Business Line of Credit vs Term Loan vs Working Capital in Canada (2026)

Two Canadian businesses can need the exact same dollar amount in 2026 and yet need completely different financing. One is buying a $150,000 piece of equipment it will use for a decade; the other needs $150,000 of breathing room to cover payroll through a slow quarter. Funding the first with a line of credit, or the second with a ten-year term loan, would be a costly mistake. This guide explains how a business line of credit, a term loan, and working capital financing each work, what they cost, who they suit, and how to combine them so each does its job.

The short answer

Use a term loan for a specific, one-time investment you'll repay over years with predictable payments. Use a business line of credit for flexible, reusable working capital — paying interest only on what you draw — to manage cash flow, seasonality, and surprises. "Working capital financing" is the broader category for funding day-to-day operations; a line of credit is the most common form, but it also includes short-term loans, merchant cash advances, and invoice factoring. Most healthy businesses end up using a term loan and a line of credit together. See business loan options or ask Maya to match the right tool to your need.

How each one works

Term loan

A term loan is a lump sum advanced once and repaid over a fixed schedule — commonly one to ten years — through regular principal-and-interest payments. The rate may be fixed or variable, and once it's repaid the facility is closed. Because the payment is predictable and the funds are committed to a known purpose, a term loan is the natural fit for permanent or long-lived investments: an expansion, a renovation, an acquisition, or a large equipment purchase (often handled through dedicated equipment financing).

Business line of credit

A line of credit (LOC) is revolving credit up to an approved limit. You draw funds when you need them, pay interest only on the outstanding balance, and the available room refreshes as you repay. There's no fixed repayment schedule for the principal — you can carry a balance, pay it to zero, and draw again. That flexibility makes a LOC ideal for fluctuating, short-term needs: bridging the gap between paying suppliers and getting paid, covering payroll in a slow month, or stocking up before a busy season.

Working capital financing

"Working capital" simply means the cash that funds everyday operations — inventory, payroll, rent, receivables. Working capital financing is the umbrella term for products that fund those needs. A line of credit is the most common and usually the cheapest, but the category also includes short-term working-capital loans (a smaller lump sum over a shorter term), merchant cash advances (cash against future card sales), and invoice factoring (cash against unpaid invoices). The alternative forms are faster and more flexible on credit, but cost more — reserve them for short, revenue-generating gaps.

Cost structure: what each really costs

The headline interest rate isn't the whole story. Each product charges in a different way, and the cheapest rate isn't always the cheapest outcome.

• Term loan — interest on the full outstanding principal across the whole term. You pay for every dollar from day one until it's repaid, so borrowing more than you need (or for longer than you need) is expensive.
• Line of credit — interest only on the balance you're actually carrying, often at a variable rate. An idle LOC costs little to nothing beyond any annual or standby fee, which is exactly why it's efficient for unpredictable needs.
• Working capital alternatives — merchant cash advances and factoring are usually priced as a factor or fee rather than a simple rate, and the effective cost can be high. Fast and flexible, but expensive if carried too long.

Side-by-side comparison

Qualifying differences

All three look at the same fundamentals — cash flow, credit, time in business, and collateral — but they weight them differently.

Term loan

Underwriting centres on whether your cash flow can carry a fixed payment for years, so lenders dig into multi-year financials and your debt-service coverage ratio. Collateral or a personal guarantee is common, and a longer track record helps.

Line of credit

Lenders focus on the quality and consistency of your revenue and receivables, since the LOC flexes with your operations. Limits are often tied to a percentage of receivables or inventory. A clean operating account and steady cash flow matter more than a single large asset.

Working capital alternatives

These are the most accessible. Merchant cash advances and factoring lean on the strength of your card sales or your invoices rather than your credit score or years in business — which is why newer or thinner-file businesses often qualify when a bank says no.

How to choose

The deciding question is always the same: is the need permanent or temporary? A permanent asset (equipment, a buildout, an acquisition) should be matched with permanent financing — a term loan — so the cost is spread over the asset's life. A temporary or fluctuating need (a cash-flow gap, a seasonal stock-up, an unexpected bill) should be matched with flexible financing — a line of credit — so you only pay for what you use and only while you use it.

Match the duration of the financing to the duration of the need. Funding a long-term asset with short-term credit forces you to refinance under pressure; funding a short-term gap with a long-term loan leaves you paying interest on idle money for years.

Worked example: when a line of credit beats a term loan

A landscaping company has a predictable cash-flow gap every spring: it must buy $60,000 of materials and hire crews in March and April, but the bulk of its invoices aren't paid until June. The shortfall is real, but it's temporary — it reverses within a few months and recurs every year.

Here the line of credit clearly wins: the need is seasonal and self-correcting, so paying interest only during the draw window — and reusing the same facility every spring — is far cheaper than carrying a multi-year loan. Flip the scenario to a one-time $60,000 purchase of a permanent piece of equipment, and the term loan becomes the better tool.

How to combine them

The strongest setups rarely use just one product. A well-structured business often runs a term loan for the long-lived assets (equipment, buildout, acquisition), a line of credit for working capital (the day-to-day swings), and keeps a faster working-capital option in reserve for genuine emergencies. Keeping operating and property financing separate matters too — if you own your premises, that belongs in a commercial mortgage, which you can size with our commercial mortgage calculator, rather than crowding your operating credit.

Structuring this mix well is where a broker earns its keep: each facility should be sized so it does its own job without over-leveraging the others or tripping a lender's covenants.

Frequently asked questions

What is the difference between a line of credit and a term loan?

A term loan is a one-time lump sum repaid on a fixed schedule, best for a specific long-term investment. A line of credit is revolving, reusable credit you draw on as needed and pay interest only on the balance — best for flexible, short-term working-capital needs.

Is a line of credit cheaper than a term loan?

It depends on usage. A LOC charges interest only on what you draw, so for short or fluctuating needs it's usually cheaper. For a large amount borrowed continuously over years, a term loan's lower fixed rate can be the better deal.

What counts as working capital financing?

Any financing that funds day-to-day operations — most commonly a line of credit, but also short-term working-capital loans, merchant cash advances, and invoice factoring.

Can I have both a line of credit and a term loan?

Yes, and many businesses do. A common structure is a term loan for long-lived assets plus a line of credit for cash flow. They serve different purposes and lenders are comfortable with the combination when each is sized to your cash flow.

Which is easier to qualify for?

A line of credit and term loan have similar bars — cash flow, credit, time in business. Working-capital alternatives like merchant cash advances and factoring are generally the most accessible because they lean on sales or invoices rather than credit history.

Not sure which tool fits? We'll structure the right mix and shop multiple lenders for you. Ask Maya for an instant read, see business loan options, or talk to an advisor.