Term Loans vs. Operating Lines of Credit for Ontario Businesses

Most Ontario businesses eventually need to borrow — to buy equipment, smooth out seasonal cash flow, or fund an expansion. Lenders offer many products, but two structures form the backbone of most business financing: the term loan and the operating line of credit. They are built for different purposes, and the legal documents behind them look and behave quite differently.

Understanding the difference before you sign a commitment letter helps you match the financing to what your business actually needs, and helps you spot the terms worth negotiating.

What a Term Loan Is

A term loan is a lump sum advanced up front, repaid on a fixed schedule over a set period — often with regular blended payments of principal and interest, sometimes with a portion due as a final "balloon" payment. Once repaid, the amount generally cannot be re-borrowed without a new agreement.

Term loans are typically used for:

• Purchasing a specific asset, such as equipment, a vehicle, or real property
• Financing a one-time expansion or renovation
• Consolidating other business debt into a single, predictable payment

Typical legal features of a term loan

• A defined principal amount, repayment schedule, and maturity date
• Security tied to the purpose of the loan — often the asset being purchased, structured as a purchase-money security interest under the Personal Property Security Act (PPSA) to gain priority over that specific asset
• Loan covenants restricting what the borrower can do without lender consent (see our related article on loan covenants)
• Defined events of default that let the lender accelerate the loan if things go wrong

What an Operating Line of Credit Is

An operating line of credit is a revolving facility: the lender approves a maximum limit, and the business draws down and repays as needed, paying interest only on the amount actually outstanding at any given time. Once repaid, the available credit typically becomes available to draw again, subject to the terms of the facility.

Lines of credit are typically used for:

• Managing the gap between paying suppliers and collecting from customers
• Covering seasonal fluctuations in revenue
• Providing a cushion for day-to-day working capital needs

Typical legal features of an operating line

• A maximum authorized limit rather than a fixed principal amount
• Security frequently tied to the business's receivables and inventory, often through a general security agreement registered under the PPSA
• Ongoing reporting obligations (borrowing-base certificates, financial statements) so the lender can monitor the collateral supporting the facility
• A demand feature in many cases — meaning the lender can require repayment of the outstanding balance on notice, even absent a default (see our related article on demand loans)

Comparing the Two Structures

Many businesses use both at once: a term loan for equipment or property, and a line of credit to manage day-to-day cash flow — each secured and documented separately, sometimes by the same lender under a combined credit agreement.

Questions to Work Through Before You Choose

1. Is this a one-time need or an ongoing, fluctuating one? One-time purchases fit a term loan; recurring cash-flow gaps fit a line of credit.
2. What security is the lender asking for, and does it match the purpose of the loan? A lender securing a modest equipment loan against your entire business's assets is worth pushing back on.
3. Are there restrictive covenants that will interfere with how you already run the business? Read them before you sign, not after.
4. Is the facility demand-based, or does it run to a fixed maturity with defined default triggers? This materially changes your planning risk.
5. What reporting will the lender require, and can your bookkeeping actually support it on an ongoing basis?

Frequently asked questions