What is Alternative Lending?

Most small business owners are unable to get financing from traditional banks. In fact, it’s estimated that banks reject 80% of loan applications. Fortunately, alternative lenders have emerged to meet the needs of today’s business owners. Below we explain what alternative lending is and the types of solutions currently available.

Alternative Lending in Canada

Alternative lenders is a broad description of any small business lender that isn’t associated with a traditional bank. These lenders are often considered online lenders or “FinTech” companies because they use technology to deliver financial products or services. Online lenders are fast, adaptable and breaking barriers in the small business financing world.

Banks have strict standards of what businesses they finance because they try to minimize their risk. As a result, they tend to favour larger businesses with a proven track record. Alternative lenders provide financing products for small business owners who’s limited credit history stops them from meeting the bank’s strict criteria.

In the past decade, alternative lending has become a major force globally and Canada is no exception. In fact, the alternative lending industry is projected to reach $200 billion by 2025. This has enabled small business owners across Canada to get funding they need from emerging alternative lenders. Lendified is proud to be a leader in the alternative lending space and deliver millions in funding each month to small businesses.

Pros and Cons of Alternative Lenders

Getting funding from an alternative lender has its benefits and disadvantages. Below are some factors business owners need to consider before they choose this path.

Pros:

• Higher Approval Rates: While banks have an approval rating less than 20%,  it is estimated that alternative lenders approve over 50% of eligible small business owners who are seeking funding.
• Flexible Product Options : Alternative lenders are able to provide smaller amounts of funding that large banks won’t consider.
• Faster Funding Process: The technology alternative lenders use allows them to process applications and provide businesses with financing much faster than banks can.
• Easier to Get a Quote: Alternative lenders often have online applications and provide approvals in as fast as 1 day.  Meanwhile, an application with a bank could take weeks or several months to process.

Cons:

• Higher Interest Rates:  Banks minimize their risk by only funding more established businesses. As a result, they can offer the lowest interest rate. Alternative lenders have to charge higher interest rates because they finance riskier businesses the banks reject.
• More Frequent Payment Schedule: Compared to banks, alternative lenders tend to offer smaller loan amounts with a shorter repayment period. However, amongst the different types of alternative lenders the amount offered and term length varies.
• Credibility: Not all alternative lenders are equally credible. It’s important for a business owner follow best security practices when dealing with any online service requesting personal information.

Solutions Offered by Alternative Lenders 

Each alternative lender offers its own type(s) of financing products. Below are the most common options available and how they work.

Term Loans
A term loan is a loan for a fixed amount that is repaid in a series of installments over a fixed period of time. Term loans have a set payment schedule and interest rate. Alternative lenders usually provide short-term loans designed for working capital needs that last between three months to five years.

Line of Credit
A line of credit gives small business owners access to a pool of funds whenever needed. When the funds have been used, interest is charged on the outstanding balance. After the balance is repaid, the line of credit reverts to its original balance.

Merchant Cash Advance
A merchant cash advance (MCA) is a lump-sum advance given to a business in exchange for a percentage of their future credit and/or debit card sales. MCAs are the most expensive alternative lending option and should be seen as a last resort for financing.

Invoice Factoring
Invoice factoring is when a business sells their invoices to a lender for a discount. The lender then collects the payment from the invoiced client and forwards it to the business after deducting a service fee. Invoice factoring can be one of the more expensive alternative lending products.

Bottom Line

Alternative lenders have changed the way Canadian businesses access the funding they need. There are a variety of lenders and solutions available so make sure you choose the option that best suits your needs and goals.