- A term loan is a lump-sum amount advanced up front and repaid over a fixed schedule — typically in regular instalments over an agreed period, sometimes secured against specific assets of…
- An operating line of credit is a revolving facility — you draw on it as needed, repay, and draw again, up to an approved limit.
Buyers financing an Ontario business acquisition often assume any bank facility will do — but a term loan and an operating line of credit serve genuinely different purposes, and lenders treat them differently. Getting the two confused when you're structuring a purchase can leave you with the wrong tool for the wrong job, or a lender pushing back on your proposed structure late in the process.
This article explains, in general terms, what each facility typically does and where each one usually fits into an acquisition. Actual terms, rates, and lending criteria are set by individual lenders and change over time — always confirm current terms directly with your lender or broker before relying on anything here.
What a Term Loan Is
A term loan is a lump-sum amount advanced up front and repaid over a fixed schedule — typically in regular instalments over an agreed period, sometimes secured against specific assets of the business. Because the amount and repayment schedule are fixed at the outset, a term loan is generally the facility used to fund a defined, one-time cost: most commonly, the purchase price of the business itself.
What a Line of Credit Is
An operating line of credit is a revolving facility — you draw on it as needed, repay, and draw again, up to an approved limit. It's designed for a fluctuating need, not a one-time cost. In a business context, that usually means covering the ordinary ebb and flow of cash flow: paying suppliers before customer invoices are collected, covering payroll during a slow month, or bridging seasonal gaps.
Side-by-Side Comparison
| Feature | Term Loan | Line of Credit |
|---|---|---|
| Typical use | One-time cost, such as the acquisition price itself | Ongoing working capital, day-to-day cash flow gaps |
| How funds are advanced | Lump sum, up front | Drawn and repaid repeatedly, up to a limit |
| Repayment structure | Fixed schedule over an agreed term | Flexible; interest generally on the amount actually drawn |
| Common security | Often secured against specific business assets or a general security agreement | Often secured against receivables/inventory, or unsecured for smaller amounts |
| Best fit in an acquisition | Funding the purchase itself | Funding the business's operations after closing |
How the Two Typically Fit Together in an Acquisition
Many buyers use both facilities as part of a single financing package, but for different pieces of the deal:
- The term loan funds the purchase. This is usually the largest single piece of third-party financing, sized to the purchase price (or the portion of it not covered by the buyer's own equity or a vendor take-back).
- The line of credit funds the business afterward. Once you own the business, day-to-day operations still need working capital — paying staff and suppliers while waiting on receivables. A newly acquired business often has different (sometimes tighter) working capital needs than the seller's own historical arrangement, especially if the seller's existing line doesn't transfer with the sale.
- The two are usually negotiated together, but they're separate facilities. A lender assessing an acquisition loan request will typically want to understand both pieces — how the purchase itself is being funded, and whether the business will have adequate working capital once you own it — even though the term loan and the line of credit function independently.
Questions to Ask Your Lender or Broker
- [ ] Is the amount you're proposing for the purchase itself structured as a term loan, and does the repayment schedule reflect the business's likely cash flow?
- [ ] Is a separate operating line being arranged for working capital, or are you expected to fund that from personal resources initially?
- [ ] What security is the lender asking for on each facility, and does it overlap with security a vendor take-back seller is also asking for?
- [ ] Does the existing business have a line of credit that needs to be replaced, rather than assumed, on closing?
Frequently asked questions
Can I use a line of credit to actually buy the business instead of a term loan?
It's uncommon, because a line of credit is designed to be drawn and repaid repeatedly, not to fund a single large, fixed transaction. Most lenders will want to structure the purchase price itself as a term loan with a defined repayment schedule, even if they also extend a line of credit for post-closing operations.
Does the target business's existing line of credit transfer to me as the buyer?
Generally not automatically — a line of credit is an agreement between the seller (or the seller's corporation) and its bank. In an asset purchase in particular, you'll typically need to arrange your own facility rather than assume the seller's, and your lawyer and lender should confirm this early so you're not caught without working capital on day one.
Will a lender require both a term loan and a line of credit before approving acquisition financing?
Not always — it depends on the lender, the deal size, and how much working capital the business already generates on its own. Some smaller acquisitions are financed with a term loan alone, with working capital managed from the business's own cash flow.
How does a vendor take-back affect how much term loan I need?
Where the seller finances part of the purchase price through a vendor take-back, the amount you need from a third-party term loan is generally reduced accordingly — but lenders will often want to know the specific terms of the vendor take-back before finalizing their own facility, since it affects their view of your overall debt load.
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