Small businesses to stay afloat due to peer-to-peer lending in Canada

Recent trends reveal that the rates of interest are gradually on the rise and also the Canadian banks are pushing up the lending rates as a repercussion for the same or rather as a measure for increasing interest rates. Although the scenario is different across various nations, in this write-up, the condition that is prevailing in Canada has been discussed. So, read on for better insight.

It is being anticipated that owing to the prevailing scenario, most of the businesses in Canada will be impacted due to reduced credit availability and increasing cost of credit. However, in this upheaval, the smaller sized businesses have higher chances of being swept away as they are the most vulnerable to changing market conditions.

How will these businesses survive the turmoil?

Canada has as many as 1.14 million small sized businesses that are vulnerable. These companies hire at least 100 employees. Interestingly, these businesses represented 98% of all the small sized business sector. Also, the GDP that these companies generated is approximately 30% of the GDP of the provinces on an average.

Under such circumstances, the choice they are left with is to reduce their investment or apply for financial aid in form of loans. Majority of these businesses are resorting to payday loans alternative or payday loans, or credit cards.

P2P Lending is here to stay- How does it work

There is good news, however, and it is that these businesses can now opt for so called P2P lending also known as Peer-to-Peer lending. In this form of lending, there are platforms that operate virtually. They match the lenders and the borrowers directly and offer options as per individual requirements. This arrangement is undoubtedly much faster and cost effective.

It may be mentioned here that the smaller businesses in Canada operate in a different manner as compared to the stalwarts. The smaller businesses don’t have collateral to fall back upon most of the times and in majority of the cases, they do not boast of a good credit history.

As such, they rely on alternative sources of lending and around 80% of the them operate in this manner. So, how does P2P lending work? In such an arrangement, the individuals that intend to take out a loan can avail cash from crowdsourced funds that are pooled in by various investors.

Technology and P2P lending

This is very different from traditional lending and as compared to the present day scenario, the conventional processes are slower and time consuming. Also, therenewer and emerging technologies that have streamlined the process further, technologies that include the likes of cloud computing, IoT, Artificial Intelligence, Machine learning, and data analytics to name just a few.

The first such platform was established in the year 2015. Only last month (May), this platform, earned around $20 million from as many as 20,000 plus Canadians to source the crowdsource fund.

Studies have revealed that small businesses apply for loan amount that is approximately of an amount that ranges between $75,000 and $100,000 and the repayment period that they opt for is approximately between 3 years to 5 years.

Ideally, the rate of interest for Peer-to-Peer lending starts at 6% while the average rate of interest for such loans can be as high as 12%. Although, 12% might appear to be quite high but it is comparatively lower than the rate of interest that the credit cards attract.

As of May 2018, the Peer-to-Peer lending market witnessed a growth because as much as $3 million is expected to be contributed into the pool of funds in the next years by the government in Ontario.