November 29, 2010
Credit flowed so freely before the recession that people in the restaurant industry often use hyperbole to describe how easy it was to get financing before the collapse.
“I could have gotten my dog a loan three years ago,” says Paul Steck, president of Saladworks.
“The perception was, anyone who can breathe can borrow,” says Mitch Jacobs, founder of On Deck Capital, a lending technology company that works extensively with restaurant operators.
“We went through a period in society when nobody ever heard ‘no,’” says John Hamburger, president of the Restaurant Finance Monitor.
But after the financial meltdown, when overleveraged commercial banks large and small were imploding around the country, the flow of credit came to a standstill. Suddenly, operators couldn’t get a loan big enough to buy a dog, let alone the financing necessary to open a new restaurant….
[On Deck] It decides whether to advance a loan based on a computerized data-gathering system that looks at a business’ online banking account, credit card processing, credit scores, and other factors. This saves business operators from lugging stacks of records to banks to initiate a lengthy application review.
“It is 80 hours of labor boiled down to 15 minutes,” Jacobs says.
To date, On Deck has provided more than $80 million in loans, much of it to restaurant operators, who make up 20 percent of its clientele. On Deck’s typical restaurant client has three to four locations, and revenues from $250,000 to $4 million. Instead of its clients paying back the loans in monthly installments, On Deck automatically receives daily micropayments of about $100 from their bank accounts.
Jacobs criticizes commercial banks for dealing with small businesses as if they were individuals and putting undue emphasis on the applicant’s personal credit score.
“It was very clear to me back in 2006 that the U.S. financial system had no category of products that was for Main Street small businesses,” Jacobs says. “The banks were offering consumer products to Main Street small businesses as a work-around.”
In looking comprehensively at a business’ financial viability, On Deck is a lending model tailored to small businesses. And with so many aspects of the financial system being called into question, it may be a sign of where commercial lending is headed.
“This is a rare moment in time where some really good things could happen for [small businesses] regarding access to capital,” Jacobs says. “Because the personal credit scoring system is regarded as broken, banks are going to have to seek an alternative … that works in favor of the small business owners instead of against them. And that has not been the case.”…
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