Getting a Small Business Loan When the Bank Says No

One of the greatest barriers in the search for business capital on Main Street is the labor-intensive underwriting process used by banks. Similar to the mortgage process, getting a business loan from a bank -- if by some miracle you are approved -- takes weeks or more from application submission to closing. For small businesses, the waiting game can put a crimp on operations.

Banks also place emphasis on a business owner's personal credit history when determining whether to approve or deny the loan. One slip up on the personal credit side could cost the business funding from a bank. Nor do banks like to lend to businesses unless they have been established for several years. On Deck Capital seeks to remove these barriers to accessing capital by using a quicker, streamlined approach for business loans that emphasizes the financial health of a business in deciding whether the business is creditworthy. It takes into account business credit data, cash flow, payments to vendors and suppliers, public record information such as liens and bankruptcies and other variables, but not a personal credit check against the owner. Applicants are usually given a response within one day; once approved, funding can come as fast as two days. The service is different than say a Lendio, which is something of a loan matchmaking service between small businesses and banks, or the revenue-based lending model of Lighter Capital. "We think that this type of lending ... will open up new markets," says Noah Breslow, On Deck Capital's CEO (Breslow has been with the company since its launch.)On Deck, launched in 2007, services companies with revenue as little as $100,000 to as much as $5 million in revenue, but the company's sweet spot is a business with revenue of approximately $1.5 million and fewer than 10 employees. The business has to have been established for at least a year. Loan terms range from three to 18 months, from $5,000 to $150,000. The company is nearing $250 million in capital deployed to small businesses through its platform. "The idea was to use technology to streamline lending to that middle segment that is structurally underserved by banks [with] traditional underwriting to deliver capital efficiently. The bank underwriting process is very labor intensive," Breslow says. "Generally if you go online to apply for business loan, you are directed to a local branch, you have to go in person to fill out forms. With On Deck, you go to the website and are approved in minutes."On Deck charges a percentage based on the loan amount and terms. What's ironic about the platform is that in order to provide funding to these small businesses, On Deck borrows from banks, other financial institutions and investors. "Banks would never be lending to the businesses that we're providing capital to," Breslow says. "We're not a bank. We don't have piles of cash. Banks have the tools to dole out capital ... we borrow in bulk, but we have the ability to dole out smaller chunks" of capital.

The company is increasingly looking to partner with financial institutions to open the market for small-business loans.

On Deck says it's in discussions with many of the top U.S. 25 banks to use the technology platform. "The banks are recognizing now that we have a proven model [to work with] a segment they are missing," Breslow says. "We have a credit model that is very squarely focused on the health of these micro businesses and not on the personal credit of the business owner. [We're] able to open up credit access to a whole new spectrum of businesses [that] have been screened on personal credit." (The company wouldn't release the specific names of banks with which it is in discussions.)"Lending to a business with 300 employees is very different than an upstart with 25 employees and $25 million in revenue [or] even a home-based self-employed individual that brings in $30,000 in annual revenue," he adds.When the company originally launched, it expected certain industries to be more prevalent than others at receiving funding through the platform, like restaurants, auto body shops, retail stores and others that commercial bankers typically stay away from due to high failure rates, Breslow says. Instead, what they're seeing is "bankable" self-employed people like doctors and dentists finding relief through On Deck's system. "Time is valuable. They can't step away [from their businesses] and then wait a month to get approved," he says. "What we've learned is that convenience and speed and this idea of business owners being in control of the process" is appealing to applicants. The other trend the company is seeing involves the types of projects for which business owners are using the funds, indicative of the economy."Business owners are taking on new projects and making investments, but they're smaller and shorter term than these long five-to-seven year investments," Breslow says. "Instead of someone saying 'I want to open a new location,' they might be using [the money] to hire workers at current locations."

One recent happy customer of On Deck is Travis Clark, owner of a Foot Solutions franchise in Grove City, Ohio. Foot Solutions fits and sells proper footwear, orthotics and custom arch supports to customers with foot, knee and back pain.

Clark opened his store a year and a half ago. He claims his personal bank PNC Financial Services(PNC) wouldn't even look at his application because he hadn't been in business for at least three years. A PNC spokesperson could not be immediately reached for comment."I had to resort elsewhere," Clark says. "I found On Deck [online] and I contacted them and it's been a pretty smooth process since we started."Clark says he worked with an On Deck representative over the phone and within five days he had a $20,000 loan. "Since we're such a seasonal business we used it for inventory purchases. We have to do new purchases each season especially in Ohio," Clark says, adding that he would "absolutely" use On Deck again if needed. "The process is pretty straightforward, they don't judge up front like a lot of the banks are going to do," he says. Defaults are roughly 5% of On Deck Capital's portfolio. On Deck doesn't make public its approval vs. rejection rate of applications, but Breslow emphasized that the company is providing access to capital for many businesses that can't get bank loans. The system's automated payment system helps keep tabs on what's happening at the businesses quicker than a bank's portfolio. Businesses have two choices on how to pay back loans. They can either choose fixed, daily micro-payments, drawn from their operating business account. Or they can choose a split funding option, which On Deck launched in April. Split funding allows merchants to pay back the loan using a variable percentage of their daily credit card sales. The split funding keeps the benefits of a true business loan, while offering the flexibility of aligning loan payback with seasonal or varying sales, according to the company's website. The daily payments prevent the "snowball effect often caused by missing larger monthly payments," according to the company's website. "We're looking at that business's bank account every single day and that allows you to keep closer tabs. And in the event there is something going on, we can adjust the terms accordingly to work with the business owner to get through it," Breslow says. "We're still servicing a small section of the market. As it gets more mainstream and more widely accepted, you will see it more widely deployed," Breslow adds. To contact Laurie Kulikowski, send an email to: Laurie.Kulikowski@thestreet.com.To follow Laurie Kulikowski on Twitter, go to: http://twitter.com/#!/LKulikowskiRELATED STORIES:>>How To Sell Your Business for Top Dollar >>Starting a Business With a Friend? Here's How To Stay Friends>>Behind the Scenes at a Small Biz: June Profits From Thin AirFollow TheStreet on Twitter and become a fan on Facebook. >To order reprints of this article, click here: Reprints