If you need money quickly as a small business in Canada, your best bet is to turn to alternative lenders. Small business owners can easily work with online lenders to access a variety of business financing – from term loans and lines of credit to invoice financing and merchant cash advance loans. This post will outline the types of alternative lenders currently operating in the Canadian market, their advantages and disadvantages, and how much a borrower can expect to pay when accessing capital from them.

One of the most common challenges small businesses face when borrowing from alternative lenders is the uncertainty surrounding the true annual interest rates they are being charged. Since inception, Lending Loop’s core values have revolved around transparency and democratic access to data, and as such, we present all our interest rates in the form of an annual percentage rate (APR).  Unfortunately, this is not a common practice amongst alternative lenders, and very few quote their rates as an APR. This post will equip small businesses with the questions they should be asking themselves before deciding to borrow from an alternative lender.

Before we begin, there are two important terms to keep in mind:

  • Annual Percentage Rate (APR): The APR expresses the cost to borrow as an annual percentage of the loan amount.  The APR can vary significantly from the quoted interest rate because of various fees associated with the loan, including origination fees and administration fees.  As a result, the APR tends to be higher than a loan’s stated interest rate.
  • Total Cost of Capital (TCC): The total cost of capital metric captures all interest, loan fees and any other fees that are a condition of receiving a loan.  The total cost of capital metric states the total dollar cost of the financing option – a crucial source of information for a small business owner seeking to borrow.

Alternative Lending Options

There are a wide variety of different non-bank financing options available to small businesses. Generally speaking, if you need money quickly, your best bet is to turn to alternative lenders. Small business owners can easily work with new, online lenders to access a variety of business financing – from term loans and lines of credit to invoice financing and merchant cash advance loans.       

According to a study by Harvard Business School, most major alternative lenders offer full loan applications online over desktop or mobile platforms and take just 30 minutes to complete. Meanwhile, applying for bank financing can take an average of 25 hours for a single loan, and that’s not even accounting for the additional weeks (often months) it takes to hear back from the bank.  

Additionally, big banks have only approved between 13% and 20% of all loan applications over the past five years, whereas alternative lenders have accepted on average between 61% and 64% of small business owners looking for funding. This means that alternative lenders are both faster and more accepting than traditional financial institutions.            

Term Loan Products

Term loans are designed to be a flexible financial tool that allows borrowers to better manage their cash flow through a predictable payment schedule. Term loan products allow small businesses to pay back the loan, plus interest, with daily, weekly or monthly payments.

Pros Cons
  • Set payment structure
  • Limited paperwork
  • Speed of funding
  • Suitable for a wide range of business purposes
  • Daily or weekly payments could prove difficult to make for businesses with sporadic revenue
  • Interest rates quoted are often a misrepresentation of the true APR
  • Hidden fees are often charged when topping up or repaying an existing loan early

Note: All of Lending Loops loans are quoted using an APR, are repayable in monthly installments and allow for early repayment without any additional fees.

It should be noted that term loan products are quite uncommon in the alternative space; where they do exist, they often require a daily or weekly repayment schedule that most business owners find difficult to sustain.

As previously mentioned, most alternative lenders do not quote an APR to potential borrowers when they are reviewing the loan terms. The table below gives an apples to apples comparison of the APR of a term loan offered by an alternative lender, and the Lending Loop term loan that was provided to refinance it. This is real loan data for a specialty transportation company:

Term LoansThis means that the Lending Loop loan resulted in monthly payments that were $4,969.84 less than the payments charged by the alternative lender. Ultimately, the Lending Loop loan also cost the business $11,814 less as well.

Merchant Cash Advances

A merchant cash advance (MCA) is a lump sum of capital you repay using a portion of your daily credit card transactions.  MCAs are often provided through online financing companies and repayment is automatically deducted each day through your merchant account.  MCAs are one of the most expensive alternative lending products on the market, so it is important to translate the cost into an APR to truly understand the cost of borrowing.

Pros Cons
  • Quick access to funds
  • Easy approval process
  • Poor credit is accepted
  • Advantageous for businesses with unsteady cash flow or seasonal business cycles
  • Higher fees and APR than traditional term loans
  • Less flexibility to change merchant service providers
  • No benefit to repaying early, with borrowers often penalized for doing so
  • Daily deduction of credit card receipts reduces cash flow
  • The speed and ease of MCAs can put you into a debt cycle. Borrowers may find themselves in need of another advance soon after taking on their first one due to the extremely high costs and frequency of repayments of MCAs, which can cause cash-flow problems

The table below again gives an apples to apples comparison of the APR of a merchant cash advance offered by an alternative lender, and the Lending Loop loan that refinanced it. This is real loan data for a company in the food and beverages industry:

MCA

Lending Loop’s loan was payable over 3 years rather than 1, and only required monthly repayments instead of daily ones. With an APR 16.63% lower and a monthly repayment that was $2,277.56 lower, Lending Loop’s loan was much better able to support the needs of the business.

Invoice Financing / Factoring

Also known as “accounts receivable financing,” this option lets you get paid for your outstanding invoices right away – for a fee. With invoice financing, you could get an advance of 80-85% of the value of your invoices, with most of the other 15% paid to you later. When the client actually pays the invoice, you will get the full invoiced amount back minus a factoring fee, which is usually 0.5% – 4% per month.

Pros Cons
  • No need to wait for an invoice payment
  • Invoices serve as collateral, so no need to put anything else on the line
  • Higher fees and APR than traditional term loans
  • Fees are based on the time it takes for invoice to be paid

The following table gives real loan data from a factoring arrangement that Lending Loop refinanced for a company in the transportation space. Factoring is especially common in this industry vertical.

Factoring

While factoring might seem appealing, the true cost of it depends on how long your customers take to pay you. A Lending Loop term loan not only provided this business with the financing it needed to grow, but also with a predictable payment schedule and a 12.04% lower APR. The certainty that comes with knowing exactly how much you need to pay back has intangible, but undeniable, value to the owner trying to build a successful business.

Generally speaking, the APR on MCAs, invoice financing and non-Lending Loop term loans provided by alternative lenders can often range from 20 – 40%.  Lending Loop evaluates businesses on an individual basis and considers many different factors when making lending decisions. As such, our APRs fall in the 5.9% – 26.5% range.

To learn more about how we can save your business money while providing you the financing and payment terms you need to grow your business, click below to begin an application. Submitting an application is completely free and takes under 5 minutes.

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