Modern Startup: Alternative Lenders

Easy access to capital is one of the most critical resources an entrepreneur can have. Whether you're looking to spend on tools to help your business grow, consolidate some higher-interest debts, or invest in certification and training that will help take your business to the next level, you're going to need money. 

Your typical options are to look for investors, borrow from friends and family, or go to a traditional bank for a loan or line of credit. But there are other options available that might be a better fit for the fast-paced digital world that modern entrepreneurs live in - options like the relatively recent but growing world of online alternative lenders, such as Kapitus.

When we hear the words "alternative lenders," most of us think of loan sharks and sketchy ads targeted at people who have bad credit or are otherwise unable to deal with a traditional bank, and the idea of getting a huge loan entirely online has some people understandably skeptical. Since this field is fairly new, there isn't a ton of information out there, so I decided to get hands-on with my research: I signed up for accounts with three of the most well-known online lenders - Grow, Borrowell, and Mogo - and actually went through the entire process of getting a loan from one of them.

Before I go through the process from start to finish, here's a little background. I first heard of Grow under their previous name, Grouplend, when I was looking to take a 12-week programming course. Since these types of courses don't qualify for government student loans, Grow was listed as a "financing partner." Borrowell came up when I was doing research on Grow and online lenders in general. I had only heard of Mogo recently, even though they're one of the oldest players in this space, after reading about PostMedia (owners of the National Post and other publications) partnering with Mogo earlier this year to provide at least $50 million in media promotion.

All three companies position their value around two primary factors. The first is speed. They use phrases like "money by the next business day," applications that take as little as "1 minute" and an "instant...obligation-free quote" that doesn't affect your credit score.
This brings us to the second value proposition - some type of credit monitoring. Both Borrowell and Mogo offer a "free credit score," which Borrowell updates quarterly and Mogo updates monthly. Grow is a bit less direct, offering a service called RateTracker, which "monitors your personal credit metrics" and gives you an interest rate updated monthly (the idea being that if the interest rate goes up or down, your creditworthiness is going in the same direction). I signed up for all three, along with a separate credit monitoring service directly with Equifax, listed as the credit score provider for both Borrowell and Mogo. My scores with Borrowell and Mogo were identical, but my score pulled directly from Equifax was about 50 points lower, so these aren’t necessarily apples to apples comparisons. All three scores were in the “Excellent” range.

Grow advertises interest rates between 4.8% and 18.99% APR, with no additional fees. Borrowell lists their rates as "starting from 5.6% APR" but doesn't list an upper limit, and also charges an "origination fee" between 1-5% - which, to be fair, they break out during the loan process and are very clear and transparent about. Both providers seem to be aiming for people with good credit. By contrast, Mogo's interest rates range from 5.9% to an eye-watering 45.9%, while also providing services like pre-paid credit cards and short-term loans that are typically geared towards people rebuilding their credit. After doing some asking around, I spoke with a person that went through personal bankruptcy who told me that Mogo had been aggressively marketing to him with several offers in the mail, even though he had never given them his information or signed up for any of their services. You can decide for yourself whether high-interest credit offers targeting people with a history of credit problems are a way of giving these people a second chance, or just preying on their vulnerabilities for profit, but it's certainly something that gave me pause when looking at Mogo vs. the others despite Mogo's slick presentation and millennial-friendly marketing.

I requested a no-obligation quote with all three. Grow offered the best rate, with Mogo being about 0.3% higher and Borrowell nearly 2% higher (including origination fees) for the same loan amount and term. I decided to go forward with Grow based solely on the rate. Since everything seemed so simple and easy, I started my application late on a Thursday night. They did their best to assure me of how fast everything was going to be every step of the way, including an estimated time for each procedure - three minutes for a specific form, a couple of minutes to take a photo of myself for verification, et cetera - but with each additional step, I began to feel like this was not going to be as simple a process as was advertised. This wasn’t like signing up for a Facebook account - they requested detailed information, including copies of government-issued IDs and read-only access to my bank accounts. This is basically the same information a regular bank would ask for, but these lenders market themselves as different from traditional institutions and your expectations are set accordingly. The next morning I was contacted to set up a “quick verification phone call, no longer than 15 minutes” (again, offering a specific time estimate every step of the way). I set up my call for later that afternoon, where someone from Grow proceeded to ask extremely detailed questions about individual transactions from my bank accounts (remember, they require access to this information as part of the application process). They asked questions about specific deposits, withdrawals, email money transfers, and payments to the CRA - questions that, again, any regular bank would probably ask if they were going to loan you money, but that nevertheless caught me a little off guard with how specific they were. As promised, the call took no more than 15 minutes, and my loan was approved later that day. By Monday, the money had been deposited in my account, fulfilling their claim of “money by the next business day.”

Overall, my experience was positive. I went from applying for a loan in my pajamas on a Thursday night to having the money in my account on a Monday morning, with about an hour of total effort put into the process. However, all these companies would do better to manage expectations - the parts of my experience that were unexpected or felt a little off were only that way because of the fact that these alternative lenders do so much to market themselves as different from traditional banks. When the process begins to feel more bank-like, it seems like a disconnect between marketing and reality.

Financial technology is an area that’s constantly changing. At press time, Grow no longer appears to offer consumer products directly - they’ve pivoted into an enterprise fintech company, offering back-end services to credit unions and other financial institutions - while Mogo appears to be ramping up their consumer product offerings, and new players like Lendful are entering this increasingly competitive space. More companies trying new and innovative ideas will only lead to better offers for everyone, and perhaps the big banks might take notice and revamp their own products. For now, Canadian entrepreneurs have more ways to access capital than ever before, and that’s unequivocally a good thing for everyone.
This analysis is a good example of how a hedge fund can function and keep providing seed capital to startups. And yes, they indeed are different from a traditional bank.