Non-bank lenders often provide businesses with added flexibility as they’re privately-owned institutions that aren’t subject to the confinements of a banking license. They also get their funding from numerous sources that offer better flexibility and options, making non-bank business loans increasingly preferable among Canadian businesses.
If you’re thinking about financing, limiting your options to regular banks could cost you. Your business deserves to know all the options available, especially if these options can provide you with better rates, fees, loan terms and even customer service.
3 things to know about getting a business loan from an alternative lender
The number of alternative business lenders has grown considerably in recent years, giving you more choice than ever.
These loans are usually unsecured and available for amounts up to around $300,000. Terms differ but are usually between 6 months and 5 years.
To apply, you’ll need to meet minimum requirements (set by the lender) typically covering your annual turnover and how long you’ve been in business.
What types of non-bank business loans are available?
Online direct lenders. These lenders usually process your application by using algorithms that work a lot faster than banks’ traditional underwriting process. They also typically consider alternative information like shipping records to help you qualify for a more competitive deal.
Peer-to-peer (P2P) lenders. Peer-to-peer platforms connect business owners with investors who fund the loan and collect on the interest. From the borrower’s perspective, they work a lot like online direct loans, but have a longer turnaround.
Business lines of credit. A business line of credit provides ongoing access to funds and allows you to withdraw funds up to a maximum limit. As you pay back the loan, you regain access to your full limit.
Unsecured business loan. This type of loan doesn’t require you to attach assets as security for your lender. It’s usually a fixed term loan with a predictable repayment schedule.
Secured loan. This type of loan requires you to attach assets as security for your lender. It could be a term loan or a line of credit. One common type of secured business loan is a business equity loan which uses the equity you own in a property as security.
Micro loans. These nonprofits often offer small-dollar financing to businesses that are just starting out, usually at a low cost. They typically also offer other services like free business training and support.
Credit unions. Credit unions are owned by their members and can be more flexible when it comes to business requirements. But they have some of the pitfalls of borrowing from a bank, like a slow turnaround.
Business loan broker. While technically not a lender, some business loan brokers can help you find a lender with suitable terms and submit an application. Using a service like this will cost you a fee, but it may be worth it if you’re having trouble finding financing.
The non-bank business loans included in this Finder guide are selected based on information provided to Finder as well as an analysis of non-bank business loans available in the marketplace. The list provided in this guide does not represent all business loans in the Canadian market. When assessing a non-bank business loan, we consider key factors such as fees, ease of application, as well as suitability. No single business loan can be considered the best for all Canadian businesses. As such, we strongly recommend you compare all business loan options before selecting and applying for a credit account.
Compare non-bank business loans from these online lenders
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Pros and cons of borrowing from nonbank lenders
It can be easier to get a loan from an alternative lender than going to a bank. But there are some drawbacks — namely, the cost.
Pros
Options for all credit types and industries
Available for businesses as young as six months
Low revenue requirements compared to bank loans
Cons
Higher APRs than bank loans
Potentially low funding amounts
Not all lenders are transparent about costs
How to find the best non-bank business loan for you
There is no one “best” business loan on the market, as it will depend on your particular situation. However, keep the following in mind when comparing your options:
Can my business afford it? As the most important factor in your decision making, be well aware of all loan costs as well as your repayment ability over the next few months.
What’s the interest rate? Make sure you know the difference between fixed and variable interest rates and how they can impact your business. Also be cautious of variable interest rates that exceed your repayment ability.
What’s the APR? This combines the loan’s interest rate, fees and other charges into one single percentage to help you better compare your options.
What are the fees? Be aware of one-off fees such as application fees, exit fees and termination fees. Other charges include ongoing fees such as service and advance fees.
How will I repay the loan? Lines of credit don’t have fixed repayment terms, but lump-sum term loans do and will usually cost you the loan amount plus interest over the loan’s term. Also keep in mind that lenders are usually more flexible with repayments for business loans than personal loans, so check your lender’s repayment terms before applying.
