Fintech lenders help small businesses out of tight spots

In business, cash flow doesn't always keep pace with costs. Predicting sales can be a challenge. Customers can take a long time to pay, and sometimes unexpected costs come up.

Some businesses with cash flow difficulties find themselves in a tighter spot than others. Broadplay, a Toronto-based digital marketing and mobile app development agency, is growing, but it's too big for chief executive officer Marcus Anderson to borrow from friends or family. And it's too small, and carries too much debt, to get bank financing.

"Banks are really good at providing an umbrella on a sunny day," Mr. Anderson says.

Faced with a cash-flow crunch, Mr. Anderson says he turned to a Toronto-based startup called FundThrough. It offers what's called invoice financing – it gives companies a cash advance based on their unpaid invoices.

Once he received the funds, the first payment Mr. Anderson made went to Canada Revenue Agency.

Steven Uster, FundThrough's CEO, says customers often use his service to avoid a cash crunch when taxes are due. "For business, it isn't necessarily April, we see it throughout the year," he says.

"CRA charges all these penalties, and you don't want to be offside by not paying your HST [remittances] on time," he says.

The advantage of FundThrough, Mr. Uster says, is that rather than waiting 30 to 90 days for an invoice to be paid, customers can get a cash advance for 80 to 90 per cent of the invoice's value within 24 hours.

"It's very rarely a profitability issue," he says. "It's a cash-timing issue for small businesses, and that's what we're solving – that time issue, that wait period. You've got obligations that come up and they're not always matched with the timing of your inbound cash flow."

FundThrough is one of a new batch of online lenders – or fintech companies – that are using information other than credit scores to assess the riskiness of a transaction.

The fee charged by FundThrough depends more on whom the invoice was sent to than it does on the credit-worthiness of the borrower. Mr. Uster says an advance will usually cost between 1 and 2 per cent of an invoice.

For Broadplay's Mr. Anderson, that cost was a lot cheaper than one option he has used before – borrowing money against future scientific-research and economic-development tax credits.

"When you're low on cash, you're juggling bad options," says Ian Crosby, the CEO of Bench, a Vancouver-based accounting startup.

In general, alternative lenders tend to charge higher fees than banks, but Mr. Crosby says that's partly because many of their customers wouldn't be able to get a small-business loan from a traditional financial institution.

That doesn't mean banks aren't doing business with small-business owners.

"The banks are lending to these guys, but they're lending to them on credit cards," Mr. Crosby says. "The credit card lenders are charging much higher interest rates than any of the new fintech companies."

Carolina Suarez, the accounts director at Invoice Payment System Corp., a Mississauga-based company that offers invoice-based financing, says she often sees businesses fail to set aside money for future tax bills, and then they struggle to find the money when it's time to pay.

"The reality is, either way you're going to have to get the cash from somewhere," she says. Invoice financing is cheaper and faster than using a credit card, she maintains.

Barbara Orser, a professor at the University of Ottawa's Telfer School of Management, says that while invoice financing may beat credit cards, it's not a good idea over the long term.

"It's a strategy that's deployed to tide over," Ms. Orser says. "There's an absolute disadvantage to using that as an ongoing method of capitalizing cash flow."

Small businesses should bring in a chief financial officer as soon as possible, even if it's just a virtual one, and create plans for scenarios so that unnecessary debt and deficits can be avoided.

Small businesses also often underutilize supplier credit, she says, and should take advantage of it when it makes sense.

Businesses that rely on short-term debt and cash advances run the risk of getting trapped in a cycle of debt, says Bench's Mr. Crosby.

"That's how businesses die," he says.

Five fintech lenders

FundThrough: Based in Toronto, it offers advances to small businesses backed by invoices. It charges a flat fee of 0.75 per cent to 1.25 per cent, plus a daily fee ranging from 0.025 per cent to 0.049 per cent while the invoice is outstanding. Fees are based on who's paying the invoice, not who's getting the advance.

Invoice Payment System: Based in Mississauga, this company also offers invoice financing. It got its start working with the trucking industry and has expanded into other markets. It offers additional services, such as doing credit checks on the businesses its customers are invoicing, and it maintains a database of payers and how long they take to pay an invoice. It also handles collections for customers. Fees are 0.1 per cent a day, plus a flat fee of between 3 and 4 per cent.

Thinking Capital: Based in Montreal, Thinking Capital has partnered with major financial institutions, including Canadian Imperial Bank of Commerce and Toronto-Dominion Bank. It examines how money is moving through a business to evaluate creditworthiness. It offers loans and merchant advances of as much as $300,000. Businesses either pay back a fixed amount or a percentage of their daily credit card sales. Its interest rates vary and can be comparable to bank loans, at the low end, or a credit card, at the high end.

OnDeck: Based in New York, OnDeck is traded on the New York Stock Exchange and has been operating in Canada for about a year. It uses a proprietary algorithm to determine creditworthiness. Interest rates can vary widely; the company says they average between 0.003 per cent and 0.04 per cent a month.

Borrowell: One of the few online lenders targeting consumers and small businesses, Toronto-based Borrowell offers longer-term loans than its competitors, around three to five years. It uses traditional credit scores and looks only at the borrower – not their business. Interest rates start at 5.6 per cent.

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