Working capital in Canada: line of credit or term loan?

For most Canadian businesses the answer is: a line of credit for working capital, a term loan for assets — and the requests that get refused are usually the ones that confuse the two. An operating line exists to bridge the timing gap between paying suppliers and collecting from customers; it is margined against receivables and inventory and expected to revolve. A term loan exists to buy things with a useful life, amortized to match. This guide covers how Canadian lenders actually margin operating lines, what the four main working-capital options cost in 2026, what the business plan has to show for a working-capital request, and the three reasons those requests get declined — starting with the most common one: asking the bank to fund operating losses.

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

A line of credit funds short-term timing gaps in receivables and inventory; a term loan funds asset purchases. The distinction is not stylistic — it drives how each product is secured, priced, and reviewed.

An operating line of credit is revolving: you draw, repay, and draw again as the cash-conversion cycle turns. It is secured by the current assets it finances — accounts receivable and inventory — and the amount you can draw is tied to those assets through margining (covered below). Critically, most operating lines in Canada are demand loans, reviewed annually: the lender can require repayment at any time, and the facility comes up for renewal each year against your latest financial statements.

A term loan advances a fixed amount, repaid on a schedule over a set term, secured by the asset it bought. The lender matches the amortization to the asset's useful life — equipment over five to twelve years, real property up to twenty-five. The use-of-funds section of the plan is what proves that match.

The practical rule: if the cash comes back within one operating cycle, it belongs on the line. If it pays back over years, it belongs on a term loan. Businesses that put long-term purchases on the operating line burn the margin room they need for day-to-day operations — and lenders notice, because it is one of the standard refusal patterns.

How much can I draw against receivables and inventory?

The Canadian margining norm is 75% of accounts receivable under 90 days plus 50% of inventory — RBC, Canadian Western Bank, and BDC all cite these ratios. Receivables older than 90 days are excluded from the calculation entirely, on the logic that an invoice that has gone unpaid for three months is no longer reliable collateral.

How the margin is administered depends on size:

• Businesses with roughly $1 million or more in receivables typically get a margined line: the borrowing base is recalculated monthly from an aged receivables listing and inventory report the borrower submits, and the available draw moves with it.
• Smaller businesses usually get a fixed, unmargined line — a set limit that does not float with receivables, secured instead by equipment or property (often including personal assets).

A worked example: computing the borrowing base

Suppose a distributor carries $500,000 in accounts receivable, of which $80,000 is more than 90 days old, plus $200,000 of inventory:

Component	Balance	Margin rate	Lendable value
A/R under 90 days	$420,000	75%	$315,000
A/R over 90 days	$80,000	0%	$0
Inventory	$200,000	50%	$100,000
Borrowing base			$415,000

The available draw is the lower of the borrowing base and the authorized limit. If the limit is $500,000, this business can draw $415,000 — not $500,000. If it has already drawn $415,000 and a $100,000 customer slips past 90 days, the base drops to $340,000 and the account is out of margin: the lender can demand an immediate paydown of the excess. That mechanic — not the interest rate — is the real risk of an operating line, and it is why the cash-flow projections behind a working-capital request need to model the borrowing base through the year, not just the peak need.

What are the working-capital options in Canada, and what do they cost?

Four instruments cover most of the market, and they sort cleanly by cost and speed:

Option	Cost (2026)	Margining	Structure
Bank operating line	~11% avg	75% A/R under 90 days + 50% inventory	Demand loan; annual review
BDC Working Capital Loan	Higher than LOC	Usually unsecured	Flexible term
CSBFP working-capital LOC	Cap prime+5%	$150K limit	Working capital only
Fintech / asset-based	Highest	Up to 80% A/R / 50% inventory	Fast; revolving

Some context on each:

