Forbes recently interviewed OnDeck CEO Noah Breslow and-the day before his third quarter earnings call-gave him an opportunity to address many of the criticisms hurled at his company and the short term on-line lending industry. As usual, Noah gave an eloquent defense.
At the crux of the debate is how loans should be presented to small-business owners. OnDeck and hundreds of other players in their industry insist that factor pricing makes loans simpler and clearer for businesses to understand. Other players insist on traditional APR pricing. Breslow responds that OnDeck prefers to give a dollars and cents cost because "Customers don't find cents on the dollar confusing."
I recently had some insight when a client we're working with came to us after being offered a loan by OnDeck. The story goes: this small business earned $284k in 2014 with a net loss of $70k. This year has been better so far, with $586k in revenue and $80k in profits.
Based on their credit profile, and financial performance OnDeck was willing to offer them the following terms just a few weeks ago. The fine print includes a blanket lien on all company assets and a personal guarantee from the owner.
- The first offer was for a loan of $55,000 with a payback of $60,500 over 3 months. This includes 63 daily payments of $960.32 and an origination fee of $1,375.00.
- The second offer was for a loan of $105,000 with a payback of $123,900 over 6 months. This includes 126 daily payments of $983.33 and an origination fee of $2,750.00.
- The third offer was for a loan of $150,000 with a payback of $183,000 over 9 months. This includes 189 daily payments of $968.25 and an origination fee of $3,750.00.
- The fourth offer was for a loan of $195,000 with a payback of $247,650 over 12 months. This includes 252 daily payments of $982.74 and an origination fee of $4,875.00.
Are you curious what the APR is on these different offers?
- Offer 1 (3-month): 100.85% APR
- Offer 2 (6-month): 81.25% APR
- Offer 3 (9-month): 64.13% APR
- Offer 4 (12-month): 57.2% APR
I don't find these figures confusing at all. To me and I would argue to any rational business person, these interest rates would make one shake in their boots.
Sometimes when I tell people the story of these loans-they look at me like I am crazy and they must be rare and uncommon. In fact, OnDeck issued $483 million of these loans in the third Quarter of this year. And they are just one of hundreds of lenders or advance companies like this.
I have no problem with short-term loans. Emergencies come up, and capital is needed to float the business. There is a specific business case for short-term lenders. But I do think that APR's should be disclosed clearly-so that borrowers understand what they are getting themselves in for.
If you were an entrepreneur looking for money would you take any of the loan offers above? And if the offer included the APR would you think about them any differently? Do you think that loans like this are good or bad for the economy?