The Alternative/Specialty Finance industry in Canada remains a fragmented marketplace with both strong regional and national brands active today. The dominance of the large public financial services providers remain solidly in place, however the nimbleness, risk-tolerance factor and technology orientation of the Specialty Finance industry certainly enables a now well-established next tier of credit and related services providers to earn a sizable piece of the credit markets in Canada.
In the wake of the 2008 financial crisis, and the “big banks’” subsequent further pullback from small-to-medium sized business (SMB) lending, there has been a continually growing opportunity for those Specialty credit providers exercising the nimbleness, risk tolerance and technical application mentioned above. Alternative forms of lending product, supported by new proprietary underwriting policy are becoming more commonplace (and accepted) and there is a vibrancy in the incumbent players to dominate this fragmented market.
Traditional and alternative lenders alike have accelerated their SMB loan digitization efforts in recent years – an initiative that has made it easier to adjust underwriting standards more easily amid the pandemic and resulting economic uncertainly. Commercial FinTech lenders have of course crafted their own credit methodologies (and Policies), and by automating much of the decision-making process, the cost of underwriting is brought down to offset higher funding costs and higher bad debts expectations. Surprizingly, the bad debt costs during the last six months have not been the disaster that everyone thought they would be. And now with 6 months + being in this COVID economic environment, many businesses have “re-calibrated” their businesses enough to see profits again – just on a smaller scale on on a lower cost base. This has enabled the lending levels to start to rise again – getting capital back out to the marketplace.
Using technologies such as maching learning to replicate credit decisioning and AI to advance the models from historical data, while enhancing security and reducing fraud, more trust is finding its way into the user base to further increase the comfort and repeat use of the services.
There will be new opportunities for the invoice-discounting product to integrate – in managing inventory levels and tracking logistics for example – by connecting different systems together through APIs. SMBs can now be connected more seamlessly to the wider supply-trade enjoyed by their larger enterprise counterparts .
SMBs have been caught in a pseudo credit crunch as a result of the pandemic. According to Biz2Credit, big banks only granted 13.6% of SMB business loan applications in August 2020, compared to over 28.2% in December 2019. Small bank lending has dropped even more dramatically, from over 50.6% in December 2019 to 18.5% in August 2020.
Canadian businesses continue to rely on the federal wage subsidy, rent relief, and government funding programs. This cannot last forever and the need for disclosure of these line items in the analysis is critical to knowing what the real profitability of one’s counterparty is.
Covid has also hit several of the SMB lenders pretty hard – forcing them into much reduced platforms to save costs, and reducing their ability to fund. The Canadian government provided a significant amount of capital into the marketplace to support business and quite rightly so. Whilst this support can’t last forever some lenders found themselves going to zero in terms of underwriting, and business development activity. Because of this there were also further liquidity challenges which meant that lenders re-evaluated how their businesses operated – choosing to dilute investment, creating a leaner team, reducing overheads etc.
Financing has always been a challenge for SMBs, and that is especially the case today due to COVID. Access to capital is critical to the success of these businesses and Accelerated Payments is addressing the problem head on for its customers. Our solution enables businesses to offer flexible financing programs and receive payment upfront, without the need to take on any of the financing risk. Their business customers benefit from access to Net Terms and extended financing, providing our clients with added purchasing power with each approved transaction.
AP’s particular receivables financing model focuses credit decisions on the buyer with insurance provided for each transaction. It also facilitates export invoices allowing many Canadian SMBs to grow their international business. No requirement for personal guarantees, liens or additional security, no long term contracts and a fully transparent affordable pricing structure makes this type of alternative finance very suited to SMBs looking to move quickly on new opportunities and grow their business.