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Canada Ripens for Online Small Business Loans

The alternative lending landscape is a greenfield opportunity for small business lenders. Big banks tend to keep their powder dry for larger companies with established track records in longevity and paying back what’s owed. Smaller companies have a real need for cash, and especially working capital. PYMNTS spoke with Troy Wright, founder and chief executive officer of Canada’s Lendified, to see what trends are setting up for small business lending up north.

PYMNTS: You serve the Canadian small business market specifically. What are the needs that small businesses have that are left unfulfilled by larger lenders?

TW: The small business segment here in Canada is a severely underserved market, with a total potential of as much as $110 billion – yet small businesses see as much as 15-20 percent of loans declined [by larger lenders]. There’s a lot of good potential here, with $10 billion to $20 billion in unmet demand. Lendified was started by myself and the team, and we came out of a big bank environment. I came out of what is known as the Big 5, Chartered Bank, and we all had seen the landscape clearly.

A lot of these people are using a lot of personal resources, with credit cards, lines of credit, friends and family, for example. At Lendified, we help small businesses access working capital, with loans that typically range from $5,000 to $35,000 across 12 months.

The loans themselves may go towards inventory build, or paying suppliers. Or maybe a company wants to expand or do some renovation to existing operations. The payments can also go to increasing staff levels – which means higher revenues. We like to say we focus on “main street and mainstream businesses.”

PYMNTS: Describe the loan approval process. What are the advantages that are in place for small business lenders specifically, in terms of technology and information that can be used for smaller businesses over traditional lending?  

TW: We calculate creditworthiness across a number of factors, with quick and easy access to lending in a process that typically takes about 5 minutes – and other, “typical” loan applications, elsewhere, can take 25 to 30 hours of work to get done.

The thing that is interesting is that, as we are purely online, we notice that two-thirds of our customers do their lending activity across our site through smartphones or other devices. And they do it in the morning, or at night – when the big banks are not open.

Lendified, and online can do this — looks at a number of factors in determining creditworthiness, with a number of traditional metrics such as cash flow, real data, and metrics that are proven. But we also look at the history and behavioral patterns that can be used in addition to a credit score. These are relatively unproven in determining the reliability or likelihood of someone to pay off a loan, but we find that the data are useful.

For example, reputation: As others might use Google, or in the U.S., Angie’s List, here in Canada we have HomeStars, which can be useful. It might be telling for example, to see an application from someone with a good credit score, but a low score on the service side – there is indeed some correlation there, we’ve found [with creditworthiness].

Of course, we do not approve loans based solely on social media. Instead you should picture a pie chart, in which we look across items, and give them weightings, such as ownership, cash flow, reputation, and so on.

PYMNTS: Could you talk a little bit about risk control – what’s specific to Canada?

TW: We operate in an industry that is not regulated, and which is not overseen by something similar to the FDIC in the states, which is the Canada Deposit Insurance Corporation. But we take our risk control inspiration from Basel III, which has also helped us with our credit modeling process. We also follow what you might know as the “5 Ps” of credit analysis [which include people, purpose, and payment].

PYMNTS: Do you see demand across any particular industries in Canada?

TW: We see demand across a wide range of businesses, with contractors, construction, online retailers, and service companies especially, and restaurants, just to name a few. We also see interest from the manufacturing and wholesale industries.

PYMNTS: Are there plans to move beyond current borders? If so, when and how? If not, why not? What new products do you plan to introduce?

TW: Our geographic focus is and will be on Canada right now, with acknowledgement that there is always the temptation to look outside [Canada]. But in the U.S., for example, there are lots of lenders in the space we are in.

There really is a need for working capital to be provided to smaller businesses. That means, and we feel we are, in a good niche. Canada may be behind the U.S. in this industry, but we are catching up fast.

We’re looking into term lending and leasing, too. Especially in small ticket equipment leases. We see this as an underserved market in Canada, with equipment at loan sizes of roughly $50,000 to $75,000 for any number of items across contracting, and home builders and the like. This is a pretty fragmented market, one that is diverse and has real need.

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