What Rate Could You Receive for a Short-Term Commercial Loan with OnDeck?
If you are a small business owner, you know to expect the unexpected. Whether a crucial piece of equipment breaks, you experience a seasonal cash flow crunch, or you fall short on inventory, there may be times when you need a commercial loan to cover the shortfall between your expenditures and revenue.
Traditional banks have long held the monopoly on this type of lending, which often created a problem for business owners. The loan application process requires significant paperwork and documentation, and could take a substantial amount of time to complete. A bank may take weeks to approve a commercial loan while determining the creditworthiness of the applicant (both the personal credit of the small business owner and the viability of the business itself). Once the loan is approved, it could take days or weeks longer for the funds to be disbursed. At that point, the need for the money may be passed — and your business may have suffered considerable damage in the meantime.
Consider a situation where a business manufactures a product that is only used in the summer. If a critical piece of equipment breaks down in the spring, shortly before the product will be sold, the company needs to fix or replace the equipment immediately so that it can get its product to the market — not in six to eight weeks, at which point it will have missed much of the prime selling season. Applying for a commercial loan to cover the cost of the repair or replacement and waiting for an extended period for the loan to be approved and the funds disbursed could mean a devastating financial blow for the company. Getting the loan approved and the funds released quickly are the top priority for this business — which is why alternative lenders such as OnDeck are important to many small businesses.
Alternative lenders offer short-term commercial loans and lines of credit to small businesses in the United States. By using over 2,000 data points and innovative algorithms to analyze a business’ creditworthiness, OnDeck can approve a short-term commercial loan within minutes — and release loan funds in as little as twenty-four hours. For small businesses that need a quick infusion of capital, this is critical.
Of course, OnDeck has strict standards for approving loans — but its requirements are more generous than those imposed by traditional banks. For example, while most banks require a small business owner to have a personal credit score of at least 720 for a loan, OnDeck’s minimum credit score for a loan is 500 (however, the average credit score for a small business owner approved for a loan is 660). OnDeck only requires one year of operating history for a business, compared to two years for most banks, and a minimum of $100,000 in annual revenue. OnDeck is able to approve loans faster because it takes into account a wide variety of factors, such as online reviews of a company and real-time cash flow. By incorporating such a diverse set of data into its calculations, OnDeck can get a better picture of the overall ability of a small business to repay its loan — and can make a faster determination on an application.
The main disadvantage of access to quick cash through alternative commercial loans from OnDeck is the cost. These short-term loans tend to have relatively high interest rates, with annual percentage rates (APRs) that can range from 9 to 99%. The APR of a loan is essentially the total cost of a loan. It includes all expenses associated with the loan, from the interest rate to origination fees and any other costs that are typically associated with a loan. While many borrowers may look at the interest rate of the loan (such as 12%) or at the origination fees, neither of these numbers will give you the true cost of the loan. It is only by combining the interest rate and various fees into an APR that a borrower can understand the overall cost of a loan. Banks and other lenders are required to inform borrowers of a loan’s APR under the Truth In Lending Act. Using the APR, borrowers can compare loan terms to determine which loan has the best overall rate.
The interest rates for OnDeck loans vary considerably based on a number of factors, such as the amount of money borrowed, the creditworthiness of the business owner and OnDeck’s assessment of the health of the business itself. For short-term loans of between three and twelve months, the fixed simple interest rate is as low is 9%. The average rate for short-term loans is 21.6%. For long-term loans of between fifteen and thirty-six months, the annual interest rate is also as low as 9.99%. The average annual interest rate for long-term loans is 40.1%. However, it should be noted that these interest rates are not APRs, and do not take into account various fees, such as origination fees. OnDeck charges a one-time origination fee of between 2.5 to 4% of the total loan amount for a first loan, 1.25 to 3% for a second loan, and 0 to 3% for a third or subsequent loan. This could represent a significant expense to the total cost of a loan. For example, if a business took out a $100,000 loan with a 3.5% origination fee, then it would add $3,500 to the loan. This fee would be in addition to interest and other fees that may be assessed by OnDeck.
One sample rate provided by OnDeck shows how much a “highly qualified” restaurant owner can expect to pay for a $50,000 short-term (six month) loan. This hypothetical business owner has $5,000 in daily cash flow and 1.5 million dollars in annual revenue. A potential loan through OnDeck would include an 11% simple interest rate, with a daily payment of $440 for 126 days, and a $1,250 origination fee. The total repayment cost for this loan would be $56,690 — which is not cheap, but may be necessary to help a business get through a tough spot.
Of course, individual business owners may find that the cost of a loan through OnDeck is still worth it if they receive the money that they need to keep their business going during an expansion or a difficult time. While APRs can range considerably from 9 to 99%, the expense of a short-term commercial loan through OnDeck may be a good investment in the future of a business.
A savvy small business owner should do a full analysis of the terms and conditions of an OnDeck loan, looking at the annual percentage rate (APR) instead of just the simple or annual interest rate. Taking into account the full cost of the loan — including origination fees — is vital to ensure that it is truly affordable for a small business. With that caveat in mind, a commercial loan through a private commercial lender through OnDeck may be a good decision for a small business owner who needs a quick infusion of capital.