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Lauryn Vaughn, co-founder of The Upside, recently secured $750,000. The funding, a combination of private capital and a loan from BDC, will go to technology updates, marketing, and a larger warehouse, office and showroom space.Todd Korol

This article is part of The Globe and Mail’s Small Business Borrowing Guide series, which will run weekly on The Globe’s Entrepreneurship page for the next five weeks.

The promises for easy and fast online financing for small business owners are plentiful. Instead of lengthy applications and weeks spent waiting for a decision and deposit, new companies and established banks tout simple and convenient online applications, followed swiftly with automated decisions and fast funds.

But as Canada’s online lending scene transitions – with both new lenders and traditional banks moving online to offer loans, lines of credit and cash advances – entrepreneurs across the country still struggle to secure capital.

“Many firms, particularly at the startup phase, do struggle to find appropriate lending options,” says Dan Kelly, president of the Canadian Federation of Independent Business (CFIB).

“There are additional struggles, depending on the sector of the economy, the region that you happen to be in, the size of your business, the length of your business ownership, the gender of the owner. All of those factors can lead to even more challenging relationships with the bank,” Mr. Kelly says.

Personal assets are often a requirement. Not owning a house, for example, can lead to rejections on a business loan. As well, research shows both new immigrants and women have a harder time accessing financing.

“Women-owned businesses are more likely to self-finance, so they will get a home equity line of credit or they will max out their credit cards before they approach a bank,” says Angela Richardson, an accountant and partner at Richardson Miller LLP, and chair of the board of directors at Alberta Women Entrepreneurs.

Mr. Kelly calls Canada’s banking sector “a bit of a double-edged sword.” While it provides stable lending to some businesses, many entrepreneurs face high rejection rates and struggle to secure financing elsewhere at a reasonable interest rate.

“Banks are not particularly known to be risk takers, and there’s good and bad from that,” Mr. Kelly says.

Research from the CFIB from 2016 shows the overall rejection rate for small and medium businesses accessing bank financing is 15 per cent. Small firms, with fewer than five employees, are nearly six times as likely to be rejected for a loan than mid-sized firms.

In his 25 years with the CFIB, Mr. Kelly says he has noticed more businesses try to operate without financing from a bank, relying instead on their own equity or assets, family and friends, or personal or corporate credit cards. “They try to self-finance as much as possible and that can really limit a business’s growth opportunities,” he says.

New digital companies aim to address such issues. Cato Pastoll, chief executive and co-founder of Loop Securities Inc., better known as Lending Loop, says he saw firsthand the struggles faced when it comes to financing, as both his parents were small-business owners who turned to family and friends for capital.

Financing is a “really huge pain point” for small business owners, says Mr. Pastoll, adding some owners are unable to get the financing they need to be able to expand, while others have to pay far too much to be able to get that capital.

In response, Mr. Pastoll’s three-year-old Toronto-based company connects small businesses seeking capital with Canadians who want to lend money to small businesses through an online platform.

While Lending Loop is not a lender, instead facilitating the lending process, other companies are taking on that role, including four-year-old Lendified Holdings Inc. and Thinking Capital Financial Corp., founded in 2006.

Others startups such as Clear Finance Technology Corp., known as Clearbanc, offer new models for financing. Co-led by Michele Romanow of Dragons’ Den fame, Clearbanc, which recently secured US$300-million in capital, provides cash advances to e-commerce companies that want money for marketing. Customers don’t have to give personal guarantees, give up equity or undergo credit checks.

New online lenders, however, face a lack of awareness from small-business owners. “They are minuscule in the Canadian landscape at the moment,” Mr. Kelly says. “About 1 per cent of our members have used some form of online lending.”

As well, interest rates are often higher than traditional lenders. Borrowers using Clearbanc, for example, pay a fee of between 6 per cent and 12.5 per cent, while interest rates in Lending Loop’s online marketplace vary from 6 per cent to 26 per cent, based on the risk rating of the business. Rates from other alternative lenders are even higher, and some products can cause confusion for borrowers as they don’t state the interest costs in the standard way – as an annual percentage rate.

Kevin Clark worked in banking for 30 years before co-founding Lendified. “Different institutions simply make different lending decisions,” says Mr. Clark, who is also chair of the Canadian Lenders Association.

Banks don’t want to be in the space of accepting higher loan losses to manage, says Mr. Clark, which opens up the space for alternative online lenders, such as Lendified. “We’re actually compatible to the banks, because we offer a product and are prepared to take the risk in a space where they don’t really like to play.”

Arun Kumar, head of small-business banking at Bank of Montreal, says the small-business segment of the market has been underserved, as banks used either heavy commercial models or simplistic retail models to lend to all small-business owners. “If you didn’t fit perfectly into either, you’re basically priced accordingly,” he says.

“With technology and automation, I think it’s becoming more of a level playing field for the smaller sized borrowers,” Mr. Kumar says. “The gaps that existed due to the banks not having simple, automated solutions … are getting more and more diminished, because we are building those solutions."

BMO, for example, introduced a new digital platform for loans last year, called BMO Business Xpress. Other traditional banks also offer options that promise quicker, easier access to financing. HSBC Bank Canada, a subsidiary of HSBC Group PLC, worked with U.S. fintech firm Biz2Credit to introduce eCredit, a business line of credit available through an online application. The Business Development Bank of Canada, a Crown corporation focused on supporting entrepreneurs, offers online small-business loans for up to $100,000.

Mr. Kelly worries that as banks adopt alternate forms of lending, they may step back from traditional lending. “Most of the small businesses that I speak to still want to have a relationship with their financial services provider,” he says. “This is still a new enough area that people are not particularly comfortable doing everything online.”

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Lauryn Vaughn, co-founder of The Upside, an online retail consignment store based in Calgary, says she knew her company needed capital to grow, but faced difficulties knowing where to find financing.Todd Korol/The Globe and Mail

Lauryn Vaughn is founder of The Upside, a large Canadian online luxury reseller. The Calgary-based company, founded nearly four years ago, recently secured $750,000. The funding, a combination of private capital and a loan from BDC, will go to technology updates, marketing and a larger warehouse, office and showroom space.

As well, for about eight months, The Upside has used Clearbanc to advance its digital marketing. Like other merchant cash-advance products, Clearbanc borrowers repay the money advanced, plus a fee, as a predetermined percentage of their sales. Ms. Vaughn says applying for and receiving an advance from Clearbanc has been “seamless."

For about a year, Ms. Vaughn says she knew The Upside needed capital to expand, but faced difficulties knowing where to find financing.

The Upside operates on a consignment model, meaning it doesn’t have large amounts of inventory. “To be asset-light, any business person would say that’s a good thing, but any bank is going to say, well, at the end of the day, if you close up shop, we can’t come and take your inventory,” she says.

After facing challenges with banks, Ms. Vaughn was successful with a $250,000 loan from BDC. The remainder was raised through private capital.

“The hardest journey was definitely for the private funding, and that took the longest. But if you don’t have traditional lending as an option, then you will have to go down that route,” she says.

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