Alternative Lending in Canada: A One-size-fits-all for Businesses and Consumers
Our journey around the world of alternative lending continues! Armada Labs makes another stop — this time, in Canada, one of the booming fintech clusters and the topic of our today’s talk.
Key Facts about Canada’s Alternative Lending
If to say it in general, Canada’s alternative lending sector is highly valued by the business community and the general public. Perhaps, one of the main arguments is the relatively easy access to alternative financing options, yet the metric varies depending on a particular region. At the same time, traditional finance still catches up with the solutions people use in their lives.
According to Statista’s highlights, the main figures are the following:
- By the end of 2020, the total value of transactions in Canada’s alternative lending should reach $69.8m.
- In the next four years, the total value of the transactions is expected to grow by 3.4% each year, with an approximate total amount of $79.7m by 2024.
- Crowdfunding is the most “money” segment of Canada’s alternative lending; its value is projected to reach the $46.1m mark by the end of the year.
No doubt, the sector is growing, but what’s behind these promising figures? We’ll take an in-depth look at the situation to find out!
Consumer and Business Alternative Loans vs. Traditional Ones, at a Glance
The recent stats show that Canadians continue slowly adopting alternative lending for their personal needs. Per Smarter Loans’ report, last year, only slightly more consumers — 30% of the respondents — sought traditional financial services against 28% of those in 2018. Indeed, the difference is insignificant.
We can also see that consumers approach alternative loans with thorough consideration in mind, preferring to choose between several options in most cases. This attention plays in their favor since most of them are satisfied with the quality of the chosen lending service.
As you can see, the shift is gradual; although more Canadians take alternative loans, most still utilize traditional services.
Meanwhile, the alternative loan market is dominated by cash installments, with only over 30% of respondents preferring to contact banks or other traditional loan providers. On the other hand, they are more likely to purchase conventional mortgages and business loans than contact alternative lenders.
Even for other loan types, such as equity, truck and trailer ones, and other equipment loans, the situation is ambiguous; consumers hesitate among the options and often contact traditional lenders first.
Consumers like loans that are fast and accessible, and we can see the interconnection between the stats. Most popular loans are the ones that have the most satisfied consumers, and the most demanded loan type is payday loans.
Perhaps, the same is true for the least valued alternative loan types, which are perceived as the least convenient altogether.
Note that the research data is a general overview of the Canadian population, but consumer priorities and preferences vary depending on the gender, geography, and even age group. The latter aspect has already been covered on our blog.
Business Loans: a Perspective of Canadian Startups and SMEs
Throughout its existence, the Canadian lending market has been controlled by several major banks, and the local economy has been supported by SMEs, mostly constituting Canadian businesses. Those businesses that didn’t manage to receive funding from banks got limited in their options; at least most of them didn’t know better. With the increasing awareness about alternative lending, its speed and convenience, the situation has changed.
One of the new lending options Canadian SMEs can take is a merchant cash advance (MCA). MCA is not funding as such; instead, a business sells a part of its future revenues to get quick cash in exchange. In this way, a lender provides a fixed-percent “loan” of a borrower’s future sales.
Yet, there are more options to choose from and leverage. For example, FundThrough, a Canadian lending company, helps small businesses raise funds by providing invoice factoring. Specifically, it charges every borrower a 0.5% fee from the lending sum that must be repaid within 12 weeks.
As an alternative option, SMEs can choose Lendified, a Canadian p2p lender offering quick loan applications within 10 minutes and quick fund receipts in two days. The annual percentage rate ranges between 8% and 18%, depending on the loan’s sum (usually between $5,000 and $150,000). The repayment terms are up to 24 months.
Individual lenders may need an extra service besides the loans themselves, and Borrowell is the one that provides such. Clients can freely monitor credit scores, receive personalized loan product recommendations based on their credit profiles, along with free tips on how they can improve their credit.
Overall, Canadian alternative lending firms often provide SMEs with more attractive crediting terms than traditional lenders. The choice of available lending options is also wider, and credit approvals are faster.
A Few Words about Lending Regulations in Canada
One should note that in Canada, regulators don’t act as the “restricting force” that seemingly puts obstacles in particular alternative lending operations. Instead, they actively support various initiatives. The formation of the Ontario Securities Commission (OSC), the Canadian fintech regulatory body, is, perhaps, the most significant breakthrough in closing the gap between the government and the alternative payments sector in general.
In October 2016, OSC “gave birth” to another important regulatory initiative: LaunchPad, a small group of regulators working to modernize the existing financial law and facilitate compliance procedures for fintech startups. Following this initiative, in January 2017, the Fintech Advisory Committee was established to inform regulators about fintech innovations and current regulatory challenges businesses deal with. The insights the committee collects from the researches are used to define the following regulatory guidelines.
Meanwhile, Canada’s alternative lenders have to cope with different compliance issues, depending on the kind of services they offer. Also, there are local regulations that may add specificity to their lending procedures.
To Sum Up
Let’s summarize our review with several essential takeaways.
- Canadian alternative lending is on the rise. We see that more people take alternative loans, and most of them are satisfied with the lending service.
- High loan demand generates a higher supply. The Canadian fintech market is already big, with segments such as lending, wealth management, personal finance, and more, and it gets bigger.
- Consumers’ trust still hasn’t been won. For individual loan types, they prefer traditional banking or at least hesitate between traditional and digital options, perhaps, because of the relative transparency in loan repayment terms.