Secured or unsecured? The difference between a secured and unsecured loan is huge, with one requiring you to put up assets as collateral for the lender while the other loan type has no collateral requirement (usually meaning higher rates). The right choice depends on your particular situation.
What should I avoid?
Nonbank lenders sometimes face fewer regulations as the law catches up to the new underwriting technology they use. Because of this, watch out for the following:
Borrowing without comparing APRs. If a lender only discloses the cost as a flat fee, ask about the equivalent APR — often those loans are the most expensive.
Hard credit checks to check your rate. Stay away from lenders that don’t allow you to get a ballpark estimate of your rate without running a hard credit check, which affects your credit score.
Payments your business can’t handle. Daily or weekly repayments offer less flexibility and increase the likelihood that you’ll miss a payment and have to pay a fee.
Taking on too much debt. Many of these lenders will offer financing to businesses that already have debt. If you have a loan, be sure you can handle another repayment before you apply.
Brand new lenders. Nonbank lenders have to meet fewer requirements than a bank to open their virtual doors. Try sticking with a more established provider to avoid working with a lender that shutters its doors.
Non-bank lenders are privately-owned institutions that don’t hold a banking license. They get funding from various sources. This allows them more flexibility with rates and fees than normal banks. This flexibility is also in part because non-bank lenders are not subject to the primary federal legislation governing regular banks, the Bank Act. (However, non-bank lenders are still subject to other forms of regulation.)
If this happens, you won’t be forced to suddenly repay your entire balance, but you’ll likely be obligated to continue making payments normally — just to another provider. Your original loan terms usually won’t change, because your lender will have simply sold its loans to another lender who will continue overseeing the debt.
Non-bank lenders are not regulated by the Bank Act, the federal legislation regulating Canadian banks. However, this doesn’t mean that non-bank lenders are completely unregulated. In fact, Canada has a network of organizations and laws overseeing all aspects of the financial sector. These include:
Financial Consumer Agency of Canada.
This agency regulated all federally incorporated or registered trust and loan companies and federal credit unions – among other organizations – to ensure that Canada’s financial laws are being followed and to enforce disciplinary measures when necessary.
The Office of the Superintendent of Financial Institutions.
This body oversees federally incorporated or registered trust and loan companies, cooperative credit associations and pension plans, among other things. While not directly managing how financial institutions operate, its job is to ensure that sound financial practices are followed by helping to develop accounting standards, working with troubled financial institutions and monitoring external conditions that might have a bearing on the health and safety of financial organizations in Canada.
Financial Transactions Reports Analysis Centre of Canada (FINTRAC).
FINTRAC detects, prevents money laundering and financial terrorist activities. Working together with other law enforcement agencies, FINTRAC develops standards to securely and legally process money transactions in Canada. Financial institutions must comply with these standards.
The Canadian Payments Act.
The (CPA) lays out the legal framework for how payments are to be handled by Payments Canada, which oversees the clearinghouse and settlement system that handles electronic monetary transactions between financial systems, for example, wire transfers and e-transfers.
Deposit Insurance organizations.
The CDIC insures deposits in bank accounts up to $100,000, however, most credit union and non-bank lenders are not CDIC members. All credit unions, though, insure deposits through provincial organizations like the Deposit Insurance Corporation of Ontario and the Credit Union Deposit Insurance Corporation of B.C. Sometimes these corporations offer even more coverage than the CDID does. For instance, in 2018, the Deposit Insurance Corp. of Ontario increased its coverage to $250,000 – a whopping $150,000 more than the CDIC’s coverage. See a complete list of provincial credit union insurers here.
Typically, no. Private business lenders require that the collateral be an asset of the borrower(s) and not owned by someone who isn’t paying back the loan. Many lenders will allow you to use the asset you plan to purchase with the loan funds as collateral, so that could be a viable option if the you don’t have enough asset value otherwise.
Leanne Escobal is a publisher for Finder. She has over 11 years of experience in financial services, specializing in content and marketing. Leanne has completed the Canadian securities course (CSC®) as well as the personal lending and mortgages course by the Canadian Securities Institute. She has a Bachelor of Arts (Honours) in English literature and creative writing from Western University.
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