Free Enterprise Staff  | April 24, 2014

How Big Data Empowers Lender to Help Small Businesses

After three tours of duty in Iraq as an Army medic, Will White came back stateside with a business idea for a healthy meal delivery service. He just needed a little financing.

White figured he would easily qualify for a loan through any number of programs aimed at helping vets transition back to civilian life. Instead, he found himself confronted with the same challenges facing many small businesses — access to startup funding.

He would eventually find the financing solution he was looking for from OnDeck, a small business lender that’s using data-mining software to make loans more readily available. But not before going through the traditional — and more contemporary — routes for financing.

“You hear all the time that there are loans for veterans, and then you go to the bank and they are like, ‘Yeah, there are loans for veterans as long as you are two years old in business.’” said White. “It kind of blew my mind.”

Initially turning to an increasingly popular funding model — crowdfunding — White was able to raise $21,000 through a Kickstarter campaign to start a “paleo” food cart service in a downtown Denver mall. To him, that confirmed the potential of a larger online business that would deliver meals based on the paleo diet, which replicates what the hunter-gather ancestors ate before agrarian settlement. Yet he needed money to build a more robust website to handle site traffic as his business shifted to a subscription model.

White couldn’t hold off another year to meet the criteria for a traditional bank loan. His business, Caveman Cafeteria, was barely hanging on, having burned through $40,000 of personal savings in the first year.

That’s where OnDeck came in, providing White with a $30,000 loan virtually overnight at a critical time.

“In a nutshell, our vision is to transform the way money flows to small business and make on-demand financing a reality for them,” said Krishna Venkatraman, OnDeck’s senior vice president for data and analytics.

After filling out two on-line pages of forms and demonstrating cash flow through a bank account, White received OnDeck’s first installment of $10,000 within days.

“Our business model changed quite a bit  — we were a young restaurant losing money, and now we are basically a profitable subscription website with regular monthly revenues,” said White.  “The money from OnDeck helped make that happen,”

OnDeck is one of a new breed of companies whose business model is based on marrying big-data analytics with vastly expanded databases, including company-generated data. That allows for nearly automatic loan approvals and funding available within 24 hours, providing viable startups with critical cash infusions with minimal fuss.

OnDeck’s platform pulls together on average 2,000 data points for each of the 250,000 or so applications they have received. Having that all in one place allows the company to “determine the right loan for them,” explains Venkatraman.

The lender focuses exclusively on firms needing loans of between $5,000 and $250,000, a market segment company executives say is unattractive for most banks — and thus underserved. Since launching in 2006, the firm has loaned more than $1 billion to thousands of diverse businesses in all 50 states.

OnDeck is just one of a growing number of firms applying analytics to huge new troves of increasingly open data to wring business insights from them, said Joel Gurin, senior advisor at New York University’s Governance Lab and author of a new book, “Open Data Now.” He cites Calcbench, which helps investors quickly search SEC corporate financial data, as using a similar model.

“One of my dreams as a home owner who has gone through refinancing is that someday getting a mortgage or refinancing a mortgage will be as easy as this,” said Gurin, referring to OnDeck’s business. “That it will go from something analogous to three month’s worth of root canal day by day — to something that you could actually get approved in about a day through open data.”

Lena Botwright, owner of the Furry Tales Doggy Day Care in San Diego, is another beneficiary of OnDeck, which she turned to after being rejected by her local bank.

Botwright had also turned to the Small Business Administration for help, but came away disappointed. “Their response to us was basically max out on all your credit cards first.”

Before discovering OnDeck, she was doing just that, while paying a 47% interest rate on her cards. OnDeck’s interest rates run about 15% on average, along with a 2.5% origination fee. While that rate may be higher than those offered by commercial banks, only a small portion of applications win approval from the larger institutions. Big bank approval rates for small business loans slipped to 18.8% in March from 19.1% the month before, according to Biz2Credit Small Business Lending Index.

That leaves the field wide-open for lenders such as OnDeck, which has figured out a way to serve that market segment profitably. Others are moving into this space, as well, including Can Capital and Kabbage.

For White, OnDeck has enabled him to dream about opening in every major U.S. city within the next five years and hopefully bring the paleo diet to the Army.

“The chow halls in the Army are still full of garbage, but hopefully we can get that changed one of these days,” he said.