Canada

American Brokers Help Fuel Canada’s Small Business Finance Boom

Canada’s small business finance industry is growing, and behind the scenes, American brokers are helping fuel that momentum.

“They’re kind of killing it here right now, from what we see from the partners that we work with,” said Vlad Sherbatov, President & Co-founder of Smarter Loans, an online lending marketplace in Canada. “…for the American players that have come in, they’re already really good at the broker channel.”

Some Canadian small business funders, particularly those offering an MCA product, told deBanked that a significant amount of deal volume is coming from south of the border. And with that, the environment and culture of the business itself is beginning to shift. In their view, it is becoming more Americanized.

“…a lot of the Americanization of the industry, if you will, is coming from US brokers and funders,” said Avrohom Bernstein, CEO at 2M7 Financial Solutions.

Part of that shift is a new level of competition among firms as brokers try to maximize the options available to their clients. Bernstein, for example, said it often starts with an American broker inquiring about submitting a few Canadian deals. Lately, however, it’s been escalating into situations where eight different brokers might submit the same clients.

“Every deal now you’ve got to hustle, you’ve got to fight, you have to really work it,” Bernstein said.

That competition once meant fighting to become the one and only exclusive partner for a merchant. Now, it has become more common to find that a submitted applicant already has multiple active advances.

“…that used to be unheard of in Canada, like that used to be excessively unusual to see more than three positions, now ten is not insane anymore,” said Bernstein. “It really escalated in a way that we haven’t seen, and that’s probably over the last 12, maybe 24 months, that it started really picking up,” Bernstein said.

Jodi Levy, Head of Sales and Business Development for BizFund in Canada, said she has made a similar observation. When she first started in the industry there, something like a third position was unheard of. Now, she said, they see it much more often.

“I feel like that’s definitely more an American influence,” Levy said.

BizFund has a large American operation as well, so the company is no stranger to how things work on the other side of the border. But like others, its Canadian funding arm also works with the American broker community.

“…partners are great, American, Canadian, we don’t care where you’re from, as long as you’ve got good business,” Levy said, adding that what matters is whether those partners have a direct relationship with their merchants. She also said that working with the broker community requires operating with a sense of urgency, something she has instilled in her team as a culture of NOW.

The diversity of products brokers can offer may not be as wide as what is available in the US. Sherbatov said that once a business steps outside of traditional banking sources, it is essentially entering MCA territory. As a result, much of the new competition entering the space is focused there.

“Among the new players that have come in, MCA is definitely the product that they’ve been leading with,” Sherbatov said.

“We have like five or six banks, and then like a couple credit unions, and then there’s not really anyone between, and there’s A-paper guys, and then B, C, D type of guys,” said Bernstein of 2M7.

According to Statistics Canada, banks provided 68.5% of all capital to SMEs in 2023, while credit unions and government institutions provided 20.6% and 9.4%, respectively. Only 2.2% was funded by “online alternative lenders.” The total market size at the time was estimated at $94 billion.

“I think the big gap is—there’s tons of businesses that want capital,” said Rafael Rositsan, CEO and co-founder of Smarter Loans. “There are some funders that offer it, but they’re pretty tight, and I feel like if somebody can come in and take on a bit more risk and open up their books a bit, then there’s plenty opportunity to fund a lot of Canadian businesses.”

As for why there has been such a push from Americans into Canada, no one pointed to a single definitive reason, but the runway for growth in the alternative lending segment, as illustrated by the report, may provide a clue as to the interest. Bernstein of 2M7 said there has long been a pattern of Americans entering and exiting the Canadian market, but he had also long believed that sustained success required boots on the ground. Now, he is reconsidering that view, at least on the broker side, as the current wave of broker entrants appears to be holding more firm. For funders, however, he said it still does not really work as a remote business.

“Every funder that’s actually doing decent volume is here, except for one,” Bernstein said.

In 2019, deBanked held a conference in Toronto for what was then a burgeoning small business finance industry, but held off on further events there after Covid disrupted plans for 2020 and 2021. It did not go unnoticed, however, that deBanked’s more recent American-based events have had more email addresses ending in .ca on the attendee lists. At the most recent Broker Fair conference in New York City, for example, some firms were exclusively advertising Canadian funding products to American brokers.

Canada’s population is relatively small, at roughly 41 million residents. That is about the size of California and only 25% larger than Texas. Homegrown Canadian brokerages do exist, of course, and a lot of business in Canada stays within Canada. Not all of the deals are originating through brokers either. Some merchants prefer to work directly with a funding source, while others prefer the comfort of applying through a Canadian lending marketplace like Smarter Loans, for example. If a merchant is ultimately eligible for some kind of funding, Sherbatov said, they are going to know it through their platform.

“We love the fact that we can help the small business economy thrive in the country, it’s responsible for a lot of positive things,” Sherbatov said. And whether the funding sources originate from Canada or the US, he said those companies ultimately find their way to them.

“We’re just becoming a more critical part of that journey for the merchant, and I think that explains why a lot of the new companies, when they come in, they gravitate toward us,” said Sherbatov. “…because in the business financing space we’ve carved out a nice niche for ourselves after Covid, and usually the new players gravitate to us because they know that merchants come to us as well.”

Levy of BizFund said part of the Canadian business experience is kindness. “That stuff goes far, we love that stuff up here in Canada,” she said. On the company website, photos of the company’s team, including Levy, show them smiling and ready to fund businesses.

For stalwarts like 2M7, which launched in Canada in 2008, the market’s evolution has been dramatic. Bernstein said the industry has gone from being a bit quiet and under the radar to seeing a lot of energy recently, whether from American brokers or from Canadian brokers that have decided this is the niche they are going to focus on entirely.

“In the US, I know a lot of brokers who also do equipment and also term loans and also SBA and also all this other type of stuff, it doesn’t exist so much in Canada,” Bernstein said. “It’s like if you’re selling to small businesses and you’re offering them financing, there’s not that many products you could line up, so it’s like if you’re doing brokerage, you got to be all in, like if you’re doing MCA, you got to do MCA.”

“I think that it was evident to a lot of players outside of the market that there is a big market opportunity that’s untapped,” Sherbatov said, “just because so little financing is being released by alternative lenders, that they started to come into the space, and we’ve seen, I mean, not even for the past two years, but I’d say in the past 18 months, our own roster of business lenders on Smarter Loans has doubled, like we went from 10 to where now we have 20, and the majority of that expansion actually happened from US players coming into the country.”

And the growth is just getting started.

“There’s a lot more room for it,” said Rositsan of Smarter Loans.