What is a Line of Credit?
- Bav Malhi
- 22 hours ago
- 5 min read
A Line of Credit (LOC) helps businesses manage uneven cash flow by providing flexible access to working capital. Instead of receiving a lump-sum loan, a business is approved for a credit limit and can draw funds when needed. Here, interest is charged only on the amount used, and as funds are repaid, the credit becomes available again for use.
What is a Line of Credit used for?
A Line of Credit is commonly used to support short-term working capital needs, particularly when cash inflows and outflows don’t align.
Businesses often use it for:
Bridging the gap between invoices issued and payments received
Purchasing inventory or materials ahead of contracts
Covering day-to-day operating expenses
Managing seasonal or cyclical cash flow fluctuations
When used effectively, a Line of Credit helps keep operations running smoothly even when cash timing is uneven.
Types of lines of credit comparison
Lines of Credit generally fall into two categories depending on whether collateral is provided to the lender. LOCs can be secured against assets like receivables or inventory (usually lower rates) or unsecured (typically higher rates). The key difference is whether the credit facility is backed by business assets used as collateral.
Secured Line of Credit | Unsecured Line of Credit |
Backed by collateral such as receivables, inventory, equipment, or real estate | Not backed by specific collateral |
Lower interest rates due to reduced lender risk | Higher interest rates due to higher lender risk |
Typically allows larger credit limits | Usually smaller credit limits |
Common for asset-heavy businesses like trucking, construction, manufacturing, wholesale, and logistics | More common for professional services, consulting, tech firms, and smaller service businesses |
Approval often based on asset values and operating performance | Approval largely based on credit strength, financial history, and cash flow |
Many businesses qualify for secured operating lines because they already have assets within their operations that lenders can lend against.
Similarly, unsecured lines of credit are often used by businesses with strong financial performance or established credit profiles that may not need to pledge specific assets as collateral.
How does a line of credit work?
Think of a business Line of Credit as a pool of capital your business can access when needed.
Instead of receiving a lump-sum loan, the lender approves a maximum limit — for example $500,000 or $2 million, and the business can draw funds from it at any time.
Businesses commonly use a LOC to:
Cover payroll during slower periods
Purchase inventory before peak seasons
Manage the gap between payables and receivables
Handle unexpected operating expenses
Unlike a term loan, working capital financing offers flexibility. You only pay interest on the amount drawn, and once funds are repaid, they become available again.
How Can I Use a Line of Credit?
Rather than treating it as a one-time loan, businesses should access it with clear objectives and disciplined financial management to maximize its benefits.
Identify the purpose of the credit line Determine why the funds are needed—whether to manage seasonal fluctuations, cover short-term operational expenses, or support near-term growth opportunities.
Borrow only what is necessary Draw funds with a clear plan in mind and use them prudently to ensure the credit line supports the business’s operational goals.
Track usage and repayments carefully Maintain accurate records of how funds are used and monitor repayment schedules to manage the facility efficiently.
Monitor interest and repayment terms
Keep track of interest rates and repayment requirements to minimize borrowing costs and repay balances effectively.
Use funds for revenue-generating activities
Whenever possible, deploy the credit line toward activities that generate revenue, helping the business repay the borrowed amount while supporting growth.
Do’s and Don’ts of working with a line of credit
Do’s
Use it to manage short-term cash flow gaps (receivables vs. payables)
Borrow only what the business needs, not the full limit
Use funds for revenue-generating activities or operational needs
Track usage and repayments carefully
Maintain a buffer in the credit line for unexpected expenses
Don’ts
Don’t treat it as long-term financing for major investments
Avoid consistently maxing out the facility
Don’t ignore interest rate changes or borrowing costs
Don’t overlook fees, covenants, or collateral requirements
Don’t miss payments, as it can impact credit strength and future financing
How to Get a Line of Credit in Canada?
Securing a business Line of Credit involves a few key steps. Being prepared with the right financial information and understanding lender expectations can help streamline the process.
Check your credit profile Review your business and personal credit scores to understand how lenders may assess your application.
Compare lender options
Different lenders offer varying limits, rates, and structures. Evaluating options helps identify the facility best suited to your business needs.
Prepare required documentation
Lenders typically request financial statements, tax returns, business details, and information about assets or receivables.
Submit the application for a business Line of Credit
Once documentation is ready, submit your application and work through the lender’s underwriting process.
Work with an advisor
At Lantern Capital, we help businesses evaluate lender options, structure the appropriate credit facility, and navigate the underwriting process. Our team works with lenders across Canada who understand industry-specific cash flow cycles and can provide operating lines aligned with real business needs.
Conclusion
A Line of Credit can be a valuable financial tool for businesses managing cash flow and short-term operational needs. When used strategically, it provides flexible access to capital that helps businesses navigate fluctuations, cover expenses, and keep operations running smoothly.
If you’re exploring a business operating line of credit or other financing solutions, the team at Lantern Capital can help structure the right facility and connect you with lenders that understand your industry.
Contact us:
📞 1-855-LANT-CAP
FAQs
Line of Credit vs Credit Card — What’s the difference?
Both provide revolving access to funds, but a Line of Credit typically offers higher limits and lower interest rates than most business credit cards. Credit cards are generally used for smaller day-to-day purchases, while Lines of Credit are designed to support working capital and operational cash flow needs.
Difference between Line of Credit vs Personal Loan?
A personal or term loan provides a lumpsum amount that is repaid over a fixed schedule with regular payments. A Line of Credit is more flexible—you can draw funds as needed, repay them, and borrow again up to the approved limit.
What are my payment options for a Line of Credit?
Most Lines of Credit require regular interest payments on the amount used, while the principal can be repaid at any time. As funds are repaid, the credit becomes available again for future use. Payment structures may vary depending on the lender and facility terms.