven receivables. It is normally a demand facility, meaning the lender can require repayment on demand even when you are current — the limit is not a contract for a fixed term. And pricing is usually quoted as a spread over the lender's prime rate, so your cost moves when the Bank of Canada policy rate moves and lenders reprice their books.
Canadian lenders generally offer two versions. An unsecured line for smaller limits is often approved on the strength of the owner's credit history plus a personal guarantee. A secured line is backed by business assets such as receivables, inventory and equipment, or by a collateral charge on the owner's home, and typically carries lower pricing because the lender's risk is lower. Some lenders pair the line with a business credit card or an overdraft for day-to-day swings.
How lenders assess a small business
Assessment is rarely a single yes-or-no test. Lenders work through a framework — often described as the five Cs — and the personal guarantee sits alongside it as a sixth factor. The table below shows how each piece usually plays out for a small business.
| What lenders assess | Evidence they look for | Why it affects a line of credit |
|---|---|---|
| Character | Personal and business credit history, payment record, years in business | Signals how you behave when cash is tight; a thin or damaged file usually means a lower limit or a secured facility |
| Capacity | Revenue trends, margins, debt-service coverage, receivables turnover | The line is repaid from operating cash flow, so lenders test whether the business generates enough cash to service all of its debt |
| Capital | Owner's equity, retained earnings, how much cash the owner has already invested | Owners with money in the business absorb losses before the lender does |
| Collateral | Receivables, inventory, equipment, real estate, personal assets pledged | Determines whether the line is secured and at what limit; secured facilities usually price lower |
| Conditions | Industry, province, economic cycle, customer concentration | Lenders advance less against volatile revenue or a single dominant customer |
| Guarantees | Personal guarantee, co-signer, additional security | Gives the lender a second route to repayment if the corporation cannot pay |
What matters is the combination, not any single number. A business with strong cash flow but a thin personal credit file may still be approved, just with a smaller limit and a guarantee attached. A business with a long operating history but falling margins may be offered a secured facility instead of an unsecured one. Federally regulated banks also operate under capital and risk rules set by the Office of the Superintendent of Financial Institutions, which is one reason small business credit decisions tend to look conservative next to consumer lending.
Documents and numbers lenders ask for
Most lenders ask for a similar package. Having it ready shortens the process and often improves the offer, because the lender spends less time guessing about your numbers.
- Financial statements — two or three years of year-end statements, plus interim statements for the current year.
- Tax filings — the corporate T2 return and the owner's T1 return with Canada Revenue Agency notices of assessment.
- Working capital detail — accounts receivable and payable aging, inventory levels, and a 12-month cash flow projection.
- Personal information — consent to pull a credit report, a personal net-worth statement, and personal tax documents.
- Security details — a list of equipment, vehicles and real property, with any existing liens or encumbrances noted.
- Guarantee documents — the personal guarantee itself, and any consent the lender requires from a spouse or partner.
Smaller lenders and credit unions may compress this list for a modest limit. Be cautious with products that approve money from a bank statement and a business number alone: those are usually merchant advances or short-term loans rather than a true revolving line, and their cost is measured differently. If you want to see what a draw would cost month to month, a loan payment calculator is a reasonable starting point.
Personal guarantees and co-signers: what you are agreeing to
A personal guarantee is a contractual promise that you will pay the business debt if the business does not. It is not a formality or a character reference. For a small corporation with limited assets, the guarantee is often the main reason the lender approves the file at all — it is lending against your personal balance sheet as much as against the company's.
Three features deserve a careful read. First, is the guarantee limited or unlimited? A limited guarantee caps your exposure at a stated dollar amount, sometimes plus interest and enforcement costs; an unlimited guarantee has no ceiling. Second, is it a continuing guarantee that covers future advances and renewals, or does it apply only to the current facility? Third, what enforcement rights does it give the lender — can it pursue you directly without first realizing on business assets?
Co-signing is a close cousin. When a family member asks you to co-sign a business loan or line, you take on legal responsibility for the debt, and the lender may pursue you without pursuing them first. Under federal rules, lenders regulated by the federal government must give joint borrowers specific information about the debt they are jointly responsible for; the Financial Consumer Agency of Canada explains these disclosure obligations for joint borrowers. Our guide to what a co-signer is covers the wider picture, and if your personal file has problems, read our notes on bad credit loans in Canada before you apply.
What happens when the business cannot pay
A guarantee typically allows the lender to demand payment from the guarantor without first exhausting its remedies against the business. In practice the sequence usually runs like this: the lender calls the line, sets off funds held in business accounts, realizes on any security, then pursues the guarantor for the shortfall, including accrued interest and enforcement costs.
Your personal assets are exposed to the extent of the guarantee — savings, investments, vehicles, and in some cases the family home, depending on what was pledged and on provincial law. Obligations can also survive events owners assume will end them: selling the business, incorporating a new company, or winding up the corporation may not release a continuing guarantee. Provincial limitation periods govern how long a lender has to sue on the debt, and those periods vary by province.
Pricing and cost are set by the lender's own policies, which vary by lender and province, and are bounded by the federal criminal interest rate ceiling of 35% per annum set out in section 347 of the Criminal Code. That ceiling is a backstop, not a benchmark: most business lines price far below it, and the spread you are offered depends on the assessment factors above.
Common mistakes — and who this structure suits
Most problems with business lines of credit trace back to assumptions made at signing rather than to the rate itself.
- Treating a pre-approved limit as permanent. A demand facility can be reduced or called, so avoid funding long-term assets with short-term revolving debt.
- Signing an unlimited guarantee when a capped one was negotiable. Ask what the lender actually needs and get the answer in writing.
- Ignoring the type of guarantee. Continuing, limited and demand guarantees behave very differently when a business is sold or restructured.
- Letting personal credit slide. The owner's credit report is part of the file; the Financial Consumer Agency of Canada explains how credit reports and credit scores are built and how errors are corrected.
- Co-signing for a relative without reading the numbers. If the business cannot service the debt, the obligation lands on you.
- Assuming incorporation removes personal exposure. A personal guarantee bypasses the corporate shield it was meant to provide.
This structure tends to suit businesses with at least one or two years of filed financial statements, predictable receivables, and an owner with a clean personal credit history who can accept a guarantee. It also suits seasonal operations that need to draw and repay repeatedly through the year. It fits less well when the business is pre-revenue, when the owner cannot or will not guarantee, or when the money is for a long-term purchase such as equipment or property — a term loan is usually the better shape for that.
The rules that federally regulated lenders must follow, including what they must disclose before you sign, are summarised by the Financial Consumer Agency of Canada. Read the guarantee wording before you compare the numbers, because the guarantee usually outlives the limit.