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CANADA ALTERNATIVE LENDING

February 29, 2020 5:39 pm Published by Leave your thoughts

What is alternative lending?

The Alternative Lending market segment relates to digital financial services for business customers as well as private borrowers. The market includes bank-independent loan allocation for SMEs (Crowdlending) and for personal loans (Marketplace Lending or so-called Peer-to-Peer lending) through private or institutional investors via online platforms. In view of processing complexity, this market is focused on small and medium-sized enterprises (SMEs), freelancers and private persons. Bank financing is not considered, neither are any financial aspects that reach beyond the scope of small and medium-sized enterprises or donation-based Crowdfunding models.

The appeal of alternative lending to the general public and SMEs is determined by the ease of access to traditional finance, which varies greatly from region to region. The Alternative Lending industry is moving towards consolidation, and traditional lenders and FinTechs are coming together. The increasing share of loan and investment volume is getting funded by banks and such classic investors as pension funds and asset management companies seeking to diversify their portfolio but also interested in AI-powered loan approval processes.

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Alternative lending in Canada

With MPL markets around the world (especially Europe, U.S., and UK) maturing, startups around the world are scampering to find new locations and new opportunities to tap. Though it is not fair to term Canada as a new entrant to the fintech ecosystem, it has finally garnered the attention as one of the most promising alt-lending hubs.

The Canadian alternative finance industry is on a strong growth momentum. All segments of alt-lending (consumer, SMB, real estate) have shown multiple times growth albeit on a very low base. With a GDP of over 1.5 trillion dollars, it is a massive market for lenders. The current size of the market does not even reach a billion dollars, a paltry sum for a country with household debt over 2 trillion dollars.

Historically, the Canadian credit market has traditionally been dominated by a few main banks; consumers or businesses that weren’t approved for funding through them didn’t have a multitude of options. The door, however, is starting to unlock, as awareness increases about financing alternatives and speed and convenience become more important, especially to younger Canadians.

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Alternative funders are usually more flexible than larger financial institutions on loan repayments and often green light loan approvals much faster than banks.


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Indeed, the Canada alternative finance market experienced considerable growth in 2017—the latest period for which data is available. Market volume reached $867.6 million, up 159 percent from $334.5 million in 2016, according to a report by the Cambridge Centre for Alternative Finance and the Ivey Business School at Western University. Balance sheet business lending makes up the largest proportion of Canadian alternative finance, accounting for 57 percent of the market; overall, this model grew 378 percent to $494 million in 2017, according to the report.

The growth trajectory of the lending industry in Canada is continuing. It’s being driven by a number of factors, including tightening credit standards by banks, growing market demand for quick and easy funding and broader awareness of alternative financing products.

To meet this growing demand, new alternative financing companies are coming to the market all the time. It is predicted that over time more players will enter the market—from within Canada and also from the U.S.—and that product types will continue to grow as demand and understanding of the benefits of alternative finance become more well-known. Notably, 42 percent of firms that reported volumes in Canada were primarily headquartered in the U.S the Canadian market is much smaller than the U.S. and alternative finance isn’t ever expected to overtake it in size or scope. That’s because while the country is huge from a geographic standpoint, it’s not as densely populated as the U.S., and businesses are clustered primarily in a few key regions.

To put things in perspective, Canada has an estimated population of around 37 million compared with the U.S.’s roughly 327 million. On the business front, Canada is similar to California in terms of the size and scope of its small business market, estimates Paul Pitcher, managing partner at SharpShooter Funding©, a Toronto-based funder. Because the alternative financing landscape is not as developed in Canada, new and innovative products can really make a significant impact and capture market share.

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Alternative lending for Canadian Small Businesses

Small and medium companies are blooming in Canada: they represent 99.8% of all businesses, and they are the heart of the local economy. However, these businesses are facing extreme challenges when it comes to raising capital – a crucial element of Small and Medium Size Enterprises (SME) growth.

The Canadian banking sphere, dominated by five large banks, often overlooks these businesses. Banks in Canada typically require 32 articles of information when applying for a loan and still 78% of applications from SMEs are rejected. It is especially stressful for startups: you can’t get a loan unless you have customers, but you can’t start your business and get customers without a loan. Cash flow, on the whole, is a complex concept that may be confusing for small business owners, and this kind of financial exclusion only makes it worse. The problem is global, but this Catch-22 has given the green light to alternative lenders worldwide.

One of the alternative funding options for SMEs to bypass the banks and find the right level of capital that they need is called a merchant cash advance (MCA). MCAs aren’t loans. Instead, they represent the sale of a business’s future revenues in exchange for quick cash — the majority of applications are approved within 2 days. This way, a funder provides a lump sum payment with a predetermined percentage (the factor rate) of a merchant’s future credit or debit card sales — cash and check sales typically don’t qualify to be counted. The process goes on until the contractual terms are satisfied. The MCA industry is growing on Canadian soil, but since it is a relatively new domain, the sector remains heavily influenced by American providers, especially when it comes to business models and pricing.

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Alternative digital lending firms often provide small businesses more favorable terms on loans than can be received from traditional financial institutions. They also provide more financing options and faster approval than traditional banks. Alternative lenders like PayPal also approve small business loans at higher rates — 56% compared to 26% approval rates by big banks. 

The good news is that it is obvious that small businesses do have options to obtain money so they can continue to operate. They do not have to depend solely on traditional bank loans. Alternative means of debt financing for their operations have surfaced to the mainstream. Providing competition for traditional banks might help improve the credit markets where small businesses have usually obtained their financing.

Its best to explore all financing options, contact SharpShooter Funding© to find out what loan your business qualifies for.

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