Smart Lending: On Deck Gives Your Startup A Credit Score So You Can Secure A LoanTechCrunch May 19, 2011 Back to press
We talk a lot about the startups and companies that receive venture capital and angel funding, but what about the other subset of small businesses that are fundamental to the success of the economy, but may not be on the radar of VCs and angels? These companies, from restaurants and small retailers to salons and florists, may not be high-potential startups like a Google or a Facebook, but they provide services we use on a daily basis and are, therefore, equally as deserving of the necessary capital that would help them get off the ground. Of course, traditionally it’s been very difficult for them to secure bank loans.
Generally speaking, these small businesses likely don’t have traditional finance departments, spend little on finance, keep small cash reserves, and often don’t have the collective experience to complete a 14-item loan package that makes them attractive to lenders. On the flip side, financial institutions can’t afford to spend a lot of time evaluating and working with businesses seeking sub-$100K loans. As a result, banks tend to fall back on personal and consumer credit scores, treating these startups as individual borrowers, rather than evaluating the credit potential of the business itself.
As a result, On Deck Capital was founded in May of 2006 to bring a technological spin to streamline the process of bringing loans to Main Street businesses and startups. Instead of simply looking, say, at an applicant’s tax returns when evaluating businesses, On Deck uses software to examine a business’ day-to-day operations. The software investigates how many customers the business has, cash flow, sales, and registered complaints, for example, in order to judge whether or not the company is solid enough to repay a loan.
Considering the fact that banks have lacked an efficient way to analyze businesses for sub-$100K loans and have underwritten commercial loans based on a consumer credit score, multitudes of creditworthy small businesses have been deprived of the capital they need to grow. As such, On Deck is today announcing its On Deck Score, a business credit score developed to provide lenders with an effective measure of a small business’ creditworthiness. The startup partnered with Equifax, which collects, organizes, and manages various financial, demographic, and employment data to develop and implement the On Deck Score. Equifax will be hosting the On Deck Score.
The cloud-based On Deck platform enables small businesses to go to create a business profile, which links to electronic data sources, including online banking, accounting and merchant processing. On Deck then combines that information with social, tax, and industry data to create a comprehensive financial profile of the business. And now banks and lenders will be able to not only have access to this complete financial profile, but an accurate business credit score, through On Deck Score, in the name of streamlining the lending process.
For a somewhat unusual approach to small business lending, On Deck has been able to spend 5 years developing the technology of its business, thanks to the attention of big-name investors. RRE Ventures, SAP Ventures, and Khosla Ventures, among others, have contributed over $30 million to the On Deck platform.
On Deck Founder and CEO Mitch Jacobs tells me that there are currently 5 million businesses that have 25 employees or less — a segment the U.S. economy relies on for 40 percent of its jobs. So, facilitating the financial underwriting of these businesses is an important goal, especially as the U.S. pulls itself out of a recession. These small businesses provide the key to a full economic recovery — and future success.
“There’s been a transformation over the last 10 years, as businesses have been going from paper-based islands of inefficiencies to adopting lots of software that’s connected to the cloud”, Jacobs said. “Banks have traditionally used less realtime information than the average 10-year-old, but now the time is right, the adoption of software by businesses is high, and there’s an opportunity for businesses to quickly create a full data profile that minimizes risk for lenders and opens up a vast sum of capital for the small business owner”.
Jacobs went on to say that the the typical loan application and approval process can take up to 3 months, but the On Deck system streamlines the lending process so that businesses can be receiving capital in as little as 2 days. As this is the case, and considering that the service is free to use, On Deck has already facilitated over $125 million at an average of loan size of $30K. The ceiling price for an On Deck loan is $150K.