Illustration by Steph DavidsonBreslow shows a photo of a beaming Brooklyn wine store owner as he explains how banks aren’t lending to good small businesses. His point is that they want to borrow so little—say, $20,000 to make payroll—it’s not worth the banks’ effort to perform their expensive due diligence.
OnDeck’s software, Breslow tells the audience, gives potential borrowers an
“OnDeck Score,” a proprietary assessment of creditworthiness that pulls in more and better data than banks do. The startup’s technology analyzes thousands of variables—from cash flow metrics to clues from social networks—and spits out a loan verdict in hours, not weeks. Algorithms replace loan officers, entrepreneurs get the money they need, and everyone is happy. “We set out to create a different kind of score,” Breslow says. “And a billion dollars of loans later, we think we’ve done it.”
OnDeck’s Big Data pitch has investors panting. The lender has raised $180 million in capital from elite investors, including Google Ventures (GOOG) and Peter Thiel. Goldman Sachs and others have given OnDeck more than $300 million to make more loans. Its New York headquarters has all the trappings of a hot startup, with weekly happy hours, a game room with foosball and Pac-Man, and team-building scavenger hunts. Now the company plans to go public; on Nov. 10 it filed a prospectus for an initial public offering. Morgan Stanley (MS), JPMorgan Chase (JPM), and Deutsche Bank (DB), among others, are underwriting the share sale, which could happen by the end of the year and value OnDeck at around $1.5 billion, according to a person who’s familiar with the underwriters’ internal estimate but isn’t authorized to release that information.
Despite Breslow’s talk of tech disruption, algorithms alone don’t explain OnDeck’s growth. Rather than disrupting bank lending, it’s more accurate to say that OnDeck is part of an industry known as “merchant cash advance”—essentially payday lending for businesses. It’s a high-risk market, and interest rates can exceed 500 percent a year, or 50 to 100 times higher than a bank’s. (OnDeck’s rates average 54 percent, according to a document it sent to investors in the spring.) To fuel its rapid growth, OnDeck has worked with independent brokerages, which at one point found takers for nearly 9 of every 10 dollars the startup lent. It’s the equivalent of Priceline getting old-fashioned travel agents to enter orders into its website.
If Google Ventures and Goldman Sachs (GS) represent the prestigious end of OnDeck’s dealings, then merchant cash advance brokers are at the other extreme. The field is rife with unsavory brokerages, staffed by many of the same people who pushed subprime mortgages a decade ago and worked the bottom rung of the stock market in the boiler rooms of the 1990s. One of them is Mario Figueroa, president of Chadwick Cashflow Advances, a brokerage in Saddle Brook, N.J. He got into high-interest small business loans in 2011, shortly after doing time in a Newark halfway house for stock fraud.
OnDeck hired his brokerage to market its loans a few years ago, Figueroa says. Near his office in October, over a lunch of pizza, calamari, and tequila shots, his brand-new BMW 6 Series parked outside, he describes how an OnDeck representative offered to pay thousands of dollars for every borrower he brought in. He could hardly believe it was legal to charge such high rates, until he learned that most states’ usury laws don’t apply to business loans. His salesmen, who spend their days cold-calling businesses to offer easy money, are a colorful lot. The list of Figueroa’s past and present employees includes a former hedge fund manager convicted of stock fraud and a recovering heroin addict on probation for a motel stickup gone bad. One new hire stopped coming to work after he robbed a bank. “I saw an opportunity here,” Figueroa says of working with OnDeck. “The banking world is not using the cheap money the government is giving them to fund small businesses. Thank God we exist.”
OnDeck has teamed up with brokers
convicted of stock scams, insider trading, embezzlement, gambling, and
dealing ecstasy, according to interviews with the brokers and court
records. Brokers have brought $349 million of loans to OnDeck so far
this year, already 35 percent more than 2013’s total, according to the
prospectus. That represents a risk, the company acknowledges in the
filing: If partners “mislead loan applicants or are engaged in
disreputable behavior, our reputation may be harmed, and we may face
liability.”
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