Credit Crunch for Small Business
October 14, 2008 Office Insight, Trends
We’ve all been bombarded by news reports of the world-wide credit crunch. Rather than focus on the doom and gloom articles, I wanted to share a recent article in the Wall Street Journal that piqued my interest. The article profiles a company called On Deck that processes loans for the small business world, with a few twists.
First, On Deck has created an algorithm that allows them to assess the overall health of a company instead of merely taking a snapshot like most lenders do. They look at a company’s daily business activity including number of customers, sags and surges, and (get this) number of complaints a company has. Compare this to the average lender which basically looks at last year’s tax returns.
Second, instead of sending an invoice out every month (like my mortgage statement) saying that Joe’s Pizza owes $300 this month and has an outstanding balance of $40,000 and is paying an interest rate of 30%, On Deck basically takes $100 out of your bank account EVERY DAY. That is pretty out of the box. I think everyone could take this as a lesson in life. If Morgan Stanley would just take $10 out of my checking account every day, I’d probably save a lot more money than I do now when I have to scratch a $300 check every month. This approach means that On Deck’s loans will be paid back in about a year.
Third, the interest rate of 18% to 36% got an initial reaction from me of “wow, my credit card interest rate is less than that.” As I progressed in my research however, I found the article saying that the interest rate for small businesses can be up to 200%. So 18% to 36% looks pretty good. It must be…so far On deck has lent out over $10 Million since it began in May and is growing at a 35% clip.
Also of note….in the article, some of the ‘big name players’ voice that this takes away from the experience of loans because you miss out on the ‘personal banking experience.’ I’m thinking that most people I know don’t have much good to say regarding that experience of loans and they are fine interfacing with a computer who will at least evaluate them fairly.
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