Small business owners turn to alternative lenders to secure financing for growth

(ShutterStock image)

TORONTO – Roughly a year ago, Kyle Dutka and Tom Collver found themselves looking for a loan in order to bring on a new designer and expand their creative agency, PB+J.

But the small business owners say they haven’t had much luck with the banks.

“It’s been really challenging to get any sort of funding from traditional sources,” says Dutka. “We even had struggles getting credit cards, so we would just go and get another personal credit card and use that for the business.”

Dutka and Collver are among a growing number of entrepreneurs turning to online lenders, or marketplace lenders, in order to secure the cash they need to grow their ventures.

Alternative lenders – which typically tap thousands of data sources, including social media sites, to analyze a borrower’s ability to pay back a loan – say they are filling a gap left by the banks, for whom loaning small amounts of cash to upstarts is not profitable enough to justify the risks involved.

“Banks have really moved away from that need that small business has to get loans under $1 million,” says Gary Fearnall, the newly minted Canadian country manager for U.S.-based online lender OnDeck Capital.

“Their cost of providing services is high enough that for them, to really touch anything below $1 million – that’s just not a model that makes sense for them.”

OnDeck says it has seen so much demand since venturing north of the border in 2014 that the alternative lender has expanded its offerings and brought Fearnall onboard to lead its Canadian business. Fearnall was previously the director of marketing solutions at LinkedIn, and played a role helping the professional networking site expand into Canada.

Steven Uster of FundThrough, an alternative lender that provides loans secured against a company’s unpaid invoices, says he often works with small business owners who report being turned down by the banks.

“Likely, if the loan is less than $250,000, you’re going to get rejected, because banks just no longer like to lend less than $250,000,” Uster said. “It’s just not profitable for them.”

Online lender Mogo currently only provides personal loans, but founder David Feller says the company is working on a product for business owners.

Most financial institutions require at least two years of business financial statements before they will offer a corporate loan – a “high bar” for entrepreneurs looking to expand rapidly, says Feller.

“Because of the challenges they have going through the traditional models like the banks, a lot of small business loans are based off of personal credit,” said Feller, noting that many of Mogo’s borrowers are using the cash to fund their business ventures.

“A lot of small business owners and entrepreneurs are just applying for a personal loan, as it’s easier to get that than a small business loan through a bank.”

At least one of Canada’s biggest banks, however, says it sees an opportunity in the marketplace lending space. At its investor day last week, CIBC (CM) said it has partnered with a fintech company to explore launching an algorithm-based online lending service that will offer loans at an average value of $50,000.