Small businesses in Canada have been seeking funding from traditional sources for years, but alternative lenders are stepping up to provide working capital.

Commercial loans are common in Canada, with Statistics Canada finding that 51.3 percent of SMBs (small- and medium-sized businesses) requested external funding in 2014. Banks and credit unions have long funded businesses and start-ups, though they're generally more conservative and risk-averse.

In the last decade, alternative lenders have since emerged to service small businesses looking for funding options. As of 2018, the alternative lending market in Canada has amounted to $500 million in total transaction value, according to a Statista report.

The rise of vendors in financial technology, or fintech, has helped offer another recourse for SMBs with a lot less red tape — loans can range from as low as $10,000 to as high as $300,000.

“It is important that we work alongside financial institutions to evolve the industry, and create innovative methods of providing loans for these businesses,” says David Souaid, President and Co-founder of Evolocity Financial Group, an alternative lender in Canada. “Technology plays a big role in helping to automate these types of loans — it can make the online loan application process smoother and more seamless.”

Getting funded

The size is part of it, Souaid adds, but it’s also about the type of business that needs funding. Many SMBs operate around the clock and during specific peak seasons, which is where a structured funding method is not feasible. Alternative lending is able to provide rapid and digital application processes tailored to the business owner — this is financing in the age of personal customization.

Streamlining the process is key to the value proposition of going that route, Souaid says. For Evolocity Financial Group, specifically, the online application takes 15 minutes with proper documentation in hand and can be approved within 24 hours. The algorithm that identifies the amount of capital to lend relies on a multitude of inputs, rather than credit scores alone, to assess credit worthiness. Upon approval and agreement of the loan terms, the money is transferred within a few days, with repayment terms between 4 and 18 months.

“The approval or denial process is one that our credit underwriting department provides using a risk-scoring algorithm that looks at hundreds of data points,” Souaid explains. “Artificial intelligence (AI) is an important, emerging piece of our risk decision technology, so we're consistently machine-learning from our algorithm and constantly mining our data to make our predictive abilities, both human and AI, that much better.”

Options abound

Alternative lenders do vary to some degree. Evolocity is what’s called a balance sheet lender in that it uses its own capital with institutional backing. Marketplace lenders may use crowdsourcing methods or broker private investors with SMBs in need of cash infusions paid back with interest.

Merchants understand that, depending on the lender, acquiring capital will be more expensive than banks, yet less expensive than some of the other financing options available, he adds, particularly from private investors or credit cards.

Souaid says there are more options to get a loan today than in the past be it an alternative finance firm, or a bank that has partnered with one. The simplicity of the process has helped make acquiring financing significantly more seamless than before.

“As technologies evolve, we’re getting faster and pushing toward less friction outside of the system. We're already seeing some of the benefits of that over time,” he says. “For a lot of the next generation of entrepreneurs and millennials, this is what they expect, and the banks have realized that and adapted accordingly.”