When the owners of Molly B's Gluten Free Kitchen needed money for a commercial oven to expand their venture, they didn't turn to a bank for a loan.
Instead, the Toronto-based family business borrowed funds from Whole Foods Market Inc., a U.S.-based chain of natural and organic foods, which supplies Molly B's products in its stores across Canada.
The $50,000 allowed Molly B's to buy an MIWE double-rack oven to help the company more than double the amount of gluten-free breads, brownies and other products it bakes for future customers.
"The loan is critical to assisting us in our expansion," says Fran Earle, who owns Molly B's with her husband Michael and daughter Sherri Goldberg.
It's the first time Whole Foods has loaned money to a Canadian business as part of its local producer loan program. The initiative has put nearly $10-million in the hands of small businesses in the United States, and it is part of a trend of companies turning to alternative financing to boost their businesses.
E-commerce company Amazon.com Inc., for example, is providing loans to its online sellers, credit cards are being offered to small businesses by Google Inc., and PayPal is lending to small companies.
Small businesses are scrambling for new revenue sources as banks become more reluctant to lend in today's tighter credit environment, particularly after the global financial crisis of 2008-09. In some cases, smaller businesses also don't have the capital required to meet loan terms at the banks.
"Banks don't like to lend to small business," says Peter Renton, CEO and founder of Lend Academy, a peer-to-peer lending website.
That's despite the fact more people are turning to entrepreneurship across North America. Demand for alternative financing has increased in response, along with the number of companies offering loans.
"We are really in the top of the first inning of this change from small business financing being done in a traditional way," Mr. Renton says.
Companies such as Whole Foods are recognizing the hole in the market and offering financing, which also helps their own businesses. By backing a small company such as Molly B's, Whole Foods helps to secure the company's growth, ensuring its products continue to show up on store shelves.
"We know the supplier is going to be there for us," says Stefanie Garcia, local forager and competitive strategy coordinator for Whole Foods Market's U.S. Midwest region.
It's also good marketing for Whole Foods to show that it's supporting local businesses, Ms. Garcia adds.
The relationship between Whole Foods and Ms. Earle began more than a decade ago when she had a small jam company and she sold product to the upscale grocery chain's location in Toronto's Yorkville neighbourhood.
The business later developed into a gluten-free bakery after Ms. Earle discovered she was gluten intolerant. The company, named after her mother, began making gluten-free products that are sold across the country, including at four Whole Foods stores in Ontario and four in B.C.
The Earle family applied for a loan last spring, after hearing about the program at a food show in Vancouver. In August, the money was approved and the oven was purchased this fall.
The $50,000 loan is separate from the sales agreement Molly B's has with Whole Foods. Under the terms of the agreement, Molly B's will need to pay off the loan over the next five years, at an interest rate of 5.2 per cent.
Ms. Garcia says Whole Foods loans have interest rates that are competitive to what a bank would give a small business, between about 5 per cent to 8 per cent, and they range in value from about $1,000 to $100,000. Startups usually receive loans valued at an average of $25,000.
Whole Foods has set aside about $25 million to lend to small businesses across North America, and Ms. Garcia says the default rate is about 7 per cent. There are no penalties for early payments.
Ms. Earle says the terms of her loan were more attractive than that of the banks, and an existing relationship with Whole Foods added comfort to the arrangement.
"The banks … don't have much of an appetite for small, niche businesses, which we are," Ms. Earle says. "Whole Foods got us. They were the reason we created the company in the first place."