Point-and-click financing
Alternative lenders gain traction to fill pent-up demand in Canada
There isn’t much an entrepreneur in Edmonton, a branding specialist in Toronto, and the owner of a comics and games store in Halifax have in common. But when they recently sought capital for their growing businesses, all three arrived at the same answer — alternative financing.
“Alternative finance has really bubbled up into the mainstream in the U.S., in the U.K., in Australia — and in Canada it is now starting, finally, to bubble up,” said Steven Uster, who co-founded Toronto-based lending firm FundThrough.
More accessible than a bank loan and less complicated than crowdfunding, these online marketplace lenders use proprietary software to quickly assess a client’s loan eligibility, day or night. Like almost everything else today, it’s as easy as pointing and clicking.
“It’s pretty seamless,” Uster said. “Once you’ve filled in the application, you can get funded sometime between 24 and 72 hours later.”
Uster knows firsthand that time is money for entrepreneurs. When he launched his first online startup, Zillidy, the only funding option was “bootstrapping.”
Canada’s first o nl i ne marketplace lender, Vancouver-based Grouplend, launched last October, well after peer-to-peer lending had taken off in other countries. “Canada being Canada, we’re slow to innovate,” said Kevin Sandu, Grouplend’s CEO.
“We’ve got five big banks that hold the majority of the market and so we tend to get things late. It took a lot longer for us to get Netflix than our U.S. counterparts and I think financial services is no different.”
Now that it is available, consumers and businesses are rushing to take advantage. Grouplend, which specializes in consumer loans, is experiencing double the demand it expected at this point. Nearly 15 per cent of its customers use the loan for an entrepreneurial venture. “Clearly there’s a lot of pent-up demand, a lot of Canadians looking for better solutions,” Sandhu said.
The success of alternative lending comes as no surprise to Sunil Sharma, a managing partner at Extreme Venture Partners, who closely watches Canada’s technology ecosystem. “I think it’s clear that traditional banks, particularly in Canada, have not been very supportive of this new generation of entrepreneurial startups,” he said.
“It’s just not been a good fit with the traditional ways of lending.”
Banks prefer larger loans, which are more profitable, effectively shutting smaller players out of the process. Even though borrowing from an alternative lender might cost more, many businesses don’t have a choice.
“The reality is for a lot of small businesses, it’s either high interest or zero cash,” said Kyle Dutka, co-founder of PB&J in Toronto, which specializes in design work for fellow small businesses.
Earlier this year, he and his co-founder Tom Collver applied for a $23,000 bank loan so they could expand PB&J’s marketing and hire additional staff. First came radio silence. Then, the answer: no. This was despite the pair having three years running an incorporated business under their belts.
But one marketplace lender gave them an enthusiastic yes: On Deck Capital called Collver 15 minutes after he submitted the application to hear more about the company and walk him through the next steps. The money was in their account days later.
“We’ve been growing ever since,” Collver said. “It was a really easy transition because of having that money in hand.”
On Deck is the first U.S. firm to establish itself north of the border. In Canada, it’s already funding 150 industries, from Dutka and Collver’s branding business to the comics and games store in Halifax. Businesses must be at least one year old, and have a $100,000 annual turnover to qualify for a loan.
Rob Young, On Deck’s senior vice-president for international operations, said Canada’s market conditions convinced them to expand outside the United States for the first time. “The marketplace in Canada is moving very fast and in a very nice direction,” he said.
Canada has approximately 1.1 million small businesses, and in 2013, Stats Can found that 40% of them requested credit, but faced relatively greater difficulty securing it.
“We find frequently small business owners sacrifice their own personal credit to get their business going,” Young said.
While there is yet no Canadian online lender that specializes in startups, which are considered more risky, it doesn’t mean entrepreneurs are shut out of the market.
When Jesse, a 38-year-old “serial entrepreneur” in Edmonton needed a $15,000 loan to get his environmental services company off the ground, he found a lender in Torontobased Borrowell, which offers loans at rates from 5.6 to 18 per cent. He said this option appealed to him more than finding a business partner or taking venture capital. “There’s strings attached with that,” Jesse said.
Borrowell was offering him the money he sought and a rate comparable to a bank, but faster. There was no sit-down meeting and no paperwork, just an algorithm that determined overnight he was eligible and at what rate. “The process was almost too easy,” Jesse said. “It was like, well, what’s the next step? Everything was kind of done.”
Andrew Graham, chief executive of Borrowell, launched the business this spring after leaving a job at PC Financial. “For me it was really about grabbing an opportunity,” he said. “I think it’s a scary time for many folks who are running large financial institutions.”
Banks are waking up to what’s happening, said Graham noting one of Borrowell’s partners is Equitable Bank. “As much as there is disruption taking place, there’s also new opportunities for banks and other financial institutions,” he said.
“I think there’s an opportunity for companies like ours to work with banks that are keen to do so.”
Borrowell isn’t intended as a substitute for venture capital, but it is an option for people who have a path to repayment. “We want to reward consumers who have a history of making payments and making good credit decisions,” Graham said.
Grouplend’s Sandhu predicts the number of alternative finance firms in Canada will continue to grow, with new lenders emerging in niche areas. “Canada’s a small country, I don’t think we’ll have room for as many as you see in the U.S. But certainly a couple more in our space would be very welcome. That would help us raise awareness of this industry and let people know there are nonbank alternatives.”
And more fi r ms and improving data analysis could mean better rates. On Deck lowered its rates in the past nine quarters and Grouplend dropped its rates in March.
“In a competitive market, with more options, the rates are definitely going to become more competitive,” Sharma said.
For a lot of small businesses, it’s either high interest or zero cash