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Diamonds are displayed in a polishing diamond workshop in Antwerp, Feb. 5, 2009. With credit tight and markets volatile, more businesses are borrowing against such alternative assets.YVES HERMAN/Reuters

Steven Uster didn't set out to start an alternative financing company. When he was looking to buy a business in Canada, the former New York investment banker saw an opportunity to serve small firms having trouble getting loans.

Mr. Uster talked to a number of owners who needed a few thousand dollars to fill orders or to expand, but they couldn't get the necessary financing. To fill the void, he started Zillidy – a private personal asset lender based in Toronto that offers short-term secured loans based on items such as jewellery, gold and works of art as collateral. No banks are involved. There are no credit checks.

"Homeowners are able to tap the equity in the houses in their home equity line of credit, so I said, 'Why can't people do that with their personal assets?'"

Zillidy is the latest in a growing number of alternative financing companies that cater to small businesses and individuals looking for loans outside the traditional banking system. The industry has just a few players in Canada so far, but it is expanding rapidly in countries such as the United States, China and Britain.

The growth is based on an increase in the number of borrowers trying to bypass the banks, but it is also being driven by investors, who see the loans as an alternative investment and are willing to back them. Google Inc., for instance, recently invested $125-million (U.S.) in Lending Club and another $17-million in On Deck Capital. Both are online lending platforms. Lending Club is a peer-to-peer (P2P) business that connect investors with money to borrowers looking for loans. On Deck is a direct lender, which means it lends its own money.

Investors make money off the interest, at the risk of borrowers defaulting. For borrowers, alternative lending is an option if they can't get a bank loan, the rates are unattractive, or they don't want a hit on their credit rating. Banks have tightened their lending rules in the wake of the 2008-09 global financial crisis, which has made it more difficult for people and some businesses to get loans.

One of the criticisms of alternative lending is that people who take out these loans may not realize they have good credit, meaning they're able to get better rates elsewhere. Still, the interest rates for these types of loans vary based on the lender, the borrower's credit rating and the level of risk.

Peter Renton, CEO of Lend Academy consulting firm, says many of the alternative-lending platforms set up shop before the recession, but they have taken off since, alongside the economy recovery. "The timing, in hindsight, was perfect," says Mr. Renton. "The financial crisis hits and everyone hates the bank, everyone hates Wall Street – people are looking for alternatives."

According to Mr. Renton, the U.S. industry has doubled in the past nine months, with P2P loans now totalling more than $2.5 billion, which represents about 1 per cent of the lending market south of the border. "The industry is growing dramatically and I don't see many headwinds that are going to change that," he says.

In the United States, the industry falls under the watch of the Securities and Exchange Commission, but in Canada, P2P financing activity in particular has stalled as a result of regulatory red tape. Other platforms are taking off, such as Zillidy and FinanceIt, which provides consumer financing through merchants.

FinanceIt co-founder and CEO Michael Garrity says the company has grown by about 25 per cent month-over-month since it started in January, 2011, with more than 2,500 merchants signed on to date. The company was formed after Mr. Garrity suspended operations of his P2P company, CommunityLend, due to what he calls "irrational" regulatory overhead around investors.

He says securities regulations in Canada currently do not allow for any exemptions that would make this type of lending available to retail investors without each loan requiring a prospectus, a fact confirmed by the British Columbia Securities Commission. Another hurdle is that Canada doesn't have a national securities regulator, which means companies have to deal with each provincial regulator independently.

FinanceIt has fewer regulatory challenges since the business deals directly with merchants, helping them offer financing to their customers. FinanceIt caters to consumers looking for different terms or better rates than what they might receive from a bank or credit card company.

"A lot of times, alternative financing really means a more convenient form of financing for the end consumer. That's really where a lot of these alternative folks are emerging," Mr. Garrity says.

At Zillidy, Mr. Uster says loan volumes have grown by about 600 per cent each month since the business was launched in November, with loans averaging about $12,000 each.

He adds much of his growth is coming from small to medium-sized businesses, particularly those wanting to expand or fill orders using a short-term loan. Examples include a recent $50,000 loan provided to an independent heating and air conditioning firm, the owner of which used gold coins as collateral. A gas station owner took out a $5,000 loan to help open a lottery kiosk.

In many cases, Mr. Uster says the borrowers are people with money, but they lack liquidity. "What we found is that wealth doesn't always equate to cash, you may be wealthy, but you may not have liquidity.

"There is a vacuum of funding sources. That vacuum is being filled by the alternative lending space."

Alternative financing is expected to grow in Canada, but first the industry needs to build its reputation and trust among borrowers, says Plamen Petkov, director of provincial affairs for the Ontario branch of the Canadian Federation of Independent Business (CFIB).

"Reputation will be critical."

He adds small businesses are increasingly looking for alternatives beyond the traditional banks. A recent CFIB survey showed small and medium-sized businesses prefer credit unions to Canada's big banking institutions when it comes to affordable financing and banking services.

"It will be very interesting to see how these new alternative companies … will attract entrepreneurs," Mr. Petkov says.