Line of credit vs term loan: choose by job, not label

The decision in one sentence

The Competition Bureau frames a business line of credit around short-term working capital and a term loan around financing tangible or intangible assets. That is a starting point, not a verdict. The right answer depends on the actual amount, payment schedule, rate, fees, lender rights and owner commitments in the written offer.

The Competition Bureau describes a line of credit as a flexible, short-term loan for working capital. It also notes that it may be called a demand loan because the lender can request full repayment at any time. Its term loan description covers financing for tangible or intangible assets, with principal and interest paid over a fixed period and amortization often aligned with the asset’s useful life. These official descriptions help frame the choice, but the contract in front of you controls.

Business line of credit vs term loan at a glance

Do not use the table as a substitute for an offer. A lender can structure either product differently. Build your comparison from the written amount available, net proceeds, payment dates, total cost, rate-change rules, fees and lender remedies.

Scenario 1: inventory that turns several times

Illustrative example: a retailer has a $40,000 approved line, draws $10,000 for a seasonal order, then expects another $30,000 order later. In this made-up offer, the written agreement expressly permits another draw after repayment. The need repeats, but its timing and size are not perfectly known. The line stays in consideration only because this illustrative contract contains that permission.

That flexibility is not free by definition. The owner should ask what fees apply even when the line is unused, how interest is calculated, whether the limit can change, and when the lender may demand repayment. The stress test is simple: could the business manage if a customer paid late while the lender exercised a contractual right? If not, flexibility at the front end may hide risk at the back end.

Scenario 2: equipment with a known budget

Illustrative example: a workshop needs $60,000 for equipment expected to support operations for several years. It has a supplier quote, a defined installation plan and no reason to redraw the repaid principal. A term loan can win here because the amount and repayment horizon can be assessed against the purchase and its expected useful life.

Compare the loan’s net proceeds with the supplier invoice and related costs. Then place every scheduled payment into a conservative cash-flow forecast. Ask whether the rate is fixed or variable, whether security or a personal guarantee is requested, and what happens on early repayment. A predictable schedule is only useful when the business can afford it through an ordinary slow period.

Scenario 3: a project with uncertain final cost

Illustrative example: an office improvement is budgeted at $80,000, but invoices will arrive in stages and the final cost could move. One offer is a term loan for the full budget. Another is an illustrative line whose written terms let the business take $5,000, then $25,000, and request further draws as invoices become certain. Neither automatically wins. The term loan may make sense if the full amount will be used and its complete cost is lower. The line may avoid borrowing unused funds, but its rate-change and demand provisions deserve extra weight.

A third option is to ask whether a smaller defined loan plus existing cash is enough. Product comparison should not distract from amount discipline. Borrowing more than the project needs creates cost; borrowing too little can leave the project unfinished.

Put both offers on the same worksheet

1. Usable amount: record the cash or credit actually available after disclosed deductions.
2. Use pattern: write whether the need is one-time, staged or recurring.
3. Dollar cost: calculate interest and known fees for the amount and period you realistically expect to use.
4. Annual measure: ask for an annualized cost that includes applicable fees so unlike structures are easier to compare.
5. Payment pressure: show amount, frequency, first payment and the effect of a slower month.
6. Change rules: capture variable-rate wording, limit changes, prepayment terms and renewal conditions.
7. Recourse: identify security, guarantees, demand rights and default consequences.

For help organizing the price fields, use the business loan calculator and offer comparison. Its output is a comparison aid, while the lender’s calculation and written agreement remain authoritative.

Questions that expose a weak match

• Will the balance return repeatedly, or is this genuinely a one-time need?
• Does the useful life of the purchase extend beyond the repayment period?
• Could the payment still be made during a conservative revenue month?
• Could a demand for repayment create a cash crisis?
• Are unused-limit, setup, administration or early-payment charges shown?
• Would the business pay for funds before it is ready to use them?
• Which owner or business assets are exposed under the agreement?

If the answers are incomplete, request clarification before choosing. A familiar product name cannot repair an unsuitable payment schedule or an unclear lender right.

How comparison through Clario works

Clario Capital is not a lender. It shares one application with its network of lending partners so a business owner can compare competing offers when available. Each lender decides approval and sets its own rates and terms based on the business’s credit, performance and proposed terms. No product or offer is promised.

Clario does not charge to apply or receive offers, although individual lenders may have disclosed fees that belong in your worksheet. Comparing carries no obligation, and you commit only if you choose an offer. You can submit one application to compare available offers, read how Clario works, or review the Canadian business lender comparisonbefore deciding where to apply. The actual lender written terms govern.

This guide is general information for Canadian business owners, not financial, legal or tax advice. Clario Capital is not a lender. Funding approval, rates and terms are not guaranteed and are set solely by our lending partners. Any examples are illustrative. The actual lender written terms govern any offer you receive.