Seasonal operating lines: Canadian enterprise loan options

What to take away

How tourism peaks and fishing seasons bend a working capital line

A seasonal business does not have a working capital problem in the abstract. It has a timing problem. Money leaves in one part of the year and arrives in another, and a line of credit exists to bridge that gap.

In Atlantic Canada the gap has two shapes. Tourism peaks in Halifax and across the region run roughly from late spring to early autumn, with bookings, staffing and inventory costs landing before the first big receipts. Fishing seasons are set by quota, species and federal rules, so the money moves on a calendar the operator does not control.

A lender reads both shapes the same way: when does cash go out, when does it come back, and how deep is the trough. That is why the shape of a credit line balance reveals the business behind it.

A line that climbs through May and clears by October tells a different story from one that never quite returns to zero.

For a Halifax restaurant, the bend is staffing. Payroll and food costs rise weeks before the patio fills. For a fish plant in southwestern Nova Scotia, the bend is the opposite: a short, intense buying period followed by months of processing and receivables.

Neither business wants a term loan sized to the peak. It wants a limit that is high enough in July and quiet in January. The limit itself is not the cost.

The cost is what a drawn balance does between seasons, which is why a line of credit can cost you before you have drawn anything, through standby fees and annual review charges.

Structuring an operating line around a seasonal revenue curve

Start with the curve, not the number. Pull twelve months of bank statements and mark the month revenue peaks and the month it bottoms out. Most Atlantic Canadian seasonal files show a peak that is three to five times the trough.

From there, the limit is usually set near the peak month's cost of goods, payroll and fixed overhead, less the cash you already hold. Lenders rarely fund the whole peak. They fund the shortfall between your peak outflows and your normal receipts.

Here is how a typical seasonal file comes together.

A Halifax tour operator bills about $40,000 in a quiet winter month and $180,000 in August. Peak outflows hit $150,000 in June, before the season's deposits convert.

The lender sets a $120,000 operating line, drawn from May, with interest-only payments through September and principal cleared by December. The operator never draws the full limit, but the headroom is what lets them book the season.

That headroom is not free. Interest accrues on the drawn balance, and many facilities carry a standby fee on the undrawn portion. The checklist for any line has three moments that matter, the way you open, run and close it, and the close is where seasonal borrowers get caught.

A clean-up period is normal. Most lenders want the line at or near zero for a set number of days each year, often thirty to sixty. If your cash cycle cannot produce that, say so early and negotiate the clean-up rather than miss it.

Public backing that can sit beside the line

Public programs exist to fill gaps a chartered bank will not, and the one most useful to a seasonal operator is federal.

The Canada Small Business Financing Program makes it easier for small businesses to get loans from financial institutions by sharing the risk with lenders. Since its enhancement it includes a line of credit that can finance working capital costs, so a seasonal operator who cannot meet a bank's collateral test can ask the bank to put the operating line under the program. You apply through the lender, not the government.

The program's line of credit terms are fixed in public. A line can go up to a maximum of $150,000 and can be used to pay for working capital costs, that is, day-to-day operating expenses of the business. For lines of credit, the maximum chargeable interest is the lender's prime lending rate plus 5%, and the 2% registration fee is based on the total amount authorized, not the amount drawn. The lender must take security on any business assets. Registration fees must be paid by the borrower to the lender and they may be financed, so a seasonal operator pays that fee on the whole limit even in a year the line is barely used.

In Nova Scotia, business development runs through the Department of Growth, Development and Defence Industries. Its partners include Invest Nova Scotia and the Nova Scotia Regional Enterprise Networks, which are the provincial doors to knock on before a bank meeting.

In Newfoundland and Labrador, business support for the tourism season sits with the Department of Tourism, Culture, Arts and Recreation, which is responsible for supporting economic growth and employment in the tourism industry. Fishing businesses work to licence, quota and season rules set by Fisheries and Oceans Canada, and the lender will want those documents in the file.

The Business Development Bank of Canada lends directly to tourism operators, and Farm Credit Canada serves aquaculture and some primary fishing operations.

Program money is not a substitute for a bank line, and it is rarely fast. Applications take weeks, and each program has its own reporting. Use program capital for the asset that outlives the season, and keep the operating line for the season itself.

What a lender asks for in a seasonal file

Whichever lender you approach in Halifax or elsewhere in the region, a bank, a credit union or a community loan fund, the seasonal file is read the same way. Credit unions in particular tend to underwrite the season rather than the calendar year.

What they ask for is consistent. Expect a request for two to three years of financial statements, twelve months of bank statements, a current accounts receivable and payable list, and a cash flow projection that shows the season.

They will also ask how you handle the off-season. A tourism operator with a second revenue line, say a winter rental or a corporate events contract, is an easier approval than one with a single peak.

For fisheries, the lender wants quota documentation, landing records and a sense of the season's expected volume. If you sell to a processor, the lender may look at that buyer's payment history, because your receivables depend on it.

Personal credit matters more in a seasonal file, not less. A thin corporate history plus a volatile revenue curve pushes the lender back onto the owner's guarantee and credit score.

Before you sign anything, read the loan and line of credit guidance from the Financial Consumer Agency of Canada. It sets out what lenders must tell you about the cost of borrowing and your right to prepay, and it is where the standby fee and the clean-up clause live.

Lenders also watch the wider credit picture. The CFIB's monthly business barometer tracks how small firms see lending conditions, and a tightening reading usually shows up as smaller limits and firmer clean-up terms in the next round of renewals.

Repayment schedules that follow the season, not the calendar

A calendar-month repayment schedule is the most common mistake in seasonal financing. It forces a fish plant to pay down principal in February, when the plant is buying nothing and selling nothing.

Ask for a schedule that matches the curve. Interest-only through the build-up, then principal payments as receivables convert. Some lenders will structure it as a percentage of monthly receipts, which self-adjusts in a slow year.

Watch the reset date. Many seasonal lines are reviewed annually on the anniversary of approval, which may sit in the middle of your quiet season. If the review lands badly, ask to move it to the month before your season starts.

Watch the margin, too. A seasonal line is often priced at prime plus a margin, and the margin can step down after a clean year. Get the step-down in writing.

If you run more than one seasonal business, keep the lines separate. Mixing a tourism line and a fisheries line in one facility makes the clean-up test almost impossible to pass. Two facilities can be structured very differently, a BDC loan and a bank line for example, and one facility rarely serves two seasons well.

Finally, measure the season against itself. Comparing this August to last August tells you more than comparing August to February. The pointers on loans by industry that hold up are the ones built on your own cycle, not a national average.

Common questions