Alternative lending is a form of financing that provides funds to businesses and individuals without having to go through a traditional bank. Different institutions may offer different types of alternative lending such as peer to peer loans, invoice financing and crowdfunding.
So, what is alternative lending doing for businesses? More and more companies and individuals are turning towards alternative lending instead of traditional banks to get funding for their businesses. This is mostly because alternative lenders are able to work with borrowers who have a shorter track record, no collateral or simply need the money as soon as possible, often, but not always, in return for higher interest rates on the loans. Although traditional banks still do most of the business lending, the rigid structure and slow growth in the market mean there is still high demand for alternative lending.
Alternative lending is typically also more flexible, faster and has a higher loan approval rate than bank financing. In an age where fintech is taking over the world, and traditional banks are often unable to keep up, business owners can get an edge in the market by being open to alternative lending options when searching for funding.
We’ve put together this article to discuss what alternative lending exactly is, give an overview of the different funding types and why it may be worth considering for your business.
“Alternative lenders are able to work with borrowers who have a shorter track record, no collateral or simply need the money as soon as possible, often, but not always, in return for higher interest rates on the loans.”
Types of alternative lending
Is alternative lending right for your company? Truth be told, it depends a lot on the nature of the business and market you are in and on the specifics of your business. The good news is there are many different types of alternative financing options, which means it’s likely you’ll find something that fits what you’re looking for. Most alternative lenders offer simpler and faster application processes that require less information and effort, and many times you’ll be getting the money within the next few days or weeks (it could be months before a traditional bank even considers your application!).
Peer-to-Peer (P2P) loans
P2P loans originate from P2P lending platforms that arrange loans between investors and borrowers. These platforms are a sort of loan marketplace with lenders choosing who they want to invest in to diversify their portfolio, and businesses having access to several kinds of investors and loans. P2P loans are great for businesses and entrepreneurs who want easy and quick access to a loan without having to visit a bank or build an extensive track record.
In Canada, the most well known P2P lending company is Lending Loop.
Invoice Financing
Invoice financing is a popular alternative to traditional banking loans. As a small business owner, it’s likely you’ll sometimes have to deal with a lack of cash flow because of customers taking months or even years to pay. With invoice financing, you get paid immediately by the lender for a small fee – usually a percentage of the invoice upfront.
Examples of lenders facilitating invoice finance in Canada are Meritus & Bibby Financial.
Lines of Credit
If you’re looking for a short term line of credit with more flexible options, a line of credit from an alternative lender may be a good option for you. These lenders offer quick, easy and stable access to funding. We recommend comparing with various different lenders in terms of repayment terms, methods, fees and interest rates before committing to one as the market terms vary very widely depending on the company.
One of the most well known lenders for business lines of credit in Canada is OnDeck.
Equipment financing
Equipment financing is a type of credit that can be obtained both through alternative and traditional lenders. The main feature of this type of financing is that you are using a vehicle or some kind of equipment as collateral for the loan. The main risk in taking on equipment finance is that there is the potential to lose the equipment if the loan cannot be repaid.
Examples of companies that offer this in Canada are CEF and OnDeck.
SR&ED Financing
An SR&ED advance funding loan is a new kind of financial instrument that uses a company’s future tax credit payments as collateral for funding. The SR&ED tax credit is a source of cash that many Canadian companies have access to, but the slow process means businesses need to wait for months to see the money in the bank. With a tax credit loan, companies have immediate access to the funds within the year that R&D takes place. By using the R&D funds earlier, companies can net a larger R&D credit at the end of the year, which translates into a potential payment of up to 55% of what the company spends on R&D in the year.
Fundsquire’s Advance Funding service is an excellent alternative finance option for companies who invest significantly in R&D.
BDC Xpansion Loan
The Xpansion Loan scheme is run by the BDC to support companies that are investing in growth projects and can cover a variety of situations that include: expanding your market, either domestically or abroad, technology investments, developing and launching new products and costs associated with intellectual property.
These loans are flexible and require no personal security as well as having no early repayment penalty. Additionally, the advantage is that if a company has repaid part of the loan, they can request that funding back as an additional expansion to the initial loan.
Non-Bank Lenders
Non-bank lenders are financial institutions that typically don’t have a banking license, but are still able to loan money to borrowers. Some of the lenders will have high APRs and others will have one-off fees. Non-bank lenders usually have more options available for businesses and may be able to offer loans over a longer period. They’re also less restrictive and are more flexible when it comes to businesses with a shorter track record.
Most non-bank lenders can be accessed and applied to online. Always make sure to read all agreements before starting your application. Some examples of non-bank alternative lenders in Canada are ThinkingCapital and OnDeck.
Conclusion
Alternative lending is growing rapidly in Canada as more entrepreneurs and businesses want access to quick, efficient and flexible financing. If you’re someone who needs funding but is filled with dread at the thought of going to a bank, this list of lending options offers some fast, flexible and simple alternatives. We feel every business owner should have a list of alternatives ready for when the funding topic comes up; the less time you spend on finding funding for your business, the more time and energy you’ll be able to spend on what truly matters: your product, team and business. If you enjoyed the article please share with others and let us know your thoughts in the comments below!
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