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The Rise of Alternative Lending

When businesses need to grow, they need access to money to help them grow. After all, you cannot expect a tree to grow without a seed. However, the commercial lending market has become very conservative in Canada, which means that the banks are missing out on opportunities to profit from business loans because they are overly concerned about the possibility of default.

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Into this financial vacuum has stepped a host of alternative lenders. It started as a trend in the United States and then spread to the UK and to Australia. Now, it is become more and more popular in Canada as well. This sort of lending is easier to get than a bank loan and is simpler to arrange than crowdfunding. Online alternative lenders simply run a client’s numbers through a proprietary software package to determine whether that client can be eligible for a loan. The software runs 24 hours a day, seven days a week. So you get a lending decision within minutes, and the funding comes between one and three business days after approval and signing of the documents.

Why is this important? If you’re an entrepreneur and you need money for your business, then you know that every day that passes without the capital that you need is a number of missed opportunities. The first online alternative lender in Canada was Grouplend, based in Vancouver, and they finally launched last October. They have had about twice the demand that they anticipated, and about one in six of their customers use the funds to launch a business – or help meet financial needs for a business that’s already up and running.

Why is there a niche for alternative lending? Banks and entrepreneurs have never blended well. After all, entrepreneurs are starting businesses from nothing – which sounds like a whole world of risk to a bank. Banks like borrowers who show up with pristine credit ratings, reliable income streams and plenty of savings. Of course, entrepreneurs looking to launch a new business might only have one of these – and they might not have any of them. A new business is not going to have a reliable income stream, and entrepreneurs may be sinking their savings into the business too, so they may not have a lot left to leverage for the loan.

Also, banks prefer to give out loans in bigger amounts. An entrepreneur might not need a huge loan, and that will eat into a bank’s profit margins. So they won’t go through the hassle of approving a smaller loan, simply because it doesn’t contribute enough to their bottom line. This is a shame, in a way, because an entrepreneur might be able to qualify on the basis of other metrics, but they end up having to pay an alternative lender more simply for the convenience of the service.

The first American company (name withheld) to set up shop north of the 49th parallel funds 150 industries in Canada. The requirements are fairly simple: businesses have to have been around for at least a year, and they need revenues of at least $100,000 per year. Management noted the death of lenders in this sector in Canada. There are about 1.1 million small businesses in Canada, and in 2013, a study by StatsCan discovered that about two in five had asked for credit. However, StatsCan also found that these businesses had a tougher time accessing credit than their larger counterparts.

But what if you’re running a startup that doesn’t have much in revenues yet? Another large firm (name withheld), based in Toronto company offers credit at rates between 5.6 and 18 percent. If you are starting a new business and need some capital, this company might be a better option than having to give equity to an investor. This company offers the advantages of a lack of paperwork – and no face-to-face meeting – but their rates are competitive with what some banks offer.

There are some banks in Canada that are waking up to the potential that exists in the alternative lending industry, but for now, it is the smaller companies that are making a difference for entrepreneurs. The good news is that if you’re starting a small business and need some funding, you have a lot more choices than you had just a year ago.

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