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Cato Pastoll, CEO of Lending Loop, is working through his online platform to improve access to financing for all entrepreneurs by connecting small businesses seeking capital with Canadians who want to lend money to small businesses.Mark Blinch/The Globe and Mail

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.

Lending Loop

Growing up with parents who were both small-business owners, Cato Pastoll saw first-hand the struggles entrepreneurs face when it comes to financing.

“One of the things that always stood out for me as they were growing their businesses was they were often very reliant on family and friends to give them the capital they needed to grow those businesses, as opposed to being able to find things from a more formal source,” Mr. Pastoll says.

As chief executive and co-founder of Loop Securities Inc., branded as Lending Loop, Mr. Pastoll is now working to improve access to financing for all entrepreneurs.

Lending Loop is an online platform that connects small businesses seeking capital with Canadians who want to lend money to small businesses. Lending Loop is not a toron – rather, it facilitates the process.

The Toronto company bills itself as Canada’s first fully regulated peer-to-peer lending platform for small businesses. Nearly 1,000 small businesses have used Lending Loop, borrowing more than $54-million from more than 10,200 lenders.

Entrepreneurs apply online for loans from $1,000 to $500,000. Loan terms vary from three months to five years (the average is three years) and interest rates vary from 6 per cent to 26 per cent a year, based on the risk rating of the business.

“What’s interesting about our model is we don’t make any more money off the higher interest rate,” unlike other alternative lenders, Mr. Pastoll says. “We’re really trying to find the rate that best suits the business that’s applying, and on average it’s in the low teens, so about 10 [per cent] to 13 per cent.”

Mr. Pastoll says small businesses are attracted to Lending Loop because of its rates, longer loan terms and focus on credit education. “It’s not just about giving them the capital, it’s about educating them – on what it means for that business, how much capital they can actually afford to repay at a given point in time,” he says.

Does Lending Loop live up to its claims? A small-business accountant who has used the platform several times shared his experience with The Globe and Mail, but first, here’s more on how Lending Loop works.

The promise

To be eligible for a loan, businesses must be in operation for one year or longer, have more than $100,000 in annual revenue, be registered as a corporation or partnership, and the owner must have a minimum personal credit score of 600. (Credit scores generally range between 300 and 900, with a higher score being more favourable.)

Anyone can become a lender by opening an account with a minimum $200 deposit (except for in Quebec, because of regulatory concerns). “A lot of people really love that they’re investing in local businesses and investing in that community,” Mr. Pastoll says.

Lending Loop says it takes five minutes to complete their online loan application, containing questions about the business and its performance.

Financial statements must be shared, but they do not have to be audited. In many cases, Mr. Pastoll says, businesses will provide management-prepared financial statements or their tax returns, which include their financial statements.

Next, Lending Loop evaluates the loan request. Mr. Pastoll says 60 per cent to 70 per cent of completed applications that meet the minimum qualifications are approved. If businesses are not approved for financing, the company will try to match them with a lender outside of Lending Loop.

Approved borrowers get assigned a loan grade and are sent a personalized loan offer by Lending Loop. If the borrower accepts that offer, the loan gets posted on Lending Loop’s online marketplace, where actual lenders can invest. Once the loan is funded, money is transferred to the borrower’s bank account.

The experience

Andrew Zakharia, a small-business accountant and founder of AZ Accounting Firm in Toronto, has used Lending Loop more than a dozen times, applying for his own business and on behalf of clients.

Mr. Zakharia says in his experience it typically takes about two to four days to go from a completed application to a loan offer. If the business owner accepts the offer, it goes to Lending Loop’s online marketplace for 30 days, with a possible 15-day extension.

The amount of time it takes to fund the loan can vary, Mr. Zakharia says, based on how big the loan is, how crowded the marketplace is and even the time of year. He’s noticed it takes longer to get loans funded during certain times, such as summer and December.

Lenders can set up an auto-lend option to automatically invest in loans that meet predetermined criteria, meaning some loans get funded immediately.

For borrowers, the process can take five to 10 days, Mr. Zakharia says. “But on the high end, you’re waiting 45 days.”

Mr. Pastoll says the average funding time is eight days. Loans under $50,000 have an average funding time of 3½ days. Since the company started, Mr. Pastoll says less than 2.5 per cent of loans have not been fully funded after 45 days. So far this year, that number is less than 1 per cent.

Where a loan has not been fully funded, the business owner can choose to receive the amount that has been raised or go elsewhere.

Payback time

Business owners make a fixed monthly payment for a predetermined term, plus an origination fee that goes to Lending Loop, which is added to the value of the loan. The origination fee ranges from 3 per cent to 6.5 per cent, depending on the loan grade. The company says the fee covers the cost of underwriting and processing the loan. Lending Loop also charges lenders a 1.5-per-cent fee, collected whenever a business makes a repayment.

Unlike other companies that penalize businesses for paying loans back early, there are no extra or hidden fees with Lending Loop. “It’s completely transparent,” Mr. Zakharia says.

The bottom line

Entrepreneurs should start looking for loans with the big banks as they have the best rates, Mr. Zakharia advises, then try the Business Development Bank of Canada (BDC). Lending Loop would be a good next option.

“Lending Loop is good for someone who has a good personal credit score and a good outlook for their business; their business is showing profitability and it has cash flow,” he says.

Mr. Zakharia says Lending Loop is not a good fit for entrepreneurs who need money now and want to repay it quickly, because they will still have to pay the origination fee. (Other lenders, such as BDC, charge an annual loan-management fee of $150, which in most cases would be significantly less than an origination fee based on a percentage of the loan.)

For businesses seeking loans of more than $100,000, he advises them to expect to be patient, as bigger loans take longer to fund on Lending Loop.

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