Data-driven small business lending startup On Deck this morning announced a $17 million expansion to its Series D round of funding, bringing the round to $59 million. The investors this time are Google Ventures and PayPal co-founder and venture capitalist Peter Thiel and Industry Ventures. In February, the company closed $42 million in financing led by Institutional Venture Partners, with participation from RRE Ventures, SAP Ventures and First Round Capital. Last summer, the company closed a $100 million credit facility led by Goldman Sachs.
What will the company do with all this money?
"Shoring up the balance sheet is always a good thing," says Noah Breslow, On Deck's CEO. The company's loan volume grew 25% in the first quarter of 2013, compared to the fourth quarter of 2012. "We can use the money to accelerate our product development and our marketing initiatives as we try to reach more small business owners around the country," he says.
On Deck has loaned $450 million to date, and plans to lend about that much in 2013. Breslow says this represents "tens of thousands" of loans, he prefers not to give a specific number.
The company offers loans to small businesses from its website, using a homegrown credit scoring system called On Deck Score. "It's the Main Street equivalent of FICO," Breslow says. On Deck approves loans in five to ten minutes, Breslow says, and the funding is provided within a day. "It's about as complicated as applying for a credit card," he says.
On Deck collects information on small business owners' personal and business credit profiles as well as the cash flow and transaction activity of the business, public records, online banking records and social data, including Google Places' reviews and rankings of retail establishments. "What we've learned is no single data source carries the day, it's really this mosaic of different data sources together," Breslow says. "Some businesses have very strong footprints in one data source but not another. We think it's about the aggregation of all of them and the intelligence to know which ones to use when that's a lot of the special sauce behind our company."
The default rate is a single digit and loss rates have been declining for the last three years, Breslow says, as the company has improved its models and scaled up.
The company charges interest rates of 18-36% on three to eighteen-month loans. "We recognize that the rates are different and more than a traditional bank, but the service we're providing is a lot faster and more efficient," Breslow says.
Customers typically use the loans to invest in things like buying inventory, remodeling, and marketing.
In the traditional bank model, a borrower usually comes to a branch and the banker does a site visit to the business before making the loan. Online, of course, none of this is possible. "We have to do the digital equivalent," Breslow says, looking at data on the business for fraud patterns and red flags, such as an owner who lives three states away from his business.