Need A Loan? On Deck Capital Looks At Cash Flow, NOT Credit Score Credit Cards

Need A Loan? On Deck Capital Looks At Cash Flow, NOT Credit Score

14 May, 2010 Credit Cards Capital Deck Capital

Recognizing how today’s tight lending standards can crush a small business’s chance for a loan, On Deck Capital steps into the gauntlet of big banks and large lenders to provide an alternative business loan solution which evaluates creditworthiness according to cash flow rather than credit scores.

Operating since 2006, On Deck may revolutionize the lending process according to this interesting model that looks at the “true health of a business” rather than assess what a credit score says about a borrower’s propensity to pay a loan.

Without checking credit scores or even asking for collateral, how does On Deck figure out who is eligible for a loan? On Deck looks as at the full picture of a business’ financial profile, from positive cash flow, to business patterns of customer activity, to online banking information. The company claims that by analyzing all of this past and current financial information—and tracking it over a period of days—they can better assess a business’ ability to service a loan.

This stands in stark contrast to traditional lenders, who tend to look at credit scores amongst other factors as a way to gauge how risky a borrower is. This can ruin a start-up’s chance for a loan because new businesses often exhausted credit while trying to get off the ground. After analyzing this real-time financial data, On Deck makes the call of whether a small business has the solid finances and stability to pay back the loan.

It gets more interesting. Making good on the loan happens with a daily micropayment system: automatic loan payments occur daily with small deductions (typically around $100-$300) taken direct from the borrower’s bank account. On Deck somewhat reduces the high risk involved with servicing small business borrower through daily repayments; for borrowers, smaller automatic payments avoid monthly bills that are easier to forget about and harder to pay back. On Deck reported to the New York Times that default rate for borrowers had never crossed 10%.

But this isn’t just a good faith loan—this is an expensive loan. Businesses pay a fee of $500 and up, and annualized interest rates range from 18% to 36%, higher than big banks charge. On Deck argues that the interest, such as $2,000 on a $30,000 loan, is marginal when compared to the potential of getting access to capital they wouldn’t otherwise get.

On Deck’s model offers a solution to the small business Catch-22: in order to get a loan, you need good credit and a good business; but in order to build good credit and profit, you need capital to jumpstart your business. Though there is higher interest and daily payments, this could be a valuable resource for businesses that need a short-term loan they otherwise couldn’t afford or get from a traditional lender.

It’s a totally new way of defining creditworthiness beyond the three digits of a credit score. While it works for small businesses, I’m not so sure this will ever reach the consumer marketplace. It would be quite a sight to see big mortgage lenders and credit card issuers taking the time to assess cash flow and financial portfolio, one consumer at a time.

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