Loans with a click

Last year Shannon Schofield, the owner of Tampa small business CardQuest, needed $50,000 in capital to launch two new product lines. After having a bank turn her down for a loan request for her $2 million business, she started to look at other options. That's when she found OnDeck.

The technology-fused small business lender provides an almost instant decision to business owners who fill out a five-minute loan application online. OnDeck charges a short-term rate, drafted out of customers' accounts daily, that varies depending on the term of the loan. A typical rate for a six-month loan would be 20 cents for every dollar that you borrow, according to OnDeck CEO Noah Breslow. When annualized, the rates can range from 18% to 38%.

“Once I got comfortable with it, I liked the model,” Schofield says. “When you need money to keep doing what you're doing, that's when you just need money.”

Founded in 2006, OnDeck's online credit model is on its fourth generation, with a fifth generation expected for release this summer.

To date, the company has loaned more than $825 million, with $450 million in loans in 2013. OnDeck's default rate is in the single digits and has been declining for the last two years, according to Breslow. Though he declined to share exact revenue, the company grew 150% over the last year, and is projected to grow 100% again this year, he says. The 250-employee company, based in New York City, has offices in Denver, New York City and Arlington, Va.

Tampa is one of OnDeck's top 20 metro areas, based on amount of loans, according to Breslow. Orlando and Miami also made the list, ranking Florida in its top five states, with more than $80 million in loans from OnDeck, and $45 million in 2013 alone. Breslow credits the high number of loans in the state to small businesses such as restaurants, auto repairs, hair salons, and unique product development companies.

Breslow, 38, spoke with the Business Observer about OnDeck's strategy during his recent visit to Tampa. The following is an edited transcript of the interview:

What are traditional lenders like a bank missing in their strategy?
Traditional lenders have a tougher time with smaller loans. Most banks lose money on loans less than $250,000. They're really set up to do a $1 million loan rather than a $50,000 loan. And then I think the other thing that they miss, if they decide that they do want to do the $50,000 loan, they try and reduce the business owners to their FICO score, their personal credit score. What we've found is a lot of small business owners borrow on their personal credit to get their business off the ground and then all of the sudden they have a $2 million business that they're attached to. But FICO, the personal credit people, don't take that into account.

It's really the lack of interest in smaller loans and trying to simplify a business down to a person. What OnDeck's technology does, is we look at the business as a business. We care less about the owners in some ways than the performance of the business. If your business performs a certain way in the last six or 12 months, we're going to make a six- or 12-month bet on the business rather than a five-year bet on the owner.

How do you do that?
We do a lot of data collection. The whole key to making a small loan efficient is to not have a lot of manual work in the process. We'll collect some information from the business owner, probably as complicated as applying for a credit card, then some data on the cash flow of the business, like three months of bank statements and credit card statements. We also collect data from business credit bureaus, public records, and social data where appropriate, like a restaurant on Yelp or Open Table. We're getting big enough now that we have algorithms that help us crunch this data and make a very efficient but also high-quality credit decision for these smaller dollar loans.

This is different than the community bank with the personal underwriting touch. The actual decision-making isn't done by people, it's done by algorithms.

What's a decision on which you'd like to have a mulligan?
What I've learned is the critical parts of the business you have to control. Sales and marketing and distribution, for example in the early days, we thought we could outsource that, and we were just going to be this technology company.

Mitch and I were in a room and we were like, if we get the software right, then people will just come to the site and order loans and it will just be like buying shoes. It's not like buying shoes at all. It's almost like buying a car online. It's not quite that big of a purchase, but almost. So what we found is the moment we added more of a human touch to the process and took more of the marketing under our own control, that's when the business really started to scale.

What about now — what's keeping you up at night?
It's really getting the word out more than anything. Building that trust with small business owners. We just had lunch with these folks, and an owner of a hair salon was saying, “I went to Bank of America and asked about OnDeck and they hadn't heard of you. I went to Raymond James and they hadn't heard of you.” I think he does his credit card processing with Square, and he said, “Square hasn't heard from you.”

People who use our product come back; they use it again. The average customer takes 2.25 loans from us. That number keeps trending up as we build a track record, but I think it's really that trust factor and getting the word out.

Any other challenges?
Knock on wood, it's a good time for the company. But the other challenge we've really had is hiring people. We have to hire 100 people into the company over the next six to eight months.

We're leaning on our employees more, and we're trying to be very proactive. We'll reach out to people who have jobs who aren't seeking jobs but have the skill set we want, say, “We're doing something great here, I know we're interrupting your probably wonderful and normal life, but will you come talk to us at OnDeck?”

One of the other things I do, when I hire someone senior on the team, I make them do a written exercise. Not short — like three hours or four hours of work. I think if someone really wants the job, they'll put in the work. It shows clearly who wants and who's capable of thinking very critically because we try to present problems that we encounter in the business.

Why are your customers willing to pay more?
Our costs to our customers are high because our costs were high when we started. Our core component costs are coming down.

Today we compete on access; these are customers that banks turn down. We compete on speed; we're 100 times as fast as a bank. We compete on service; you talk to someone and you have a good interaction with them on the phone. And ease, we don't ask customers for tons of information and we collect a lot of that electronically. And I hope one day to compete on price. I definitely know we're not the low-cost thing.

What about other competitors that have popped up more recently with similar models?
When people see a good thing they try and chase it. You asked me what I worry about at night, it's not the competitors. Not to be cavalier about it, it's just more that it's a very big market. There's room for multiple players to play. I also think it's tough to build a business if you are copying others. We don't feel like we're copying anyone. The goal is really just to stay focused on improving our products for our customers' sake and add what they need next, rather than playing defense against any new entrants. Also there's the element of scale, anyone who starts today has to lose a lot of money. We've lost tens of millions of dollars in bad loans to learn how to do this right. They're going to have to pay their tuition too, so it takes some time.

What's in store for the future?
There are a number of products small business owners use today to get financing. We have a term loan product today at OnDeck, there's a term loan product at banks, but there's also lines credit, equipment leases, purchase order factorings, and credit cards. I guess our contention is that no one has tried to bring technology and innovation to these products in many years. The equipment leasing process — we're leasing equipment at OnDeck to build our next datacenter. It is an archaic process; it takes 60 days to close the transaction. And it's a lot of the same things that we've seen in our first product, we've seen in these other products. The thinking is let's take this platform that we've built, this credit model, and start applying it to other products that small business owners need so we can ideally over time become more than a single transaction to them. We want to become their financing solution. And I think that, plus the economies of scale as we continue to grow, we can almost become a one-stop shop for our customers' financing needs. That's what we're building for right now.

This story has been updated to correct Noah Breslow's age.