Funding 101: A Quick Guide to Alternative Lending

Alternative lending Canada

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Alternative lending refers to the many ways loans are provided to businesses and individuals without a traditional bank. From invoice financing to SR&ED, alternative lending makes it easier for companies with shorter track records, less collateral, or an immediate need for funds to access a loan. 

As a global technology shift continues, the needs of businesses start to change. Technology companies and software-as-a-service (SaaS) businesses crop up quickly and can become profitable in a short amount of time. These businesses may have few physical assets, large financial requirements, and a short window for taking their product to market. They still require funds, but a traditional bank loan can’t meet their capital needs. In many cases, alternative lending is a flexible, efficient way to fill the gap. 

Pros and Cons of Alternative Lending

There’s been a steady increase in alternative lending used in Canada. The value of the market for alternative loans is expected to reach $108.5 million by 2025. A lot of this forecasted growth is because:

Alternative Lending is Flexible

Alternative lenders have more latitude around what kind of loans they provide. Unlike traditional banks, these lenders can finance assets like revenue, equipment, or SR&ED (Scientific Research and Experimental Development). They can also offer up-front payment for your outstanding invoices, early payment for grants, or other types of loans traditional lenders can’t. 

Alternative Lending is Fast

Traditional banks have strict requirements around who can borrow money, how much they can access, and when. Since alternative loans are more flexible, the approval process is often much quicker. Although how fast you get your loan depends on your business and lender, many alternative lenders offer financing within days. Traditional bank loans can take weeks. 

Alternative Lending Has a Higher Approval Rate

Alternative lenders have more flexibility around loan amounts, repayment terms and the borrower’s required income, collateral, or creditworthiness. Enterprises not eligible for a traditional loan may still qualify for an alternative form of funding based on their business model, product, or performance. 

Alternative Lending is Founder Friendly

For many businesses, alternative lending is a way to access additional funds without diluting your share of the firm. Whether you’re using alternative financing in between rounds or as an alternative to venture capital at this stage of your operations, an alternative loan can provide you access to the funds you need without giving up your piece. 

Cons of Alternative Lending

Although alternative lending has plenty of benefits, there are a few downsides. Alternative lenders are free to charge higher rates and sometimes offer shorter repayment periods. Some options may not be able to provide the same dollar value loan as you would get from a traditional bank or other financial institution. 

Types of Alternative Loans

Although many alternative lenders offer traditional term loans or lines of credit, there are plenty of other options. These choices include:

Peer-to-Peer (P2P) Loans

Peer-to-peer (P2P) lending is done over an online marketplace and links borrowers (like businesses) with investors looking to fund them. Although P2P loans are often for individuals, investors can also offer them to companies, and they may have more favourable loan terms than those at your bank.

Equipment Financing

Some lenders offer equipment financing for businesses that need to purchase equipment to produce or distribute their products. Since a physical asset is associated with these loans (the equipment), the lender can often offer more favourable rates. However, they will take the equipment as collateral if you do not repay your loan.

Invoice Financing

Invoice financing (sometimes called factoring) is a type of lending where the creditor provides money for the outstanding amount of your invoices. This alternative loan allows companies who have sales revenue to access these funds more quickly, so the money can be reinvested into the company or paid to suppliers. 

Lines of Credit

Although traditional banks offer lines of credit, alternative lines of credit are also available. With more flexible qualifications than a traditional lender, these loans can get your business through a cash crunch or its next growth phase. They provide you access to funds up to a set amount. Like a traditional line of credit, you only pay interest on what you borrow

BDC Working Capital Financing 

Formerly known as an Xpansion loan, BDC’s working capital financing is geared towards entrepreneurs. The program funds loans for businesses without compromising their cash flow. 

Alternative Financing through Venbrige

Alternative financing options from Venbridge give you access to capital based on factors traditional lenders might not consider. SR&ED tax credits, grant money, and revenue from SaaS sales are all assets you can use to obtain a loan. 

  • SR&ED financing lets you borrow against the SR&ED tax credits you intend to claim. SR&ED disbursements rarely coincide with when you need the funds. Financing options can give you working capital without the wait. If your business is thinking of claiming SR&ED, fill out our online form, and see how much you might be able to access. 
  • Grant financing allows your company to borrow against its approved Canadian grants. Receiving funds from these grants can take months or years, which isn’t ideal for the fast-paced tech world. Grant financing gives your business access to this money right away. 

As the business landscape shifts towards new technology and new funding needs, alternative lending methods have stepped in to fill the gap. If a traditional loan isn’t appropriate for your business, an alternative loan might be the way to go! Quick access to capital, high loan to value, and no dilution make alternative lending a fast, flexible and founder-friendly option for a loan.

Is your company looking for alternative funding? Click here to contact the Venbridge team. We’d be happy to help!

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