If there's a contest running to be the poster child for alternative lenders to small businesses, Noah Breslow, chief executive of OnDeck, wants to win it.

Now his company, which went public in December, is trying to make online lending to small businesses a mass-market phenomenon. It's a tall order, given the relatively small place online lenders occupy in the small-business financing universe--not to mention the barrage of criticism such companies, including OnDeck, have faced in recent months. Still, Breslow remains ambitious. 

"Alternative lending has gone mainstream," he told me last week, during a visit to the company's headquarters in Midtown New York City. "Our goal in the next five years is to become the leading small-business lender in the U.S., period."

Certainly OnDeck, which has loaned to 30,000 small businesses since 2007, has been on a tear lately. It originated $1.2 billion worth of loans in 2014, an increase of 152 percent from 2013.

OnDeck, an Inc. 5000 company, reported $158 million of gross revenue for 2014, an increase of 143 percent from 2013. After accounting for funding costs, OnDeck's net revenue nearly tripled, to $73 million for the same time period. It's still not profitable, like a lot of newly public tech companies, but its net losses fell by 23 percent year over year, to $18.7 million for the full year 2014.

Still, Breslow's in for a tough slog in a notoriously fragmented market. By dollar volume, banks do much more small-business lending than anyone else: Collectively they had about $700 billion in outstanding small-business loans, compared with $10 billion for online lenders, according to a July working paper by former Small Business Administration head Karen Mills, currently a senior fellow at Harvard Business School. 

And competition among the upstarts is stiff: Other online alternative financing companies include Lending Club, which went public right before OnDeck and which has also gotten into small-business loans; Kabbage; Biz2Credit; and PayPal, which launched working capital loans in 2013. 

There's also that lingering perception problem. OnDeck puts an online spin on a type of lending that has a downmarket reputation at best and a predatory reputation at worst, in part because of the high interest rates that alternative lenders often charge. The average OnDeck loan carries a steep 51.2 annual percentage rate--and that's down 10 percentage points from a year ago.

And in a scathing report from November, Bloomberg BusinessWeek called OnDeck "payday lending for businesses," relying heavily on the services of less-than-scrupulous brokers.

Breslow claims that the article overstated the role of brokers in OnDeck's business, and says that he's trying to give alternative lenders a better reputation. 

"When we entered the market, nonbank business lending was like the Wild West," he says. "We started this company to become the blue chip alternative to the bank loan."

His timing, at least, is good. Since the financial crisis, small-business owners have loudly criticized traditional bank lenders for shutting off the loan spigots. Mills and other experts have noted with alarm the banks' tendency to focus on larger, more lucrative commercial loans at the expense of the smaller working capital loans most entrepreneurs need. 

During my recent visit, most of the company's 369 employees were hunkered down at row upon row of computer screens that are jammed into row upon row of long, high desks. The atmosphere was quiet, congenial, and intense--which also describes how OnDeck tries to recruit new customers.

"Small-business owners don't respond to cute in any of our marketing," says Andrea Gellert, the company's senior vice president of marketing. She adds that when OnDeck has tried to "jazz up" its direct marketing campaigns, business owners have tended not to respond.

Most of those customers have been in business, on average, seven and a half years and have $500,000 in annual revenue, Gellert says. Which begs the obvious question, why are these companies having such trouble getting loans?

For one thing, banks make it difficult, lending experts say, and they prefer businesses that have operated for at least two years, are profitable, and have assets that can be collateralized. Loans are also tied to profit or revenue agreements, and can be called in if those are breached. There's also the hassle factor: The process of getting a bank loan is time-consuming and paper-intensive, often taking weeks or months before funds arrive.

By contrast, OnDeck, which offers uncollateralized loans and lines of credit, can have money in a small business's account the same day, in many cases, and with almost none of the arduous terms associated with bank loans. Businesses must have a proven track record of revenue, usually a minimum of $100,000 for at least one year. Using a merchant cash-advance model, payments are deducted on a daily basis, and the loans are usually paid off within a year. (One key difference, OnDeck notes, is that it deducts a fixed dollar amount, as opposed to a daily percentage, typically charged by merchant cash-advance entities.)

Breslow notes he's also serving a well-defined financing gap. The average loan from top SBA bank lenders is nearly 10 times larger than OnDeck's average of $44,000, which is of a size the company has identified as the most underserved niche for small-business loans.

"These loans just weren't getting made," Breslow says.

That certainly was the experience of Tom Bernard, president and founder of ProCraft Interiors, a general contracting company in New York City. Bernard bootstrapped the startup in 2011, and then found he needed capital to take on larger jobs so ProCraft could grow. Getting bank money was a nonstarter, Bernard says, so he went to OnDeck. He qualified for a $60,000 loan, which allowed him to hire a project manager.

"Twenty years ago, banks might have given me a loan," he says. "But now you have to prove to them you don't need the money in order to get it." 

Published on: Mar 4, 2015