Bill Finley, co-owner of Hemp and Company, was approved in less than 48 hours for his business loan with Company Capital, an online provider that offers short term lending options for small to medium sized businesses.
Online business lenders are increasingly popping up in the financial technology (fintech) world and filling a major gap for Canadian small businesses often overlooked by the major banks, but small business owners should take the time to research these various platforms to ensure they fit the company's needs.
The Canadian marketplace has seen a number of new entrants join the online lending space in recent months. Mogo Finance Technology Inc. was the first Canadian online lender to go public in June and announced it will enter the small business lending space over the next year.
Lending Loop, a peer-to-business lender where individual investors will finance small business loans, is set to launch its lending site at the end of September. The platform is already open for small businesses to submit loan applications. Once approved, businesses will be added to an online 'marketplace' where individual investors will be able to fund the loans.
One of the biggest attractions of online lenders is the speed in which they can process an application. While banks can take between four to six weeks to process a business loan application, most online providers can process in one to two days of the application.
Bill Finley, co-owner of Hemp and Company, was approved in less than 48 hours for his business loan with Company Capital, an online provider that offers short term lending options for small to medium sized businesses.
Based in Victoria, B.C., Mr. Finley has been running his organic clothing shop for 16 years. His first online loan was four years ago when he was looking to increase his inventory. He had the option of applying for a short term business loan or a merchant cash advance, and decided on the latter.
A merchant cash advance allows a company to borrow a sum of cash up front but pay back the amount based on a percentage of daily sales vs. a fixed monthly payment.
For example. Mr. Finley borrows $15,000 for his inventory purchase. The amount he will pay back, including the amount of borrowing is predetermined upfront to be $16,700.
The length of time he has to pay back the loan depends on how aggressive he wants to be with the payments.
During the summer months when Mr. Finley's business produces higher sales, he pays back the loan at 15 per cent of his daily sales until the loan is paid in full.
The advantage – especially to seasonal businesses – is the percentage of daily sales can be adjusted accordingly. If the winter months are a slower season, business owners can choose to lower the percentage of sales going toward their loan payment. The downside is the lower you go, the longer it will take to pay off.
Small business owners should also be aware that the price tag of borrowing with online lenders is much higher than that of the major banks. Interest rates can be as low as 10 per cent but also has high as low- to mid-20s, depending on the provider and loan application.
To qualify, businesses need to be Canadian based and running for at least one year. Thinking Capital is one of the few providers that look at businesses that have been open for just six months.
To complete an online application, depending on which provider, small business owners may need to provide: A company address; how long a company has been in business; name of owner(s); how much money the owner(s) have invested in the company; a sales history of the company, as opposed to a full financial statement (the sales history is generally acquired by the company's third party point-of-sales provider); estimated annual revenue; and social media accounts, as in some cases a company's Facebook or Twitter account can help verify the health of their business with the number of followers or connections.
"Our underwriting doesn't rely on financial metrics alone," says Anthony Lipschitz, chief strategy officer at Thinking Capital, which has been in the Canadian marketplace since 2006. "Technology has rapidly changed since we first started and we have spent the last few years really focused on building our technology from a servicing standpoint."
While all platforms provide some sort of small business loan, they all have individual quirks, which may or may not work for specific business needs.
Toronto-based FundThrough provides access to capital based on a company's receivables. The loans are comparable to a short-term line of credit that helps bridge the gap between when a business invoices its customers and when it gets paid.
OnDeck Capital Inc., one of the largest U.S providers, entered the Canadian marketplace last year. The platform lends to over 150 subsectors of businesses with a strong focus on 'main street' shops.
"Our clients are everything from restaurants to flower shops to your local hairdresser," says Rob Young, OnDeck's senior vice-president of International Operations.
For longer term loans, several online providers including OnDeck, Company Capital and Thinking Capital offer small businesses fixed term loans from $5,000 up to $500,000. (Thinking Capital loans are capped at $300,000.)
Unlike a bank, companies don't have to provide a mountain of documents says Steve Clark, chief executive officer of Company Capital.
"We are really trying to keep it simple," says Mr. Clark "That is why sometimes it doesn't work at the bank. We just need the basic info and our technology platform can help determine the validity of the company."
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Clare O’Hara