This is part 2 of our 2 part series on the Canadian marketplace lenders. Be sure to read part 1, which provides an introduction to the Canadian lending market and highlights two other marketplace lenders.
When I asked Steven, Co-Founder and CEO of FundThrough about the state of small business lending in Canada he said that many banks believe loans of $250,000 or even $500,000 aren’t profitable. Thus, banks try to convert these customers to personal loans collateralized by mortgages. He also stated that the traditional factoring or asset based lenders are all very old, paper based and ripe for disruption. In some cases, a borrower who is rejected by a bank would wait another full year to apply again due to lack of other options. FundThrough is trying to change this through their invoice financing product.
FundThrough’s goal is to reduce payments of invoices from 30, 60, or 90 days for businesses that sell to other businesses. The team at FundThrough realized that the biggest asset for a small business is their accounts receivables, not their inventory or equipment. Many small businesses completely fail or fail to grow due to the lack of growing capital. FundThrough offers a secured loan product as the loan repayments are tied to the invoice. They offer more risk appropriate pricing, which translates to lower rates for their borrowers.
A typical borrower with FundThrough has 10 employees or less, but usually only 2-4. These small businesses have less than $5 million (~3.8 million USD) of revenue, but many are earning less than $1 million (~761,000 USD). On average, FundThrough is providing about $75,000 to $100,000 (~57,000-~76,000 USD) on each advance.
FundThrough provides invoice financing through this line of credit. There is a one-time invoice fee ranging from 0.75% to 1.25% once an invoice is funded. In addition, the investors charge a funding fee while the funds are outstanding. This ranges from 0.025% to 0.049%, which works out to 10% to 15% APR. Once the borrower pays back the invoice, the amount gets distributed to the investors. To date, investors are earning 11.5% net of all fees.
I asked Steven about how they are able to underwrite these small businesses and he said the most important factor is who the small business sells to. This enables small businesses and new borrowers to leverage the credit strength of their customers. FundThrough essentially looks at the invoice itself, ensures it is real, and decides whether or not it is likely to be paid. A portion of this process for them is still manual. FundThrough doesn’t look at personal credit at all, and there are no personal guarantees. Their view is that if a small business is selling to high quality customers and the invoices are valid, it doesn’t matter what their personal credit history looks like.
The way a loan works is pretty straight forward. If a borrower has an invoice for Walmart at $100, FundThrough will fund the whole loan at $90. Once the invoice is paid in an average of 55 days, the borrower pays back FundThrough. During that period, the borrower is likely continuing to sell and their line of credit can continue to grow. FundThrough can continue to process new invoices through tying in with the small businesses’s supplier and accounting portals. Steven noted that using this technology, they often know about a new invoice before the customer submits it. The amount borrowed varies widely with these businesses where a borrower could be looking for a few thousand or up to $750,000.
Steven had several things to say about borrower acquisition. He said that although they are doing online marketing, there is not a lot of searching going on due to where the market is when it comes to getting loans online. They also do direct mail, but have found referrals to be the biggest channel and that is continuing to grow. Steven also talked about offering their loans to companies with the same circles of influence or channel partners. These are companies that sell to the same client base, for instance, accountants or business software companies.
FundThrough closed a seed round in February of this year and their growth over the last 10 weeks has increased 250%, albeit off of a small base. They are confident that as awareness increases and borrowers have positive experiences that they will continue to be successful. Canadians are now getting the same choice that their peers are in other countries.
Lending Loop offers loans to small businesses, which vary in term from 6 months to 5 years. Rates are between 6%-15.5% and loan sizes range from $5,000 to $500,000. They completed a soft launch in June of 2015 so they could test and refine their business strategy. This made their loan offering open to borrowers only.
In September, they will open up the marketplace and all investors will be able to participate. Lending Loop will be the first marketplace lending company in Canada to open to retail investors. From the start, Cato Pastoll (Co-Founder and CEO) and the rest of the team wanted put an emphasis on helping communities and having retail investors on board is key to achieving this goal. Cato mentioned that they have been working with their lawyers for over 6 months to ensure retail investors can participate. With their platform, retail investors will be able to invest as little as $50 into a single loan, making diversification across many small businesses relatively easy with little capital. It is still early days for Lending Loop, but Cato hopes that average returns will fall in the 8%-9% range depending on which loan rates are targeted. He mentioned that even returns of 6% are attractive to investors in Canada.
With respect to borrower acquisition, Cato said that borrowers are coming in organically as well as through loan brokers that they have relationships with. They are receiving leads from bank advisors that are turning small businesses away. Currently, these banks do not see them as a threat and the advisors want their customers to be served. In these cases, the bank will provide other services to the small businesses and simply pass the deal to Lending Loop. Lending Loop focuses on businesses that are well established with a solid track record that may be on the cusp of getting bank financing. In order to apply for a loan through Lending Loop, businesses must have the following criteria:
Operating for 2 years or Longer
Greater than $200,000 in Annual Revenue
Have Assets to be Used as Collateral OR Will Sign a General Securities Agreement
Less than 5 existing creditors
Headquartered outside of Quebec
Although they have just launched, Lending Loop has put together a unique offering and it’s great to see that retail investors will be able to participate.
LendFul is a new marketplace lender and will offer loans up to $35,000. They are slated to begin originating mid 2015, so we should see them coming to life shortly. They are similar to Grouplend, requiring a FICO score of above 690. It will be interesting to follow their progress as they begin to originate and it is a company we are keeping an eye on to join the ranks of those mentioned in this roundup.
While it is still early days for these companies, it’s clear that they are all making good progress on breaking into a new market. It seems that they have all taken a thoughtful approach to their businesses and have taken what they’ve learned from other markets and applied it to Canada, while making adjustments where necessary for the local market. It will be interesting to see how the Canadian market develops over the next couple of years and compare it to the trajectory we’ve seen in the United States.