Entries in small business (1)

Saturday
Jan022010

Beyond traditional bank loans, specifically for small business

For small businesses with cash flow challenges, the current loan environment is difficult and sometimes non-existent. Because many proprieters start out putting business expenses on credit cards, their credit score suffers and that alone is enough to disqualify them from traditional bank loans. On Deck Capital, however, believes "that a small business with a healthy cash flow should be supported." They facilitate loans exclusively to small businesses and open up credit to many companies that were previously shut out because, "by reviewing business performance in addition to credit history, we extend loans to companies that we believe in, but may have been considered too risky by traditional lenders."

Their model offers several distinctions and innovations:

  • Loan approval based upon business performance (cash flow, credit card revenue, and payment behavior) in addition to credit score
  • Daily Direct Debit payments. On Deck Capital processes direct deposits to repay the loan rather than sending monthly notices. This approach is "proven to prevent the snowball effect often caused by missing larger monthly payments"
  • Short loan terms of either 6 or 12 months

Unlike p2p lending companies like Lending Club, On Deck Capital doesn't promise rates that beat the bank's. They acknowledge that traditional bank loans are generally the most favorable option, but also recognize that the credit score required makes such loans often inaccessible to small businesses. On Deck Capital's rates are in the "ballpark" of banks' but are priced higher to reflect that small business is risky and many small business owners have less-than-excellent credit. Still, they are clearly a better option (they claim 50% better) than putting business expenses on credit cards or turning to cash advances.

I'm intrigued by On Deck Capital's narrow focus on small business loans. Alternative financing options clearly are clearly needed for the small businesses that drive much of our country's growth, but I've been skeptical of the ability of p2p lending companies to fill that gap. In my personal experience as a lender on Lending Club, I steer clear of the small business loans because 1) they seem to be an excessively risky proposition, and 2) they are nominally "personal" loans that the borrower should be able to repay regardless of the success of the business, but that case is not made convincingly. I don't feel particularly comfortable judging small business loans and prefer to stick with the personal loans with attributes I know how to evaluate (debt to income ratio, credit score, etc). 

On Deck Capital is managed by people who know small business risks and can make the right evaluations based on a composite of attributes that form their patent-pending algorithm. With 223,000 transactions completed, totalling $45M in loans, they seem to be one of the few firms that is constructively helping small businesses cope with the credit crunch.