Jack Metcalf and Jason Stevens have bitter memories of the banker who walked in during the credit freeze and threatened to shut down Fan Man Lighting if they couldn't fully repay a $50,000 loan.
They'd never even been late on a payment, they said.
Other banks then turned them down for loans to help with working capital, they said, because their houses were already pledged as collateral on an SBA loan.
Fed up, Metcalf and Stevens turned to OnDeck Capital Inc., an alternative lender out of New York, and quickly got the $12,000 they needed for rent and new inventory.
Yes, the nine-month loan came with a fat 24 percent interest rate, but given the alternatives it was worth it, they said.
"You do have to bridge these things that come up. No. 1: cash flow in the winter," Metcalf said. "I think it was a reasonable deal for us."
Nonbank small business lenders like OnDeck are proliferating online at a time when many traditional banks remain wary of risk and are dealing with heightened regulations and requirements. Kabbage, Biz2Credit, Can Capital, Swift Capital, Funding Circle USA, even Amazon and PayPal make the type of fast, short-term loans Metcalf and Stevens use.
While there have always been alternative lenders, such as those who lend against inventory and receivables, this crop is distinguished for its harnessing of Big Data and ease of use with the Internet.
"The banks have failed the Main Street businesses," OnDeck Chief Executive Noah Breslow said in an interview.
Breslow, a former software engineer, said banks just aren't set up to efficiently deliver a quick $20,000 business loan. OnDeck has lent $1 billion since its founding in 2007, he said, including more than $19 million in Minnesota, and has seen triple-digit sales growth nationally in the last three years.
Metcalf and Stevens have returned to OnDeck several times since their first loan. Their new showroom in Apple Valley, dripping with drum pendants and spinning ceiling fans, sits next to the Apple Valley Transit Station, complete with a children's area with a television to help busy parents shop.
It wouldn't have happened without OnDeck, Metcalf and Stevens insist.
The influx of such lenders is registering with traditional banks, already struggling to increase loans amid intense competition for good ones. How much the nonbanks are encroaching on banks' turf isn't clear.
Many alternative lenders may be focusing on riskier customers that banks wouldn't compete for anyway, said Ron Feldman, executive vice president at the Minneapolis Federal Reserve Bank. But they have bankers talking, Feldman said.
"I didn't hear anything about it 18 months ago," he said. "Now I'm hearing about it."
Bob Coleman, editor of the Coleman Report, tracks the U.S. Small Business Administration loan industry. The alternative lenders have "definitely made a dent" in SBA lending, he said. The volume of SBA loans under $150,000 is down, and the average loan size has increased, he said. That tells him there's an impact.
Gauging the impact
Is it a good one? Coleman expressed mixed feelings. Speed to market is a good thing, particularly if you're a restaurant with food threatening to spoil, he noted. But the high interest rates and ability to roll over loans into new loans can make the financing look like business payday loans. Such financing could be delaying the inevitable demise of businesses that just aren't going to make it.
Ron Elwood, supervising attorney at the Legal Services Advocacy Project in St. Paul, noted that private lenders making commercial loans aren't subject to the same usury laws that lenders to consumers are.
"I'm wary," said Coleman. "If it's used prudently, it's a good thing."
Breslow says OnDeck isn't targeting companies on the edge of solvency. Its core customer has been in business 10 years, he said. It focuses on businesses with fewer than 25 employees, a minimum of $100,000 in sales and at least one year in business with sales. Its average loan is $40,000 and terms range from three to 18 months. Interest rates range from nine to 25 percent, but 15 percent is typical, Breslow said. An origination fee of about 2.5 percent is deducted from the loan.
Instead of emphasizing personal credit scores, OnDeck uses software to crunch financial data that borrowers upload with a short online application. For loans up to $150,000, it collects up to 90 days of cash flow information that shows important trends in the frequency of transactions, volume, expenses and return customers.
It also pulls the personal and business credit histories from credit bureaus and mines a range of public documents and data on the company's industry.
Altogether, OnDeck says it culls about 2,000 data points. A loan decision can be made in minutes. Money can be deposited into accounts by the next day. For repayment, OnDeck deducts a small amount from the borrower's account each business day.
Breslow said the company responds to episodic needs, but wants to be a "long-term solution."
"People hate their banks," Breslow said. "The vehemence is surprising."