On Deck, Which Helps Small Businesses Get Capital, Lands Some of Its Own
If the small business is indeed the engine of growth for the American economy, then most of the indications are that the engine is not yet running on all of its cylinders. One of the biggest problems facing small businesses–the dry-cleaning shop on the corner, your neighborhood bakery or pizza place, or the new plumbing-supply shop in town–is access to capital.
Small businesses have a hard time getting loans because the banks that make loans look primarily at an owner’s personal credit information and not at the day-to-day financial data related to the business itself.
The recession hasn’t made it any easier. Data from the Federal Financial Institutions Examination Council show that in 2009, banks originated $73 billion in loans to small businesses, representing a decline of 47 percent since 2007. And the overall number of loans fell by 69 percent to 1.6 million loans, from 3.6 million loans during the same period.
Raising capital doesn’t seem to be a problem for On Deck Capital. The New York-based start-up announced today that it has landed a $15-million C Round led by SAP Ventures, the venture capital arm of the German software company SAP. Its previous investments include stakes in LinkedIn, WebEx, MySQL and Red Hat Software.
On Deck is something of a right-time, right-place story, emerging as it has during a period when small businesses are struggling for needed capital. Launched in 2006, its software gathers live digital data from a business’s operations in order to help evaluate the business’s health. The point is to give banks and potential investors a tool to realistically evaluate the risk of making a loan that goes beyond the simple credit rating of the business owner. On Deck has been used to make $100 million in loans over four years.
Even in 2006, when credit was plentiful, most small businesses were able to secure loans because the banks treated them as consumers, not as businesses, says On Deck CEO Mitch Jacobs. For banks, it’s also a question of time and attention “Banks simply can’t afford to spend 80 hours to underwrite a flower shop that needs $30,000 for a relatively short period of time. It just doesn’t make economic sense.”
But at the same time, small businesses started embracing digital tools to run the shop. They started doing their banking online, and using QuickBooks to handle invoices and payroll. They started taking credit cards more often, and selling their goods and services on the Web. All of these are streams of useful data that can be captured to help paint an accurate picture of the business’s financial health, Jacobs says.
Combine that with technology that makes the repayment process both simple for the business owner and reliable for the lender, plus real-time monitoring of financial data from companies that get loans, and it’s not hard to see why On Deck is growing: Revenues tripled in 2010.
Not just any company can apply for an On Deck loan. The typical borrower company has been in business for at least a year and has at least $3,000 in credit card transactions per month. Loans range in size from $5,000 to $100,000 but average about $30,000, Jacobs said. Payments on the loan are made daily using an automated direct debit system. The small daily payments help prevent that moment that causes headaches for lenders when unexpected expenses crop up and the monthly loan payment ends up at the bottom of the priority list.
On Deck also announced that David Hartwig, managing director at SAP Capital, has joined its board of directors. Other investors include Contour Venture Partners in New York, First Round Capital, Khosla Ventures, RRE Ventures and Village Ventures.