The classic entrepreneurial adage is, "Find a customer need and fill it," but sometimes the customer need finds you. In 2010, Michael Garrity launched CommunityLend, Canada's first peer-to-peer lending company. The goal was to link consumers directly to nonbank lenders. But Garrity kept getting calls from small-business owners asking if CommunityLend offered point-of-sale customer lending services (such as installment plans with on-the-spot approval). It didn't, but as the calls continued to come in, the company realized that it should. FinanceIt was born, and in short order, the new company signed on 3,500 merchant partners. This summer, it will enter the U.S. market. Garrity explains what it took to pivot, and why FinanceIt is succeeding where traditional lenders won't go.

All in the Timing

We had just launched CommunityLend and quickly realized we were pointed in the wrong direction: For peer-to-peer lending to work, you need good-quality borrowers. Finding them takes a lot of time and money. Meanwhile, the 2008 financial meltdown essentially wiped out all point-of-sale financing solutions in Canada. Merchants had no way to offer their customers financing options, and customers were not willing to make large purchases on high-interest credit cards. By December 2010, we decided to develop a new brand: "Don't buy it, don't charge it: FinanceIt." We positioned ourselves as the third way of doing payment at point of sale, an alternative to cash and credit cards. We wanted to disrupt traditional thinking around payment plans and offer merchants a way to give a good deal to their customers. The goal was to make it simple, fast, and easy for merchants to close big transactions and sell more stuff.

The Perils of the Pivot

When you have sold a set of shareholders on a particular idea, and you have to go back to them and say that idea is not working, that you need to make a significant change, and you need more money to do it--none of those conversations are easy. We lost 80 percent of our team as we moved from peer-to-peer lending to a point-of-sale financing company. We did a big management change-out, because some hires made sense for CommunityLend but not for FinanceIt. We had to bootstrap for a while, and everyone had to do a gut check to see if he or she was up for a brand-new beginning with a new entity.

We tried to have the two companies coexist for a while, but ultimately it was clear that they could not. CommunityLend had to wind down and FinanceIt had to take off, and we had to be orderly about it. It was hard--you cannot dabble in financial services.

Rate Race

The difference between us and an in-store credit card is the annualized interest rate, which on an in-store credit card can be as high as 29.9 percent. A furniture store often seeks an easy way to get a card into somebody's hand so that person can make a purchase today, but not everyone wants a credit card at 29.9 percent. Instead, in the same time that it would take to get a credit card processed, a salesperson can use our mobile app to offer an installment loan at 12 percent. The merchant gets paid by us as quickly as the next day, and we take over the relationship between the consumer and the bank.

All About Technology

Technology is a vital part of what we do. For it to work, we had to iterate many times over to get to where we are now, with 24/7 availability and underwriting processes that work in real time. It's not easy for a traditional bank to do. We lead with technology, especially mobile. How can the phone be the new cash register? How can an iPad app be designed to work well for clients that sell different kinds of products? If a customer is buying a home-improvement service, the person can e-sign the app in his or her living room.

A Triple Play

Because of the financial crisis, there has never been another time in U.S. history when banks have had as much divergence between deposits and loans. It's a huge problem. People want to keep their money in banks, so deposits are increasing, but banks have restricted the amount of lending they do as a result of the mortgage fiasco. So we're at this very strange time in which banks have more capital than they can deploy. We offer them the opportunity to make good-quality loans, through merchants; we offer merchants a way of selling product; and we offer customers a way to afford it.

We do many things to help merchants market our services. One thing we think is particularly awesome is a shopping center within our technology platform where merchants can customize their own messaging on postcards, posters, pens, etc. We print them in our print shop and ship them out overnight. Merchants can order on the fly whenever they need anything.

Expanding to the U.S.

The North American banking landscape has $2.4 trillion that banks want to get out in loans, but they are having great difficulty finding the right customers. On the other side, we see hundreds of thousands of merchants who want to offer better financing at point of sale. They need access to capital, technology that's reliable and easy to use, and partners they feel confident in. We see this as a multitrillion-dollar opportunity.

Consumers have a lot of trepidation around debt because of what happened during the financial crisis. But at the same time, they are smarter about rate structures now, and that helps us, because our rates are transparent and significantly lower than those of credit cards. There are many quality borrowers who have not had access to this form of financing. By giving them a way to participate, we create more competition among lenders. Still, people are wary, and restoring trust in lending is something we'll need to focus on over time.

Chronicling a Successful Pivot

This timeline describes how an idea for a peer-to-peer lending network morphed into a new, merchant-focused business model owing to where the strongest demand for a new lending option proved to be. 

January 2010: Michael Garrity launches CommunityLend, Canada's first peer-to-peer lending service. Its goal is to connect consumers with a variety of nonbank lenders. But merchants keep calling, asking, "Have you got a service for us?"

January 2011: Garrity launches a sister company, FinanceIt, to help smaller merchants and service providers offer customers a fast, simple credit option. Within 16 months, it has more than 1,000 clients enrolled (and $3 million in angel funding).

June 2011: CommunityLend, which never exceeded more than $1 million in loan volume, stops taking on new loans. The company will wind down in 2014.

July 2013: FinanceIt surpasses the $500 million mark in loan applications and debuts the industry's first iPad app the following month.

Summer 2014: Having processed more than $650 million in loan applications for 3,500 merchant partners in Canada, FinanceIt expands into the U.S.

As told to Inc. contributing writer Liz Welch.