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Review of OnDeck Alternative Business Loans

For small business owners, obtaining a commercial loan can be a frustrating process.  Traditional banks require reams of paperwork, and the application process can be lengthy.  Banks also tend to have high standards for approving commercial loans, so owners with lower credit scores, newly-established businesses or an uneven cash flow may find it difficult to be approved for this type of loan.  In addition, approval through a bank may take a substantial amount of time, so if you need a capital infusion quickly, this type of loan may not be the best option for your business.  Fortunately, there are alternatives for small business owners.  A new type of private commercial lender has sprung up in recent years.  Utilizing new technologies to approve loans quickly and unfettered by most banking regulations, these alternative lenders can extend loans to a broader range of small businesses — but often with much higher interest rates.

 

OnDeck is one of the better-known of the alternative lenders, and for good reason.  Founded in 2007, OnDeck offers fast approval, comparatively low requirements for loan approval, and competitive loan terms for this type of short-term commercial loan.  While OnDeck loans are not ideal for every small business capital need, they may be a viable option for business owners who need to access capital quickly.  Using algorithms, OnDeck analyzes over 2,000 data points to evaluate to creditworthiness of applicants.  While traditional banks focus on metrics such as credit scores, OnDeck will also look at items such as online customer reviews and real-time cash flow.  This allows OnDeck to approve loans in as little as ten minutes, and in many cases, release funds within twenty-four hours.  Because OnDeck uses a wide range of data points to evaluate the creditworthiness of its applicants, it is a good choice for business owners who have below average credit scores.  While traditional banks may require a relatively high credit score, OnDeck’s personal credit score minimum for term loans is 500, and 600 for lines of credit.  However, most OnDeck borrowers have a credit score of at least 660 — which indicates that many OnDeck borrowers are financially savvy business owners who need a short-term loan to cover an unexpected business expense or other short-term financial need.

Advantages of OnDeck for Loans and Lines of Credit

If you are a small business owner who needs a loan, OnDeck may be an attractive option for a number of reasons.  First, and perhaps most importantly, OnDeck’s application process is simple to use, requires minimal paperwork, and can be completed quickly.  A loan application can be completed online or through the phone, giving technophobes the ability to avoid submitting personal information online if desired.  OnDeck only requires basic information to complete the loan application.  This includes a business tax identification number, three months of credit card statements, the Social Security number and driver’s license number of the business owner, and between one to three months of bank statements for the business.  Once the application has been submitted, a decision will be issued within minutes.  If the application is approved, the funds will be released in as little as twenty-four hours.  For businesses that need a quick injection of cash, this is an obvious benefit of using a lender such as OnDeck, particularly when compared to the lengthy and cumbersome process of applying for a loan through a traditional bank.

 

Second, OnDeck has relatively low requirements to be approved for a loan in comparison to most banks’ standards.  OnDeck requires business owners to have a credit score of at least 500 (for term loans) or 600 (for lines of credit), a minimum of $100,000 in annual revenue and at least 12 months (one year) of operating history.  OnDeck also does not require business owners to use personal assets, such as a home, as collateral for the loan.  Most banks have much stricter requirements.  For example, banks generally require the use of personal assets as collateral, and demand a minimum of two years of operating history plus a credit score of at least 720.  OnDeck’s comparatively lower standards make it far easier for business owners to be approved for a commercial loan.  Nevertheless, even though OnDeck’s standards may technically be lower than most banks, it should be noted that the average borrower through OnDeck has a relatively high credit score and runs a successful business.  The majority of borrowers have a credit score of 660 or higher, have been in business for seven years or longer, and have a gross annual revenue of $450,000 or higher.  Again, this indicates that OnDeck is being used by smart business owners who need a short-term loan rather than as a last resort for failing businesses.

 

Third, using a commercial lender can help a company build credit, raising your business’ credit score.  OnDeck reports your regular, on-time loan payments to the three major credit bureaus (Equifax, Experian and PayNet).  When you make payments on your short-term loan, you will see your credit score rise accordingly — as long as you make your payments in full and on time.  Short-term loans through OnDeck may have daily, weekly or monthly payments requirements, so be sure to stay on top of payments.

