By Don Sadler
WHEN THEY NEED to borrow money for
their business, the first (and often only) place
most small-business owners think of
approaching is their local bank.
But a new type of lending platform has
recently emerged that enables owners to
bypass traditional banks and secure business
loans over the Internet. Online small-business
lending takes several forms, including peer-to-peer lending, crowdfunding and cloud lending, says Steven Schipper, a Costco member
and the managing director of Lend Trade, a
consulting firm in Waukee, Iowa, that specializes in lending.
How online lending works
Peer-to-peer lending has more in common with venture capital than with bank
loans, says Schipper: “Peer-to-peer lenders
are primarily individual investors looking to
earn a healthy return on their money.”
LendingClub ( lendingclub.com) and Prosper
( prosper.com) are two of the biggest peer-to-peer lending marketplace websites today.
Most crowdfunding lenders, meanwhile,
don’t expect to earn high rates of return on
their money. Instead, they are looking to help
entrepreneurs raise money to start new businesses or launch new products and services.
This may make crowdfunding sites like
IndieGoGo ( indiegogo.com), Kickstarter (kick
starter.com) and Kiva ( kiva.com) good options
for business owners looking to raise money for
new startup ventures. “Crowdfunding inves-
tors are often family members and friends
who want to help entrepreneurs get new busi-
nesses off the ground,” says Schipper.
There’s one catch with crowdfunding,
though: Business owners typically must raise
100 percent of the money they request in
order to receive funding. If they fall short,
even by just a few dollars, they usually don’t
receive any money at all.
Bank lending—without the bank
Cloud lending is a bit more like tradi-
tional bank lending, but without the bank,
says Tim Tedrick, a partner with Wipfli, a
CPA and consulting firm in Sterling, Illinois.
“Cloud lenders typically specialize in making
small-business loans of less than $100,000,” he
says. “They offer a simple value proposition:
easy online loan application and fast decision
and loan funding—in other words, no fuss,
Two of the biggest and best-known cloud
lenders are OnDeck ( ondeck.com) and
Kabbage ( kabbage.com). Founded in 2007,
OnDeck is already one of the nation’s largest
small-business lenders; it has loaned more
than $2 billion to about 30,000 small busi-
nesses in the United States and Canada.
OnDeck offers term loans of up to $250,000
with maturities between 12 and 24 months, as
well as lines of credit up to $20,000.
OnDeck uses a proprietary credit-scoring
model it developed called OnDeck Score.
The Costco Connection
Costco members will find a wide variety of
small-business services available through the
Costco Services program, including payment
processing, payroll services, business checks
and forms, credit reports and more. Go to
Costco.com and click “Services.”
Cloud lending and other
forms of small-business
This model enables it to give
applicants a loan decision just
a few minutes after they fill out a
simple online loan application, which
usually takes 10 minutes or less. It can
then wire-transfer the money or send it via
Automated Clearing House to the business’s
account within one business day.
OnDeck’s 24-month term loan features
an annual percentage rate (APR) between
19.99 and 39.99 percent, while shorter-term
loans feature an APR as low as 10 percent.
There’s no application fee, but there is a loan
origination fee of 2. 5 percent.
Kabbage, which has made more than
$550 million in small-business loans, is similar to OnDeck but specializes in lending to
online merchants and e-commerce businesses. Kabbage claims to approve small-business loans by “looking at real-life data,
not just a credit score.” This includes online
merchants’ seller history, customer reviews
and user feedback ratings.
Kabbage offers small-business lines of
credit with six-month terms. It charges fees
ranging from 1 to 13. 5 percent of the amount
of money actually borrowed during the first
two months and then 1 percent for each of
the remaining four months of the term.
Pros and cons of cloud lending
“The biggest benefits of cloud lending for
small-business owners are the ease of application and relatively high approval rates compared to bank small-business loans,” says
Schipper. “In general, it’s easier to get a small-business loan from a cloud lender than it is
from a traditional bank.”
However, Tedrick points out that this easy
loan application and approval process comes
at a cost. “Cloud loans usually feature higher
interest rates than bank small-business loans,”
he says. “However, if you need cash fast and
can’t qualify for a bank loan or line of credit,
this might be an acceptable trade-off.” C
Don Sadler is an Atlanta-based writer
specializing in small business and finance.