Fintech, a portmanteau of financial technology, describes an emerging financial services sector and companies that use technology to make financial services more efficient.
In small businesses, cash flow and costs need not always be in harmony with each other, forecasting sales can be difficult and sometimes unexpected expenses can make owners realise they are short on cash flow.
Small businesses especially find it challenging to deal with this situation as sometimes they are too big for the owner to borrow from friends and family while being too small and carrying too much debt to get bank financing.
This is where the new breed of Fintech companies comes in, some of them offer invoice financing Toronto-based startup FundThrough offers what is called invoice financing which means it gives companies a cash advance based on their unpaid invoices.
Companies can use these services to avoid a cash crunch when taxes are due, and helps deal with a timing issue, as the waiting period for inbound cash flow is usually the main reason small businesses face these issues.
FundThrough is one of a new batch of online lenders which are using invoices and other information to assess the risk of a transaction; this is a change from the credit score method.
The charges of these Fintech companies too are reasonable according to small business owners who have used them. The fee charged by FundThrough depends on whom the invoice was sent to rather than on the credit-worthiness of the borrower. The average cost is usually between 1 and 2 per cent of an invoice.
Banks lend to small business too, but they work on a different scope as the lending method is usually on credit cards. Credit card lenders typically charge much higher interest rates compared to Fintech companies.
“Invoice financing is cheaper and faster than using a credit card,” Carolina Suarez, accounts director at Invoice Payment System Corp, a Mississauga-based company that offers invoice-based financing, said.
Five Fintech lenders
This company offers advances to small businesses backed by invoices. It charges a flat fee of 0.75 per cent to 1.25 per cent, plus a daily cost ranging from 0.025 per cent to 0.049 per cent while the invoice is outstanding. Charges are based on who pays the invoice, rather than who gets the advance. FundThrough is based in Toronto
Invoice Payment System
Invoice Payment System like its name suggests also offers invoice financing. It got its start working with the trucking industry and has expanded into other markets. It provides additional services, such as doing credit checks on the businesses its customers are invoicing, and it maintains a database of payers and how long they take to pay an invoice. It also handles collections for customers. Fees are 0.1 per cent a day, plus a flat fee of between 3 and 4 per cent. This company is based in Mississauga.
This Company has partnered with major financial institutions, including Canadian Imperial Bank of Commerce and Toronto-Dominion Bank. It examines how money is moving through a business to evaluate creditworthiness. Its loans and merchant advances range up to $300,000. Companies either pay back a fixed amount or a percentage of their daily credit card sales. Its interest rates vary and can be comparable to bank loans, at the low end, or a credit card, at the high end. This company is based in Montreal.
This Company is listed on the New York Stock Exchange and started operations in Canada about a year ago. It uses a proprietary algorithm to determine creditworthiness. Interest rates can vary widely; the company says they average between 0.003 per cent and 0.04 per cent a month. OnDeck is based in New York.
This Company is one of the few online lenders targeting consumers and small businesses; It offers long term loans for up to five years, something its competitors do not do yet. It uses traditional credit scores and looks only at the borrower and not their business. Interest rates start at 5.6 per cent. Borrowell is based in Toronto.