Operating line of credit
An operating line of credit, which BDC also calls a bank operating loan, is a short-term, flexible loan a business can borrow from up to a pre-set amount. BDC’s golden rule is to finance short-term expenses with short-term credit and long-term assets with long-term debt.
BDC says a line of credit lets a business borrow up to a pre-set amount, pay interest only on what it uses, and pay the balance down from its cash flow. The Canada Small Business Financing Program says lines of credit under that program can be used to pay working capital costs, meaning the day-to-day operating expenses of the business.
How it is secured and called
BDC says lines of credit are often secured by inventory and accounts receivable and are considered demand loans, meaning the institution can demand full repayment at any time. BDC also says banks closely monitor use of a credit line and may require the business to respect conditions known as covenants.
What to ask on a purchase
- Does the seller’s existing line stay in place, or must the buyer arrange a new one?
- What security and covenants apply to the line?
- Is it a demand facility, and what happens to it at closing?
See term loan vs line of credit and, for the reusable structure, revolving credit facility.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Business Development Bank of CanadaGovernmentWhat is a line of credit?
- 02Business Development Bank of CanadaGovernmentWhat’s the difference between line of credit and working capital loan?
- 03Innovation, Science and Economic Development CanadaGovernmentHelping small businesses get loans - Canada Small Business Financing Program
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