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Small businesses – some seen here along Queen Street in Toronto on March 25, 2020 – already struggle to get loans from commercial banks.Melissa Tait/The Globe and Mail

The coronavirus crisis is constraining digital small-business lending services just as they’re seeing a surge in demand from entrepreneurs left cash-strapped by the pandemic.

Three of Canada’s most prominent financial technology small-business lenders say they have had to restrict their loan eligibility criteria because of the crisis’s risk to clients. One of them, Lending Loop, which allows everyday investors to back its loan system, has seen its pool of capital for lending shrink by as much as 70 per cent, even as demand has more than doubled on a daily basis.

“The market we have seen both from individuals as well as larger corporate lenders has certainly become a lot drier,” said Cato Pastoll, Lending Loop’s chief executive officer.

Whole segments of the economy have been shuttered by the COVID-19 pandemic as governments try to reduce the spread of the novel coronavirus that causes the disease. Ottawa’s relief programs for small and medium-sized businesses (SMBs), meanwhile, have been piecemeal.

The government buckled under pressure from entrepreneurs last Friday, responding to more than a week of criticism by boosting wage subsidies for many small businesses to 75 per cent and enacting a government-guaranteed loan program.

Small businesses already struggle to get loans from commercial banks. While Mr. Pastoll and other lenders believe the new guaranteed loan program is a good starting point, it is expected to funnel through traditional banks. But the fintech lenders believe they could offer much wider support – and help stave off more layoffs and bankruptcies – if they were included in such a program.

“If there isn’t support for these smaller companies, then the Walmarts and Amazons of the world are basically going to be the only things left after all of this – which is a pretty dystopian view of the future,” Mr. Pastoll said.

Thinking Capital, one of Canada’s biggest lenders outside of the Big Six banks, has had many customers call crying in recent weeks. Many of them are in the restaurant business. But CEO Stéphane Marceau said that in light of the increased risk loaning to small businesses during the virus, “We’ve dramatically tightened our criteria” for lending.

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As criticisms of Ottawa’s approach to small-business relief mounted last week, a group of fintech lenders sent a letter to Prime Minister Justin Trudeau and several cabinet ministers offering their assistance in getting cash to entrepreneurs. The centrepiece of their offer was their technology, which assesses different financing criteria than traditional banks, and can offer credit faster.

Members of that group, the Canadian Lenders Association, would undoubtedly benefit from disbursing relief funds – and not just because of a brand boost. They have a fiduciary responsibility to use their investors’ capital responsibly, and lending to already-shuttered businesses in the midst of a pandemic is risky.

“Entrepreneurs who have temporarily closed their doors need the most assistance, but we can’t do that with our funding structure,” said David Gens, the Vancouver-based CEO of lender Merchant Growth, and co-chair of the associations’s COVID-19 working group. “It’s tough for us to put private capital out into an environment that’s this uncertain.”

The lenders want Ottawa to use their platforms to deploy funding that would be backed by the government, perhaps through the Business Development Bank of Canada. In doing so, they say they could more easily provide credit to 100,000 of Canada’s 1.2 million small businesses.

Mr. Trudeau announced Friday that traditional banks would soon offer $40,000 loans to some small businesses that would be guaranteed by the government. They would be interest-free for the first year, and $10,000 would be forgivable.

Mr. Gens still hopes Ottawa will consider using fintech services to deploy government-backed funding: “We’re here, ready to help.”

Not all fintechs say they are struggling to get money to clients. Clearbanc in Toronto gives its clients access to cash to support ad campaigns through revenue-share agreements. Its demand has increased 34 per cent since the crisis began. Because Clearbanc focuses on e-commerce companies, co-founder Michele Romanow said some of its clients are seeing a boost in business – particularly in food delivery.

“I don’t think we’re going to describe anything as booming right now,” Ms. Romanow said. “… But we haven’t changed anything about how we’re [deploying] our capital.”

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