When Mary Ellen Murphy, owner of Off the Beaten Path Weddings, faced a seasonal cash crunch last year, she got $20,000 in a few days from alternative lender OnDeck. "It really helped," she says.
Fast cash isn't usually so easy. But lenders such as OnDeck, CAN Capital, Kabbage, IOU Central, and others are loaning quickly by assessing small-business creditworthiness in new ways. Using algorithms, they value real-time cash flow and online customer reviews as much as the credit scores and spreadsheet projections banks love. OnDeck can approve a loan in minutes using 2,000-plus data points per online application, says CEO Noah Breslow. Payback averages nine months.
Since 2012, more than 100 players have entered the alternative lending industry, which includes companies that offer term loans and cash advances, says Rohit Arora, CEO of credit marketplace Biz2Credit. OnDeck has loaned more than $1 billion since 2007, while CAN Capital will lend $1 billion in 2014, CAN CEO Daniel DeMeo says.
That growth, and backing from venture capitalists, confers some respectability on an industry once synonymous with loan sharking--but it hasn't necessarily changed its nature. Interest rates can still be more than 50 percent on a compound annualized basis, and borrowers have to make repayments daily. Murphy of Off the Beaten Path Weddings hopes to find future financing elsewhere. "The terms are very aggressive," she says, "and they impact you every day."
These lenders face little oversight. "It's an unregulated, unlicensed business," says Arora at Biz2Credit. As private commercial lenders, the companies fall outside bank regulations. OnDeck underwrites all its loans in Virginia, which has no commercial usury limits. CAN Capital partners with a state-chartered bank. But Arora expects competition will be the most effective regulator. PayPal and American Express have launched similar products, and others are crowding in.
Joe Peta, co-owner of Atlanta-based children's clothing maker Feather Baby, has benefited from this competition. He took two six-month loans worth $15,000 each from IOU Central at 12.99 percent. With fees, APRs were nearly 60 percent, but Peta didn't mind. "I look at the actual cost compared to the benefit, not the APR," says Peta. He later got a 10 percent APR on a new cash-advance-like loan from American Express.
The real value of these firms may be their effect on traditional lenders. "As banks get more comfortable with what we're doing, we see it as OnDeck in the middle, where banks plug in the capital and we field the applications," says Breslow. The banks aren't there yet, but they are underwriting faster. Bank of America now analyzes customer business checking accounts and credit card processing data to reduce the documentation burden.
The ask: We asked three alternative lenders for their best deal on a $50,000, six-month loan for a "highly qualified" restaurant owner with $5,000 in daily cash flow and $1.5 million in annual revenue. Their offers:
|$2,475 and $23.21
Daily loan guaranty fee