 

Fourth, if you successfully pay off your OnDeck loan, you will be in a better position if you need a loan in the future.  While OnDeck (like most alternative lenders) charges a loan origination fee of between 2.5 and 4 percent of the total value of your loan, that origination fee percentage will drop with each subsequent loan.  A second loan will have an origination fee percentage of 1.25 to 3 percent, while a third or later loan will have an origination fee percentage of between 0 and 3 percent — which could represent a significant savings.

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Disadvantages of OnDeck for Loans and Lines of Credit

While there are benefits to using OnDeck for a short-term commercial loan, business owners should be wary of the pitfalls of using OnDeck or another alternative lender.  While these loans are approved and the funds are disbursed quickly, that speed comes with a significant drawback: costliness.  Private commercial lenders like OnDeck are largely unregulated, which allows OnDeck to charge annual percentage rates (APRs) that range from 9 to 99% on its loans.  While the simple interest rate on a loan may not seem that high — and may actually be lower than what a credit card is offering — when it is viewed in terms of the APR (i.e., combined with origination fees on term loans, maintenance fees on lines of credit, and when the interest rate is compounded on annualized basis), it may be shockingly high.  This can make a short-term loan through OnDeck a very expensive proposition, and something that should only be done as a last resort for a small business.

 

While OnDeck does not require the use of personal assets as collateral for its loans, its loans are not unsecured — which is another potential disadvantage of using this lender.  The company requires business owners to sign a personal guarantee for loans, which is an agreement that permits the lender to go after the borrower’s personal assets in the event that the borrower does not repay the loan.  If a business owner does not repay the loan, it could significantly damage his or her credit score.  Additionally, OnDeck takes out a lien on all business assets to secure the loan.  While securing a loan is standard for any lender, business owners should be aware that when they borrow through OnDeck, they are putting both their personal and their business assets at risk if they default on the loan.

 

OnDeck also requires a relatively frequent repayment schedule, typically on a daily or weekly basis.  These payments are generally deducted from your business bank account on daily or weekly for term loans, and weekly for lines of credit.  If a business has an uneven cash flow, this could present a significant problem.  Being tied to a steep daily or weekly repayment schedule that is taken directly from your company bank account could put you in deeper financial trouble than you may have been in before you took out the loan.

 

In addition, because of the way that OnDeck structures its repayment schedule, there is no benefit for businesses to pay off their loans early; they will pay the same amount whether they pay the entire amount in full on day one of the loan or if they pay if off over the entire life of the loan.  OnDeck requires its borrowers to pay a fixed amount of fees, so there is no advantage to paying off a loan early.  This is in stark contrast to most traditional loans, where borrowers can typically save thousands of dollars by making additional payments or paying off the loan early.  However, OnDeck does not assess prepayment penalties, so business owners will not pay extra if they decide to pay off the loan in advance.

 

Finally, while OnDeck does work with a wide range of small businesses, it won’t work with all types of businesses.  OnDeck maintains a “restricted industries” list, and will not lend money to any business that falls within certain categories.  This includes any business in the financial services and investment sector, sellers (such as pawn shop owners), vices (such as adult entertainment), vehicle and power equipment sales), services or administrative outsourcing, travel and transportation, or businesses that fall into the miscellaneous category (ranging from farming to mining to video rental stores).  If your business falls into OnDeck’s restricted industry’s list, it won’t matter if you meet all of its other qualifications for a loan — you will be rejected and will not be able to borrow money.

 

The decision to borrow money through a short-term commercial loan through an alternative lender such as OnDeck should be made carefully.  While there are many advantages to OnDeck’s loans, such as the ability to be approved and receive funding quickly, there are significant disadvantages, like the overall cost of the loan.  Be sure to carefully review the terms and conditions of any short-term commercial loan before signing, and utilize this type of financing carefully to help grow your small business.