This article is part of The Globe and Mail’s Small Business Borrowing Guide series.
For more than a decade, Thinking Capital Financial Corp., known as Thinking Capital, has offered small businesses in Canada an alternative option to financing from banks.
Jeff Bouganim, Thinking Capital’s interim president and chief financial officer, and also CFO of parent company Purpose Financial LP, says when Thinking Capital started in 2006, there weren’t many options for small-business borrowing, aside from banks.
“The opportunity came along to say, 'Look, we will finance you within about 24 hours,’” Mr. Bouganim says. “That’s a radically different experience for the customer.”
More than 15,000 customers have borrowed money from the Montreal-based company, which has had different names over the years.
In addition to its most popular product, a term loan called Fixed Financing, Thinking Capital offers merchant cash advances, called Flex Financing, and invoice financing (where a business receives an advance on their invoices). Thinking Capital also partners with other companies, such as Moneris and National Bank of Canada, to offer products.
To apply for up to $300,000 from Thinking Capital, basic details on the business and its sales volume are required. Thinking Capital typically does not finance businesses that are less than six months old.
A business owner submits information online, which takes about five to 10 minutes, then a Thinking Capital representative calls and collects additional information. If a business owner is approved, Mr. Bouganim says funding is usually provided in about 24 hours.
While a business owner’s personal credit is checked, business cash flow and daily transactions play a bigger role in Thinking Capital’s approval process.
Thinking Capital’s term loan (Fixed Financing) and merchant cash advance (Flex Financing) both feature daily repayments. The term usually ranges from six to 12 months, although even shorter loans are possible.
Does Thinking Capital live up to its claims? We spoke to an entrepreneur and accountant about the company’s main products.
Javier Lirman, owner of Cargo Cabbie Inc., a Toronto moving company, applied to Thinking Capital a few years ago and received a $20,000 merchant cash advance. He used the money to help cover the rental costs of a warehouse, so he could expand his business to offer storage services. Today, his business has a fleet of nine trucks and about 30 employees.
Mr. Lirman started his business in 2010, a few years after immigrating to Canada from Israel. He says Thinking Capital was the first lender that ever approved him for financing. “I found myself kind of alone, without support from banks,” he says. Because he was new to Canada, he says it took time to build his credit score.
Mr. Lirman says he paid back the $20,000 advance through 5 per cent of his daily sales, over about one year.
“It was really affecting my business because all the money that I get into the company, via credit card or debit, they get a percentage,” he says.
Still, because he had struggled to get financing elsewhere, Mr. Lirman applied for another Thinking Capital advance after he had paid off the first advance. This time, he says he asked for $50,000 and was offered a payback rate of 12.5 per cent of his daily sales. He declined the offer.
“I think there’s always somebody willing to lend to you, but then the conditions and how much you’re putting on the line to get the money, that’s another thing,” he says.
Thinking Capital does not use an annual percentage rate with Fixed Financing, its loan product. The company says the price to borrow varies and ranges from 8 per cent to 22 per cent of the total borrowed amount. Borrowing $100,000 over one year, for example, would cost between $8,000 and $22,000. There is also the potential for an origination fee of up to 3 per cent.
“It’s highly variable depending on the customer,” Mr. Bouganim says.
Flex Financing is a merchant cash advance, in which borrowers repay the money advanced as a predetermined percentage of their daily sales. The price to borrow typically ranges between 12 per cent and 28 per cent of the total borrowed amount. Thinking Capital says the predetermined percentage of daily sales (withheld to repay the loan) varies between 4 per cent and 18 per cent.
Thinking Capital also offers “coverage payments," an option for borrowers where, on select holidays, money is deposited to ensure businesses have cash flow, as well as “top-ups” to its products, in which businesses can borrow more money once they have repaid 35, 60 or 90 per cent of their loan.
The bottom line
Andrew Zakharia, a small-business accountant and founder of AZ Accounting Firm in Toronto, says business owners need to understand what they’re signing up for with Thinking Capital. Fixed daily repayments, as well as repayments that are a percentage of daily sales, can be challenging for business owners.
Mr. Zakharia says that to keep up with daily payments, business owners may feel forced to borrow more funds through Thinking Capital’s top-ups or coverage payments. Borrowing in this way will prolong the loan or advance, he says, and potentially put a business owner in a perpetual cycle of borrowing.
“If your business has a cash flow problem, borrowing is only going to make things worse,” Mr. Zakharia says.
Mr. Bouganim says there is an evaluation process borrowers undergo before they receive top-ups.
“If you’ve had trouble paying down your loan, we’re not going to offer you the top-up, because that’s going to be a scenario where we’d be concerned that you might end up in a negative situation,” he says.
For the product to work well for a business owner, Mr. Zakharia says the loan needs to be used to bridge a short-term gap where the business owner knows for sure their situation will soon improve.
“It works if you need fast access to capital. Just know the risk. Know what you’re signing up for, and don’t use it as a lifeline for your business,” he says.