Managing finances can be one of the most challenging aspects of running any business, and this is particularly true of small and/or young businesses.
One of the keys to success is keeping comfortably within your budget, while still building up a solid credit score. A business line of credit can help to make this happen. In this guide we cover the basics of how to get a business line of credit for Canadian small businesses, including the pros & cons of a line of credit, lines of credit offered by Canada’s major banks, and steps to get your first line of credit.
What is a Business Line of Credit?
A business line of credit is when a lender approves your business for a set limit of credit. As long as you stay within this limit (and follow the terms and conditions of use), you can do whatever you like with the money.
How Does a Business Line of Credit Work?
A business line of credit is very similar to a business credit card. The big difference is that a business credit card can only be used at places that accept credit cards. That’s a lot of places, but nowhere near all companies, especially not from a business perspective. What’s more, even if they do, they may charge extra for it (or raise their prices to cover the charge).
With a business line of credit, your credit is effectively in the form of cash. This gives you much more flexibility in how you use it.
Pros & Cons of a Business Line of Credit
Business lines of credit have two big advantages and one disadvantage. The advantages are that they are a flexible source of credit and that they can help you to build a credit record. The disadvantage is that they can be an expensive way to get credit.
Pro: Flexible Source of Cash
When you have a business line of credit, you have reliable access to funds to use as you wish. The business line of credit stays open for as long as you need it (provided that you behave responsibly), but you can move on from it any time you like.
Pro: Build Your Credit History/Improve Your Credit Score
For new businesses, this can be one of the most compelling advantages of a business line of credit. New businesses have to build up their credit history in much the same way as young adults. For new businesses, however, there is a compelling reason to build up a credit history as quickly as possible. This is that having access to credit can make it massively easier to manage cash-flow effectively.
Con: Expensive Source of Funds
A business line of credit may have a set-up fee. It will very probably have some kind of management fee, charged annually or monthly and it will most definitely charge interest on the credit you use.
Interest rates on business lines of credit can be very variable. If, however, you are running a small business, especially a new one, you can expect to be charged rates at the higher end of the scale. Realistically, you can expect to pay as much for a business line of credit as for a business credit card.
How to Qualify for a Business Line of Credit: 3 Pro Tips
A lot of the tips for qualifying for a business line of credit are the same as the tips for qualifying for credit in general (business or personal). There are, however, some specific points that are worth noting.
Positive business revenue
Lenders may be prepared to accept that there will be times when your outgoings exceed your income. Your business must, however, be able to show that over a year it is revenue-positive. Your lender may want to see revenue figures for more than one year as evidence that your returns are consistent (rather than just lucky).
Detailed business plan (and industry experience)
In simple terms, you will need to convince a potential lender that you know what you are doing. Having a solid track record in your industry can be very helpful. As a minimum, however, you will need a detailed and realistic business plan.
The credibility of a young company often depends on the credibility of its owners. Lenders will therefore expect to see evidence that you are prepared to back your company yourself. After all, if you’re not prepared to put your own money at risk, then why should they risk theirs?
Established companies with a solid credit record are more likely to be accepted purely on their own financial merits. Even here, however, this is not guaranteed. For example, if a company has no meaningful assets, then the owners may still be asked to provide some form of personal guarantee.
Business Lines of Credit Offered by Major Canadian Banks
Here is a quick guide to the business lines of credit offered by some of the major Canadian banks.
WHAT THE LINE OF CREDIT OFFERS
REQUIREMENTS TO QUALIFY
STEPS TO APPLY
BMO currently has five different options for business lines of credit, one of which is denominated in USD. The offers and requirements are variable.
The requirements to qualify vary by product.
Three of the five options require the borrower to be a homeowner.
Call BMO at +1-877-262-5907 or go to BMO Bank of Montreal and request a callback.
Pay interest only on what you use.
CIBC does not disclose exact details of its qualifying requirements.
