P2P Lender Helps Fix Small Businesses’ $80 Billion Problem

Here’s something you may already know: Small businesses are the heart of the US economy. Today there are more than 28 million small businesses in the US generating 45% of the nonagricultural GDP and employing 50% of the private workforce, according to the US Small Business Administration.

But here’s something you may not know. Small businesses suffer from an $80 billion cash problem — the very resource that mom-and-pop shops and entrepreneurs need each day to cover rent, pay employees, renovate spaces, and expand to new locations.

Many would like to get loans to do these things, but because it’s so difficult for banks to verify a small business’ creditworthiness, the current borrowing process is time-consuming and difficult. As a result, the average small business spends 33 hours, contacts three financial institutions, and submits three loan applications just to get access to funding, according to a recent survey by the Federal Reserve.

The result is a lending market disconnect with a glut of unmet demand. In fact, according toOliver Wyman, a management consulting firm and business unit of Marsh & McLellan, there is an estimated $80 billion-$120 billion worth of unmet demand for small business lines of credit in the US.

Fortunately, one company plans to turn that problem into a tremendous opportunity. Enter the market’s newest peer-to-peer (P2P) lender — OnDeck Capital.

Unlike traditional banks that rely on depositors to raise lending capital, alternative online lender OnDeck Capital can quickly raise cash using a process called securitization, which involves taking out credit lines from banks and selling off pieces of the loans to investors. And unlike banks, OnDeck has the ability to approve small business loans of up to $250,000 on the same day.

To solve the borrowing process problem, and to better evaluate client risk and get businesses faster financing, OnDeck developed cutting-edge technology based on the applicant’s performance (rather than credit score), which allows an entire loan to be approved in as little as a few hours.

To help small businesses with the affordability gap — and minimize its own risk — OnDeck remade the rules of lending. For example, because OnDeck found that small businesses typically preferred smaller loans with shorter terms, it introduced tailor-fit loan products that financed between $5,000 and $250,000 with term lengths of three to 24 months.

OnDeck Capital isn’t new — the company has actually been making loans since 2007, and recently went public last December. But nearly eight years, $3 billion in loans, and 4.4 million customer payments since it was founded, the company’s innovative “micro lending” model has finally seen some appreciation.

And that’s for good reason. OnDeck’s loan originations have exploded at a compounded annual rate of roughly 120% since 2011, with $1.2 billion in loans made in 2014 alone. And the lender’s revenue this past year spiked by 118% to a record $158.1 million.

But it’s not stopping there. OnDeck has spent (and continues to spend) a fortune toward marketing its brand to increase awareness among the vastly underserved small business market — enough so to put the company in the red for the past three years.

To give you an idea, the company spent $18.1 million on direct marketing-related expenses in 2013 — more than a quarter of its annual revenue and nearly triple the amount it spent in 2012. In the first nine months of 2014 alone (the latest figures available), it spent a record $21.8 million toward sales and marketing expenses.

OnDeck knows that there are fewer than a handful of other P2P lenders targeting small businesses, including the more-established Lending Club, pioneer P2P lender Prosper, and the UK-based Funding Circle. It also knows that more losses could be ahead in the near term as it continues to spend heavily on marketing its brand.

But ultimately, the market’s newest P2P lender is confident that its heavy promotional efforts and its unique line of lending products will carry it to big things in the near future. AsOnDeck Capital CEO Noah Breslow declared in a recent interview, “Our goal in the next five years is to become the leading small-business lender in the US, period.”

It’s a bold statement to say on behalf of any company so young. But with a largely untapped market that’s worth between $80 billion to $120 billion at their fingertips, who could blame them for trying?

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