Term loan, line of credit, lease or factoring? Types of small business financing in Canada
How each type of Canadian small business financing works, what it suits, what it costs and the traps, with worked examples for a line of credit and invoice factoring.
The right type of business financing is the one whose repayment matches the life of what you are paying for. In Canada that usually means a term loan or lease for equipment and improvements that last years, an operating line of credit for working capital that turns over within months, a commercial mortgage for real estate, and alternatives such as factoring or cash advances only for specific short-term gaps. Using a short, expensive product for a long-term asset is how otherwise healthy businesses run into cash trouble.
This guide is part of the small business loan requirements and rates overview. See also the full comparison table. Figures are illustrative.
The main options at a glance
| Type | Typical term | Security | Repayment | Best for |
|---|---|---|---|---|
| Term loan (bank, credit union, caisse) | 1–10 years, sometimes longer | Assets financed, general security agreement, guarantees | Monthly blended or fixed principal plus interest | Equipment, renovations, acquisitions |
| CSBFP term loan | Up to 15 years | Assets financed or business assets | As agreed, rates capped | Businesses short of security |
| BDC term loan | Often several years, flexible | Varies | Often fixed principal; seasonal or delayed principal possible | Growth, working capital, buying a business |
| Operating line of credit | Usually reviewed yearly | Receivables and inventory, general security agreement | Interest monthly; principal as cash comes in | Seasonal and working capital needs |
| Commercial mortgage | Term of 1–10 years, longer amortization | Charge on the property | Monthly | Owner-occupied commercial property |
| Equipment lease | Usually 2–7 years | Lessor owns the asset | Fixed monthly, buyout or return at end | Vehicles, machinery, technology |
| Invoice factoring | Per invoice | Receivables sold or pledged | Fee deducted when the customer pays | Slow-paying commercial customers |
| Merchant cash advance | Months | Future card or bank deposits | Daily or weekly holdback | Last-resort short-term needs |
| Business credit card | Revolving | Usually a personal guarantee | Monthly statement | Small purchases, short float |
Term loan or line of credit?
A term loan gives you a lump sum and a schedule. A line of credit gives you a limit to draw and repay; you pay interest only on what you use. Many operating lines are written as repayable on demand, which means the lender can ask for repayment at any time, subject to giving reasonable notice under Canadian case law. A term loan can only be called if you breach its terms.
Worked example (illustrative). A landscaping company has a $50,000 operating line at prime + 2%, taken as 7.45% for the example. It draws heavily in spring and repays by autumn, with an average balance of $20,000 over the year.
- Interest: $20,000 x 7.45% = $1,490 for the year.
- If the lender charges a standby fee of, say, 0.25% a year on the unused $30,000 average, add $75.
- Total cost about $1,565 for a year of flexibility.
If the same company borrowed $50,000 as a two-year term loan at 7.45% instead, it would pay about $2,249 a month and about $3,970 of interest over two years, and would pay interest on money it did not need in winter. For working capital that comes and goes, the line is cheaper; for a $50,000 mower fleet that will last six years, a term loan or lease is the better match.
Lease or loan for equipment?
A lease can finance 100% of the equipment cost with no down payment and may be quicker to arrange, but its implied rate is often not printed on the agreement. A loan usually needs a down payment but lets you own the asset from day one and claim capital cost allowance. See equipment lease versus loan for the full arithmetic.
Factoring: what a "small" fee means per year
Factors usually quote a discount fee per 30 days.
Worked example (illustrative). A trucking firm factors a $40,000 invoice. The factor advances 85% ($34,000) immediately and charges 2.5% per 30 days. The customer pays in 60 days.
- Fee: $40,000 x 2.5% x 2 = $2,000.
- The firm received $34,000 for about 60 days and paid $2,000 for it.
- On the cash advanced, that is about $2,000 / $34,000 = 5.9% for two months, roughly 35% a year before compounding.
Factoring can still make sense when it lets you take on profitable work you could not otherwise finance, but compare it with a margined line of credit first. Check whether the factoring is with recourse: if your customer does not pay, you may have to repay the advance.
Alternatives: online lenders and cash advances
Online and fintech lenders may decide quickly with less paperwork. They are usually more expensive, often have shorter terms, and some collect payments daily or weekly. A merchant cash advance is repaid as a share of future sales and is priced with a factor rate; see the merchant cash advance guide. Any loan to a corporation between $10,000 and $500,000 must still stay at or below 48% APR under the criminal rate rules.
Matching the product to the need
- What is the money for? Write down the asset or need and how long it will produce income.
- How will it be repaid? From profits over years (term loan), from collecting receivables (line), from a sale or refinance (bridge).
- What security can you offer? Real estate and equipment lower the cost; working capital loans rely on business assets and guarantees.
- How predictable is cash flow? Seasonal businesses benefit from lines or seasonal repayment schedules.
- What does it cost in total? Use the payment calculator and the fee calculator.
Frequently asked questions
Can I use my operating line to buy equipment?
You can, but it is risky: the line is usually reviewed every year and may be repayable on demand. Long-term assets are better financed with term debt.
Is a business credit card a reasonable source of financing?
For small purchases repaid within the grace period, yes. Carrying a balance is usually far more expensive than a line of credit.
Do I need a separate lender for each product?
No. Many businesses keep their line, term loans and accounts with one lender, which can help pricing, but compare offers from at least one other lender.
What is a "margined" line of credit?
The available limit is tied to a percentage of eligible receivables and inventory, reported monthly. If receivables fall, so does what you can draw.
Sources
- BDC — explanations of term loans, working capital and repayment options
- Innovation, Science and Economic Development Canada — CSBFP term loans and lines of credit
- Canada Business (Government of Canada) — federal financing programs for businesses
- Justice Laws Website — Criminal Code and Criminal Interest Rate Regulations