• Bank operating line. The default instrument. Canadian SMEs paid an average of about 11% on lines of credit in 2023 (Statistics Canada / ISED survey data), against roughly 9% on term loans the same year — the line prices where it does because it is secured by receivables and inventory and repriced annually. Cheapest revolving money available, but demand-basis and margin-managed.
• BDC Working Capital Loan. A term loan for working capital, usually unsecured, priced above a bank operating line. Its use case is permanent working capital — funding a lasting step-up in receivables and inventory driven by growth — where a revolving line would otherwise sit permanently drawn. BDC structures repayment flexibly and does not margin the facility monthly.
• CSBFP working-capital financing. The government loss-sharing program covers working capital two ways since July 2022, with the line-of-credit rate capped at prime + 5%. Details in the next section, and program mechanics in our CSBFP business plan guide.
• Fintech and asset-based lenders. The aggressive end of the market: advances of up to 80% of receivables and 50% of inventory, funded in days rather than weeks. The trade is cost — these facilities price well above bank paper — but for a business that is out of margin at its bank or growing faster than its line, the higher advance rate against the same assets is sometimes the only path. Below this tier sit merchant cash advances, which are a different and far more expensive product — we treat them separately in merchant cash advance vs. loan, and they belong at the bottom of the list, not the top.

Can the CSBFP finance working capital?

Yes, through two stacking routes — a fact many borrowers (and some bankers) still miss, because working capital only became eligible with the July 2022 amendments.

1. A dedicated CSBFP line of credit of up to $150,000, usable for working capital costs only, with the interest rate capped at the lender's prime + 5%.
2. Up to $150,000 of working capital inside the CSBFP term loan, within the $500,000 sublimit that governs non-real-property costs (equipment, leaseholds, intangibles, and working capital combined).

The two are additive: the $150,000 line of credit sits over and above the term-loan allowance. Pricing is capped, and the 85% federal loss-sharing widens the lender's risk appetite at the margin — but the loan is still made and underwritten by a bank or credit union on its own criteria. A working-capital request that would fail conventional underwriting because it is funding losses will fail under the CSBFP too.

Why do working-capital requests get refused?

Three patterns account for most declines, and the first is by far the most common:

1. The request is funding operating losses, not growth. This is the refusal reason lenders cite most. Working capital finances a timing gap — cash out to suppliers before cash in from customers. When the statements show the business losing money, a working-capital loan is not bridging a gap; it is financing a deficit, and the lender knows the money will not come back through the operating cycle. No structure fixes this. A business in this position needs a turnaround story with evidence, not a bigger line.
2. The line of credit is being used for long-term purchases. Equipment or a build-out drawn on the operating line locks up the margin room the business needs for operations, and it mismatches a demand facility against a multi-year asset. At annual review, a line that never revolves — permanently drawn near its limit — reads as disguised term debt, and lenders respond by converting it, reducing it, or declining the increase.
3. The business is out of margin. Drawn balance above the borrowing base, usually because receivables aged past 90 days or inventory was sold down. Repeated margin calls are a credit-quality signal in themselves, and they surface exactly when the business can least absorb a demand for paydown.

The practical rule that falls out of all three: request working capital only for growth or timing gaps, and size the request to the cash-conversion cycle — the days from paying for inventory to collecting the receivable. A number derived from that cycle is defensible; a round number is not.

What does the business plan have to show for a working-capital request?

Three things — and they are different from what an asset purchase requires.

• The cash-conversion cycle. Days inventory on hand, plus days sales outstanding, minus days payables outstanding. This is the arithmetic that turns "we need $200,000" into "sales of $2.4M with a 45-day conversion cycle ties up roughly $300,000 in the cycle; the line covers the seasonal peak of that."
• Seasonality. A monthly cash-flow projection that shows when the line draws up and — just as important — when it pays down. Lenders expect an operating line to touch zero or near it at some point in the year; a projection that never revolves is a red flag, not a financing plan. Our guide to cash-flow projections for Canadian business loans covers the build.
• The A/R aging. An aged listing that shows the receivables are collectible and current. Since availability is margined at 75% of receivables under 90 days, the aging is effectively the collateral schedule — a book with 20% of it past 90 days supports a much smaller line than the headline A/R figure suggests.

