Small business financing guide Canada

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Small businesses in Canada have been struggling for some time now in financing their companies. Small businesses pay a high price for trying to gear their company, and that they’re even approved.

The head of SME banking at the Bank of Montreal, Arun Kumar, suggests that Canadian small business financing has been underserved, because there are only two models used by banks: simplistic retail models and heavy commercial ones. He states, “If you didn’t fit perfectly into either, you’re basically priced accordingly”.

Furthermore, personal assets are often required, such as having a house. Research has also suggested that both immigrants and women are less likely to be approved for financing. The difficulty of gaining finance for small Canadian companies is even backed up by the president of the CFIB. 

Ultimately, it comes down to the perceived risk of small businesses, and not being trusting enough of innovative startups. Traditional highstreet banks are only interested in more established companies that are extremely creditworthy with a proven track record, and often along with some personal assets to use for security.

 

What are the alternatives for small business financing in Canada

Although it would be much easier if Candian banks were more welcoming of SMEs due to their favourable lending rates and long-term repayment structure, there are alternatives. Being denied from a bank is certainly not synonymous with not unable to get financing.

 

Here is a brief list of possible ways a SME in Canada can gain financing without using a bank:

 

Types of small business loans

  • Installment loans by alternative lenders
  • Merchant cash advance
  • Invoice factoring 
  • Business credit card
  • Equipment lease
  • Personal loan / personal credit card

 

Pros and cons of using alternative lenders

Like stated above, a bank loan can be preferable. There are actually some instances where a small business may apply for a loan with an alternative lender, without even reaching out to a traditional bank, because it better suits their needs. This is the pros and cons of using an alternative lender over a traditional bank loan.

Before starting, let’s quickly define what an alternative lender is. Alternative lending is actually a broad term, and says more about what it isn’t, than what it actually is. As you may have gathered, it is a loan that is not from a traditional bank. The alternative lenders out there are not usually full-scale banks, meaning you couldn’t deposit money with them. They are usually a single-service business, aiming to provide financing to SMEs.

 

Pros of using an alternative lender

There are some clear benefits to alternative lending over say, releasing equity. Whilst the interest rates may seem highly, as the business grows, this will end up cheaper than if you had given away equity in return for funding. This section however concerns itself directly with the comparison between alternative lenders and loans from banks.

 

Approval

First and foremost, it is easier to gain approval for a loan from an alternative lender. Afterall, they are alternative for a reason: because banks have high standards of creditworthiness. This means that business without much of a track record, or a bumpy past, can have a higher success rate at getting approved for a loan with an alternative lender.

 

Time

It takes a significantly shorter amount of time to both apply, and gain access to funds, through an alternative lender. With traditional banks, the application itself can take a long time. You have to detail a business plan, cash flow forecasts, P/L evidence and so on. You’re truly in a position of having to go above and beyond to prove you’re worthy. Secondly (with a bank), the verdict on whether you’re approved can take weeks. From the date you decide to grab an application form to the date of receiving the money, 2 months may have passed.

 

Alternative lenders, on the other hand, require far fewer documents and may give you a verdict on your application as well as access to the funds within 24 hours.

 

Credit rating

If you apply for a traditional bank loan and get rejected, your credit rating may take a hit. Many alternative lenders however will let you apply to see if you will be approved, without the risk of taking a hit on your credit rating. Some lenders may not perform a single credit check.

 

Cons of using an alternative lender

Higher interest rates

Alternative lenders tend to have higher interest rate due to you being a greater risk, and due to the lack of documentation and evidence. Traditional bank loans will often be geared towards the long-term, with rates often below 10 or 15%. Alternative lenders however have a much more varying rate of interest, but you wouldn’t expect to get lower than 15%. Whilst some rates may be so high that it renders the loan unviable for the long term, many do not penalise early repayments, and your 

 

Regulation

Dealing with traditional banks is extremely safe due to the maturity of the industry, and how well-regulated it is. Alternative lending however is a much less adequately regulated industry in Canada, and it’s something to be wary of. You have to really spend time researching the platform/provider you’re using, read the small print carefully and look for reviews and so on. There is an argument to be made that some alternative lenders are not as transparent as traditional banks.

What kind of businesses can borrow

As we have established, alternative lenders are much more forgiving than traditional banks. Does this mean that anyone and everyone will be approved? Not quite. Whilst you’re in with a good chance, it is still somewhat important that you have a relatively healthy cash flow. If your cash flow is dire, and the loan is literally only to cover short-term liabilities or else you’ll go bust, then you may find yourself getting rejected from alternative lending places too.

On the other hand, as long as you’re generally looking healthy, your previous credit can then be sub-par. A poor credit rating is less important to alternative lenders than your current health situation. However even then, your current situation is displayed in a much more concise, admin-free way than bank loan applications.

 

What are secured loans and why you will need to put a personal collateral

Secured loans are a way of reducing how risky you are to the lender – a kind of insurance for them. Essentially, when securing a loan is the act of putting put a personal asset as collateral in case you do not make the repayments on time. In this scenario, the lender then has the legal right to repossess your personal asset, which you may have chosen to be your car, home or something of worth that can be easily liquidated.

