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 until November.
As a former banker, Kevin Clark is familiar with the struggles small businesses experience accessing capital.
After working in banking for 30 years, including senior roles at Bank of Nova Scotia, Mr. Clark co-founded Lendified Inc., an online alternative lender. His co-founder, Troy Wright, is also a former banker.
The four-year-old company fills a gap in the marketplace, says Mr. Clark, Lendified’s president. Banks don’t want to be in the space of accepting higher loan losses to manage, Mr. Clark says, which opens up the space for alternative lenders like Lendified.
“To offset those loss expectations, you just have to have higher price loans,” he says.
Lendified’s financing is more expensive than banks offer, but it’s also built around being faster. “The value proposition of this is to get the capital out the door,” Mr. Clark says. Lendified promises loans of up to $150,000 in as quickly as 48 hours.
Does Lendified live up to its promises? Andrew Zakharia, a small-business accountant and founder of AZ Accounting Firm in Toronto, applied for a loan with Lendified to find out.
Incorporated businesses in Canada with at least six months of operation, at least $100,000 in annual revenue and a personal credit score of at least 610 are eligible. (A credit score of between 560 and 659 is considered fair and between 660 and 724 is good, according to Lendified.)
Lendified offers loans ranging from $5,000 to $150,000 for up to two years.
Mr. Zakharia says the online application was simple and involved entering basic personal information, business information and sharing six months of business bank statements. Business owners use a sliding bar to choose how much money they’re interested in applying for; Mr. Zakharia applied for $150,000.
After completing the application, Mr. Zakharia immediately learned he was “pre-qualified” for a loan, the first step in Lendified’s approval process. Next, a Lendified representative called him to ask similar questions to the application, as well as a few additional questions to better understand his business. He was told he would receive an offer within 48 hours.
If the borrower accepts the loan offer, Lendified says funds are usually received in two to four days.
“We always talk to the borrower,” Mr. Clark says. “We never have credit going out the door without having had a discussion.”
Over the phone, Mr. Zakharia received a loan offer of 16.08 per cent for $150,000 on a two-year term. He told the representative the rate seemed high and was told they would look into bringing the rate down.
After the phone call, he received the offer by e-mail. It detailed a loan of $150,000 with a $4,500 origination fee and no change to the quoted loan offer – a 16.08 per cent AIR, or annual interest rate. The origination fee is a one-time fee of 3 per cent, deducted from the loan amount, meaning Mr. Zakharia would receive $145,500.
It wasn’t until Mr. Zakharia started to look more closely at the fixed biweekly payment amount that he realized that one little change in loan terminology can make a huge difference in what a customer pays for the loan.
With an annual percentage rate, or APR – what Mr. Zakharia has always seen used in the past – each repayment reduces the principal on which the interest is calculated. With an AIR, which is what Lendified uses, the repayments do not reduce the principal on which the interest is calculated.
By Mr. Zakharia’s calculations, over the two-year term, his offer with a 16.08-per-cent AIR is closer to a 28-per-cent APR.
“Any loan I’ve ever seen, whether it’s a credit card, a line of credit, a mortgage, or a term loan from any lender, the interest rate is quoted using an annual percentage rate,” Mr. Zakharia says.
Mr. Clark says Lendified uses AIR to communicate the cost to the borrower because it’s “a lot simpler to understand” than APR. Mr. Clark says Lendified explains this rate to customers through its website and on sales calls.
“What we decided to do, like other firms have done, is offer the annual interest rate. When you borrow $100,000 for one year, you’re going to pay the number that you were quoted. Say it was 16 per cent; you’re going to pay $16,000.”
He says small businesses can be taken advantage of by lenders that aren’t properly disclosing the actual cost of capital. “So we’ve tried to be a boy scout here in this marketplace and said you have one fee and you have one interest rate,” he says.
Every borrower pays an origination fee of 3 per cent of the loan total, and Lendified’s AIR ranges between 8.99 per cent and 18.99 per cent. Some businesses with “strong creditworthiness” may be offered lower rates, according to Lendified’s website.
Mr. Zakharia did receive a final loan offer with a lower AIR of 14.29 per cent and was told that over two years he would pay a total of $42,877 in interest on the $150,000 loan. He did not accept the offer.
Business owners who do borrow from Lendified repay a fixed amount every two weeks. There are no penalties for early repayments if the repayment is from the cash flow of a business, but Lendified says there can be a penalty if the repayment is made by refinancing through other financial institutions.
The bottom line
The cost to borrow at Lendified is high compared with traditional lenders, but on par with what other alternative lenders charge.
Mr. Zakharia says borrowers need to understand what they are signing up for and how an annual interest rate works compared with an annual percentage rate.
One positive of the product is that the financing is available quickly. “I would have been able to get it in the same week I applied for it, so that is a plus. But you’re paying a lot to borrow on that timeline,” he says.