Contrast that with an asset purchase, where the plan needs a clear asset justification and a useful-life match: what the asset does for revenue or cost, and an amortization request that matches how long it lasts. Working-capital requests fail when they are written like asset requests — a lump sum with a purpose line that says "general working capital." The underwriter cannot margin a sentence.

This is the part of the file where preparation shows. Bridge Note, a Canadian business plan service that writes lender-ready plans for BDC, CSBFP, and big-bank loan applications, builds working-capital requests this way as standard practice: the ask sized to the cash-conversion cycle, the monthly projection showing the line revolving, and the aging attached — so the underwriter is checking arithmetic, not guessing at intent.

The bottom line

Match the money to the gap. A line of credit funds receivable and inventory timing and should revolve; a term loan funds assets and should amortize with them. Expect availability of about 75% of receivables under 90 days plus 50% of inventory, know whether your line is margined monthly or fixed, and remember that most lines are demand loans reviewed annually. On cost, the ladder runs from the bank operating line (~11% average) through BDC's usually-unsecured Working Capital Loan and the CSBFP's capped prime+5% line, up to fintech asset-based facilities — fastest and most expensive. And before asking, apply the lender's own test: is this funding growth and timing, or losses? If the honest answer is losses, no working-capital product fixes the underlying problem, and the plan needs to address the business before it addresses the financing.

Frequently asked questions

How much of my line of credit can I actually draw against receivables?

The standard Canadian margining formula is 75% of accounts receivable under 90 days plus 50% of inventory — RBC, Canadian Western Bank, and BDC all cite these ratios. Receivables older than 90 days are excluded. A business with $500,000 in receivables ($80,000 of it over 90 days) plus $200,000 in inventory has a borrowing base of about $415,000, and the available draw is the lower of that base and the authorized limit. Businesses with roughly $1M+ in receivables report a borrowing base monthly and availability moves with it; smaller businesses typically get a fixed limit secured by equipment or property.

Why did the bank refuse my working-capital request but approve equipment?

Equipment is self-justifying: clear purpose, registrable security, a useful life to match the amortization to. Working capital is a claim on future cash flow, so the lender must decide whether it is funding growth or covering losses — and funding operating losses is the most common refusal reason. If the cash need traces to receivables and inventory expanding with sales, a request sized to the cash-conversion cycle and supported by an A/R aging will often be approved by the same lender that declined a vague one.

Can the CSBFP finance working capital, or only equipment?

It can, since July 2022, through two stacking routes: a dedicated line of credit of up to $150,000 for working capital costs, capped at prime + 5%, plus up to $150,000 of working capital within the CSBFP term loan (inside the $500,000 non-real-property sublimit). The loan is still made and underwritten by a bank or credit union on its own criteria — the guarantee does not replace the underwriting.

Should I use a line of credit or a term loan?

Match the instrument to how long the money is tied up. Cash that returns within the operating cycle belongs on a revolving line; cash going into assets that pay back over years belongs on a term loan matched to useful life. Putting long-term purchases on the line consumes operating margin room and funds a multi-year asset with demand-basis money. For permanent working capital — a lasting step-up in receivables and inventory from growth — a working-capital term loan is often the better structure than a permanently maxed line.

What does "out of margin" mean?

The drawn balance on the line exceeds what the borrowing base currently supports — typically 75% of receivables under 90 days plus 50% of inventory, recalculated monthly. If a large customer ages past 90 days or inventory sells down, the base shrinks, and because most operating lines are demand loans, the lender can require immediate paydown of the excess. Repeated margin breaches are a common reason lines get reduced or called at annual review.

Sources

1. Summary of the Survey on Financing and Growth of Small and Medium Enterprises, 2023 (average SME interest rates by instrument) — ISED / Statistics Canada, 2024
2. Canada Small Business Financing Program Guidelines (working-capital eligibility, line-of-credit cap, sublimits) — Innovation, Science and Economic Development Canada, 2025
3. How a bank looks at your business (margining, ratios, and credit assessment) — BDC, 2026
4. BDC financing overview (Working Capital Loan and product ladder) — BDC, 2026