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Cato Pastoll, CEO of Lending Loop, poses for a picture in their office in Toronto on Tuesday.

Mark Blinch/The Globe and Mail

The Ontario government is turning to Canada’s financial technology sector to help small businesses get better access to financing.

On Wednesday, Lending Loop, a peer-to-peer online lending platform for small-business loans, announced a pilot project in partnership with Ontario that will provide $3-million of loans over the next two years. The government will boost Lending Loop’s loans by 10 per cent, which will help fund more than $30-million of loans to businesses across Ontario. The government will receive a full re-payment of the loan plus interest at the end of the loan terms.

“This pilot program is important as it will significantly benefit small businesses, accelerate Fintech adoption, and provide new opportunities for financial institutions,” Jeff Leal, Minister Responsible for Small Business, said in a statement.

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Small-business loans are seen as risky, with borrowers facing annual interest rates between 8 per cent to 40 per cent as a result of challenges such as absence of collateral, a lack of operating and credit history, unaudited financial information or an absence of steady cash inflows.

“The new lending commitment from the province recognizes the contribution that non-traditional channels can play in improving businesses’ access to capital,” says Cato Pastoll, co-founder and CEO of Lending Loop. “This partnership is a major step forward for peer-to-peer lending in Canada. Globally, over $40-billion has been lent to businesses through the peer-to-peer model, and we are incredibly excited to see the Ontario government involved in helping support the growth of businesses across the province.”

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'This partnership is a major step forward for peer-to-peer lending in Canada,' says Mr. Pastoll.

Mark Blinch/The Globe and Mail

In Canada, there are a handful of online lenders offering small-business loans. The majority of the platforms are fintech start-ups that have been looking to address challenges many small businesses face when accessing financing from traditional sources – such as Canada’s five big banks.

As part of Ontario’s strategy to support small businesses, the 2017 Fall Economic Statement included a commitment to establish a pilot project to address small-business financing challenges.

In early 2018, the ministry held a number of consultations with representatives of lending platforms, credit unions and large financial institutions to determine the best approach. The government found that many businesses struggle when it comes to securing loans between $500,000 and $1-million.

“Peer-to-peer lending platforms play an important role because they increase the amount of capital for small businesses by creating new sources of loan capital, more sophisticated credit models, and efficient access,” said a spokesperson for Mr. Leal’s office. “Platforms in other markets have proven that lending to small businesses with affordable, long-term capital not only benefits the small businesses but is also a highly attractive investment for investors.”

The three-year “access to capital” pilot program also includes a commitment to provide a grant of up to $750,000 to the Toronto Financial Services Alliance to promote awareness of alternative forms and sources of lending programs available to small businesses.

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As well, a second grant of $1.75-million was announced to support the adoption of fintech technology by credit unions to increase the loans being made to small businesses.

Online provider Lendified has been outsourcing its technology platform under its subsidiary Lendified Technologies Inc. to credit unions since early 2017 and currently is in discussions with two Ontario Credit unions to implement its software for in-house financing.

“We want to help provide the credit unions with the tools to efficiently underwrite and get more credit into the marketplace by using the advanced technology that we offer,” said Kevin Clark, president of Lendified.

Andrew Zakharia, a chartered accountant and founder of Toronto-based AZ Accounting Firm, which has a large client base of small-business owners, said the announcement will further add credibility to alternative lenders as well as bring awareness that there are other financing options available.

“I think the government has finally recognized that for many small businesses, it can be very difficult to access capital through traditional lenders so one viable solution is to invest in these alternative lenders who are able to provide that capital,” Mr. Zakharia said.

Over the past five years, platforms such as Lending Loop and Lendified have been popping up to offer alternative options to small businesses looking for financing, including those that may not qualify for a business loan through larger banks.

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Many of the platforms have accredited investors and institutions that are funding the loans. As a peer to peer lender, Lending Loop’s model differs in that it allows individual retail investors to invest as little as $25. Investors are able peruse an online marketplace of small businesses and select the companies they wish to help finance.

The business model is one that piqued the interest of regulators in 2016, when Lending Loop volunteered to pause its retail investor marketplace in order to work alongside regulators and make internal changes necessary for regulation.

Registered as an exempt market dealer and one of the only platforms funded by retail investors, Lending Loop allows small businesses to apply online for business loans up to $500,000.