When Robert Harbauer went looking for financing for his next business, the Bondic liquid plastic welder, the banks wouldn't back it.
That was even though Mr. Harbauer had years of experience growing a successful business with his laser embossing company Permaboss, including through a rocky period during the 2008 recession.
The entrepreneur says the banks wanted to see three years of sales in the new venture, even though he had landed retailing giant Walmart as his first Bondic customer.
Then he heard about FundThrough, an online-only startup that offers small business loans. Not only could Mr. Harbauer get the financing based on his receivables, but the transaction also happened in about two days, instead of weeks, which has been his experience with bank financings in the past.
"The bank can't move at the speed of an entrepreneur," says Mr. Harbauer. "I was able to grow at a faster speed than any competitor as a new business. I was able to behave as though I've been in business for 10 or 15 years … You can't compete with big companies if you don't have big-company resources."
The financing allowed Bondic to produce and sell more products and within a year expand to every major home improvement retailer across Canada such as Home Depot, Home Hardware and Rona. Bondic is now expanding to the U.S.
The new lending landscape, and its risks
Bondic is one of a growing number of small businesses turning to financial technology (fintech) startups to meet their cash flow and financing needs when the banks won't lend. More fintech firms are also cropping up to meet this demand, particularly as banks become more risk averse in the aftermath of the global financial crisis.
There are risks on both sides of the transaction between fintech firms and their small business clients. The failure rate across the startup industry is high.
Alternative lenders also charge interest higher rates than the banks, anywhere from the high single digits to more than 20 per cent, based on level of risk. That compares to an average of 1.87 per cent above prime from the banks, according to a survey from the Canadian Federation of Independent Business (CFIB).
CFIB president and chief executive Dan Kelly welcomes competition in the small business lending space, especially if it provides financing that traditional lenders can't. Still, he cautions small businesses to do their homework before signing up and understand the potentially higher rates.
"Business owners should really think hard about the bite that's going to take out of their sales," Mr. Kelly says. "If you need something quick, that may be entirely appropriate. But if you're going to the well several times …. it may be wise to reassess your business model."
Today's lending alternatives
Steven Uster created Toronto-based FundThrough after hearing numerous complaints from small businesses that they couldn't invest in expansion because their money was tied up in unpaid invoices. Many of FundThrough's clients sell to big-name retailers and need more money up front to buy additional inventory or hire more staff to grow.
Borrowers can leverage the credit strength of their customers to fund their business, regardless of the credit history of our client. Mr. Uster says each borrower's customers get a risk rating and a different price associated with invoices outstanding to them.
"Who they sell to is more important than who they are," Mr. Uster says.
For example, invoices to Walmart would have a lower rate than invoices to a smaller private company. Rates average from about 10 to 15 per cent annually.
Vancouver-based Merchant Advance funds small mom-and-pop stores such as beauty salons, restaurants and auto shops, based on their credit and debit sales volumes. Merchant Advance also offers business loans.
"We are a purchaser of future sales and we typically acquire future sales at a 20 to 25 per cent discount to face value, and we collect those future sales typically within 12 months," says Merchant Advance founder David Gens.
Businesses use the advance to pay for improvements such as a new patio, or a new product line that has the potential to boost future profits.
"Small business owners often have these opportunities that require not very much capital, but can produce a high return if they pounce on them," says Mr. Gens. "It gives businesses opportunity to grow their business when they otherwise couldn't or wouldn't."
Consumer lending to help small business
Some companies are helping small business via consumer lending. Financeit, for example, is a fintech that doesn't lend to small businesses, but instead helps to facilitate payment plans for their customers.
If a general contractor is hired to do a $50,000 home renovation, Toronto-based Financeit handles the consumer loan, while also ensuring the company doing the work gets paid. Financeit, which is backed by a few Canadian banks, collects monthly payments from the customer on behalf of the contractor, using its technology such as apps and mobile devices. Its loans start at 6.99 per cent and are capped 12.99 per cent, says Financeit cofounder and chief executive Michael Garrity.
Mr. Garrity says the service helps the small business manage their cash flow, since they get paid for the whole job up front, "and therefore don't need to go and take out a loan for working capital purposes."
Merchants like it because there's no cost to use the technology, plus approved financings drive business. Consumers, meantime, are drawn by the speed and convenience of the online loan process with Financeit, versus visiting a bricks and mortar bank, Mr. Garrity says.
He says about 4,000 merchants have signed up in Canada to date, up from about 2,500 two years ago, and Financeit has processed about $1-billion in applications, approving just over half. The company recently started to expand its business into the U.S.
"There has never been a more exciting time for small businesses to take advantage of technology-based services," says Mr. Garrity, citing not just online lending, but also electronic invoicing and payment tools that are also being embraced by more small businesses.
"Being a small business owner used to be a lot harder than it is today if you're leveraging a lot of the tools and companies out there that make your job easier."
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