You can view further information about CIBC’s business lines of credit at CIBC Business Line of Credit
RBC does not disclose exact qualifying requirements
You can view more details of the offer at Royal Business OperatingLine of Credit - RBC
but you need to book an appointment to apply. You can do this in branch or call RBC on +1-888-735-9306
Up to $1M credit
To apply online you must meet the following criteria
“your business borrowing needs do not exceed $50,000
your business is for profit and operates in Canada
you have owned the business for two years or more and are the sole owner or majority owner
you are a Canadian citizen or a landed immigrant and have reached the age of majority in your Province
you have not declared bankruptcy in the past six years
you are not applying for a credit facility that will be used by someone other than yourself, the business customer of business owner”
If you do not meet these criteria, you can discuss your needs with an advisor
If you meet the relevant criteria, you can apply online at
Otherwise you can apply in-branch or call Scotiabank on 1-877-552-5522
TD Canada Trust
Variable credit limits
Floating interest rates
Pay interest only on what you borrow
Range of securitization options
TD Canada Trust does not disclose exact qualifying requirements
You can view information on TD Canada Trust’s offering at Small Business Line of Credit - TD Trust of Canada
You will, however, need to speak to an advisor to be approved for a business line of credit. You can book an appointment from the website, call TD Canada Trust on 1-866-222-3456 or go into a branch
Common Mistakes - Applying for a Business Line of Credit
The common mistakes to avoid in applying for a business line of credit are much the same as the mistakes to avoid in applying for business credit in general and also for consumer credit. Here are the top five:
Not boosting your credit rating beforehand
The moment you incorporate a business, you should be looking at ways to establish and build your credit rating. If you’re still very much in the start-up phase, you’ll probably be leaning heavily on your personal credit rating. This means you should do everything you can to boost that as well.
Not assessing your collateral accurately
First of all, you need to understand what qualifies as collateral. Tangible assets, such as real estate, may be an obvious choice for securitization, but intangible assets also have a value. Secondly, you need to be clear about that value and that is likely to mean getting an independent, professional, valuation.
Not doing your research before applying
First of all, you should think carefully about whether or not a business line of credit is the right credit option for your situation. If it is, you need to look at the different options (potentially) available to you and see which one(s) would suit you best.
Not understanding the qualification requirements
This is arguably a sub-point of failing to do your research, but it’s important enough to be worth mentioning on its own. Many lenders keep their qualification requirements private until you actually contact them to express an interest in applying. Even then, they are likely to tell you the minimum you need to know to fill in the form appropriately. The final appraisal system is often kept entirely secret.
When lenders do provide information on their qualifying requirements for business lines of credit, it is often lengthy, detailed and technical. It is, however, essential that you understand it before you decide whether or not to go ahead with your application.
If you realize that you will not qualify for the product (or that it is not suitable for you) then you will save yourself the effort of a wasted application. If, however, you decide you do want to go ahead with the application, then you need to understand what is expected of you.
Not filling in the application form correctly
On a similar note, the application forms for business lines of credit are also lengthy, detailed and technical. Going through them step-by-step can take up a lot of time. This can be very frustrating given that anyone who runs and SMB probably has, literally, countless other things to do. It is, however, important to make this time since it could save you being unfairly rejected. There are three particularly important points to note.
Supply all requested documentation in the required format.
This sounds like an obvious point, but it can be very easy to get it wrong. For example, if your lender says that they want to see your business plan presented in a specific font at a specific size, then make sure you use that font and that size.
Complete your business details in exactly the same way every time you enter them.
Humans can compensate for slight differences in presentation. Computers are not (yet) nearly so good at it. For example, a human will understand that My Business Limited and My Business Ltd are the same company. A computer algorithm, however, may well assume that they are two distinct companies.
These days, you should work on the assumption that your application is going to go through an algorithmic scoring process, so make sure that you keep all details consistent everywhere they are provided.
Provide reasonable estimates not “best guesstimates”.
In some cases, you may not have accurate figures. If so, it may be fine to put a reasonable estimate (clearly marked as such). It is, however, important to make that estimate as accurate as you possibly can and be prepared to justify it. If you “guesstimate”, at best you’ll look unprofessional and at worst you may look like you're deliberately trying to mislead a potential lender.
Maurice (Moe) Muise learned the ins-and-outs of government while an employee of the Government of Canada in Ottawa for 10 years. His current focus is helping small businesses in Ontario to identify and maximize government grants to grow their business.
Click here to learn more about Moe’s background and how he can help your business.