Recognizing the gap for small business lending left by banks since the financial crisis and even before, online lender OnDeck Capital has rushed into the void of alternative lending. As a sign of how well that's worked, on Monday, OnDeck, an Inc. 5000 company, filed to go public.
Founded in 2007 by Mitch Jacobs, OnDeck has quadrupled its revenue in the past two years to $107 million for the nine months ended September 30, 2014. It has originated $1.7 billion in loans for 4.4 million small business customers.
Moreover, OnDeck has created a niche by innovating in the alternative lending business, using its own scoring model that takes advantage of more active and pertinent data in small business owners' lives. Among other things, it tracks payroll data, checking account information, and rental information, to make its decisions.
"Main street banks have failed main street businesses," Noah Breslow, OnDeck's chief executive, told me at Inc.'s offices earlier this year. "It is too expensive for them to make smaller loans."
In its filing with the Securities and Exchange Commission, submitted under the expedited process allowed for small companies with less than $1 billion in annual gross revenue under the JOBS Act, OnDeck reported an adjusted net loss of $14 million for the nine months ended September 30, 2014. That is a decrease of 23 percent compared to the same nine months a year earlier. The company reported profit of $354,000 for the three months ended September 30, 2014.
For the full year 2013, OnDeck's net loss increased 45 percent to $24 million compared to the full year 2012.
Among its risks, OnDeck lists its ability to increase the borrowing of existing customers, compete effectively with other companies in the small business lending space, and to expand internationally. OnDeck also lists its history of losses, which it says it expects to continue in the future.
OnDeck's lending model is slightly different from others in the online financing space, says Dan Ciporin, a general partner for Canaan Partners, in New York and San Francisco.
Whereas most online lenders tend to use a marketplace model, connecting lenders with borrowers and making money on the origination fees, OnDeck is a balance sheet lender. In other words, like a bank, it has to have the capital to lend, which it typically gathers from a variety of sources including institutional sources and through securitizing loans. It typically makes money by charging interest.
In fact, OnDeck's interest rates are quite high, between 30 percent and 56 percent on an annualized basis, although the terms of its loans are usually less than a year, and OnDeck receives payments each day from the companies to which it lends. The average size of its loans is $40,000, although they can range between $5,000 on the low end and $250,000 on the high end, Breslow said.
"If you are earning interest income, the goal is to get the cost of capital as low as possible and making a priority of a higher interest product going out," Ciporin says.
Canaan Partners is one of the largest investors in Lending Club, a loan marketplace, which has similarly announced its plans to go public.
For its part, OnDeck competes with other alternative lenders that service small business borrowers online, such as Kabbage and Biz2Credit.
OnDeck, which hopes to raise $150 million through its offering, listed RRE Ventures, Institutional Venture Partners, Village Ventures, and SAP Ventures as its largest investors, with between 10 percent and 15 percent ownership stakes each. Google Ventures owns a further 6 percent. Breslow owns 2.4 percent of OnDeck.
Morgan Stanley, Merrill Lynch, and JP Morgan Securities are the lead underwriters of the deal. OnDeck will list on the New York Stock Exchange.
As an indication of how it might price its stock in the public offering, OnDeck reported selling 2.6 million in Series E stock to 14 accredited investors for $29 a share in February.
"The OnDeck IPO launch shows that alternative lending businesses are going mainstream and Wall Street is making multiple plays in the space," says David Goldin, president and chief executive of AmeriMerchant, a competing alternative lender.
Corrections and Amplifications: Noah Breslow is the chief executive of OnDeck Capital. An earlier version of this story inaccurately stated his job title.