Canadian companies often struggle to find loans that do not require security. For the most part, small business loans from banks will usually ask for collateral. This brings your personal possessions under threat, and dependent on your business. Of course, it’s always more preferable to legally and financially demarcate your business from your personal life as much as possible.

In many instances, alternative lenders may not ask for security. However, having an unsecured loan of course comes at a greater cost. Without collateral, the lender sees you as a greater risk, and applies a greater price (in the form of interest) accordingly.

 

4 online lenders in Canada

Here are 4 online lenders within Canada that offer financing to Canadian SMEs.

Loans Canada review

Loans Canada is a “one-stop shop” for small Candian firms. They don’t just offer you loans, but they compare many providers in one place and take into account your situation. These can be filtered by personal, commercial, auto, title, mortgage and debt relief. Here, you can see the range of rates per each provider, the loan amounts possible, and the term in months. 

Fake lender scams are rife in Canada, but Loans Canada are reported to be good at identifying the legitimate ones for borrowers. They also have their own list of scammers that they’re aware of. Whilst this isn’t every single one, they do a good job at being an authority within the industry.

 

Lending Loop review

Lending Loop claims to provide borrowers with the tools, resources and funding that you’re looking for. Lending Loop is properly licensed and regulated, meaning you’re certainly safe to use the platform, whether you’re an investor or a borrower. 

Lending Loop is a little different to Loans Canada. Whilst they don’t provide businesses capital from their own pocket, they don’t merely have a directory of lenders. They’re a peer-to-peer lending company, meaning the money you borrow is from a retail investor (anyone with at least $200 to put into their account). 

This means there’s a larger pool of lenders, because it’s more decentralised and democratic. This leads to better match ups between lenders and borrowers, which may result in more preferable agreements. It’s one of the largest P2P lending sites in Canada, so it’s reputable. These are personal loans, however.

 

LendingArch review

LendingArch is a large Canadian lending marketplace. Reviews of LendingArch are very average on Trustpilot, but there are not many, whilst there are almost 14,000 reviews on them at squareoneinsurance, in which they are rated at 4.7 out of 5. They are generally considered to be safe and reputable. LendingArch claim to use smart technology that can result in quick credit for Canadians.

Lendified review

With Lendified, a Canadian business can borrow between $5,000 and $150,000. The term lengths vary from 3 months to 24 months. This is approved as a legitimate lender by Loans Canada. Lendified is however a very new to the market, having only been funding Canadian business since 2015. Rates at Lendified are affordable relative to the alternative market. You can also improve your business credit when repaying Lendified loans. 

Lendified are focused on good customer service. They can be contacted through a webchat, Facebook, Twitter, email, blog as well as telephone. Repayments can be automated too.

 

Overall in the Canadian alternative lending market, there is an increasing amount of options. Furthermore, there is a very useful law that many other countries lack: APR is capped at 60% according to the criminal code. There are sometimes exceptions with payday loan companies, but these do not interfere much with the small business loan market. The capping of APR is arguably why there has been a struggle in this space for small businesses, as the risky borrowers don’t have a costly-but-willing lender to loan them money over 60% APR.

What happens if I do not meet the requirements?

If you don’t meet the requirements of the majority of alternative loans, it looks like your situation is seen as very risky. Additionally, you may not be fully educated on credit, or unaware of the full extent of your own situation. Services such as Borrowell can help in this situation (as reviewed below). As a side note, other financing options may be available. If you don’t have any personal assets for collateral for example, but you do have a substantial accounts receivables, then it may be possible to use invoice factoring instead.

 

Borrowell review

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As touched on above, Borrowell might be a useful company if you have not met the requirements in terms of business health or credit. Borrowell has a whole list of useful services in fact. Firstly, you can receive a free credit check along with reports. This can even tell you who you owe, your credit score, and have a monthly report update.

Secondly, it has credit education. This means that you can use its AI-powered Credit Coach to help you understand what credit scores are, how they’re composed, how to improve it and so on. This can be a healthy way to better understand how to fix your credit score. 

Alternatively, they provide product recommendations based on your credit profile. These customised recommendations will help you quickly identify the few services out there that may be willing to do business with you given your adverse situation. With over 50 financial product partners, it’s likely that you’ll be presented with a company you didn’t know about. 

Borrowell was established in 2014, but has since grown due to the increase in demand for credit services in Canada, given the adverse climate for SME borrowing. It has quickly gained recognition for being a useful, innovative, trusted company. Borrowell has been named in the top 100 fintech companies by KPMG, along with “startup of the year” at the 2018 Canadian Fintech and AI awards.

Overall, there’s no real harm in using Borrowell. It’s free to do a credit check, and it could just provide with more information than you previously had. Given that it prides itself on having a diverse working environment, this positive attitude is reflected onto the customer experience of using the company.

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Moira Heaney
3 months ago

Would love to discuss this article further – can you please reach out with the email I provided?

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