Access to lending has long been a struggle for small businesses, with many companies lacking the established credit history for traditional bank-based lending. Past solutions have included everything from high-cost alternative small business loans to borrowing from friends and family. In today’s data-driven world, a new option has arrived, allowing businesses of all sizes to get funding for everything from inventory to expanding operations.
Lending solutions from Kabbage and OnDeck are similar to traditional bank loans but add real-time cash flow analysis to the underwriting process.
How Kabbage and OnDeck Underwrite Financing
By underwriting based on cash flow, Kabbage and OnDeck give small businesses more options for funding and provide a more accurate assurance of repayment for the lender. Lenders use the analysis of real data to determine the likelihood of timely repayment. This assurance means a lender is happier to provide funding, and the loan amount and terms are in line with the small business’s financial outlook. Most important, both Kabbage and OnDeck allow approved small businesses to quickly get loan proceeds.
While both Kabbage and OnDeck offer small business loans with data-driven underwriting, there are some critical differences between each company. Let’s take a look at the financial products offered by each lender so you can find the right source of capital for your business.
The marketing message from OnDeck is “getting a loan shouldn’t be a second job.” OnDeck also touts that it understands small businesses and provides a hassle-free process that respects your time as a business owner. To this end, OnDeck’s process is simple. Businesses answer a few questions, such as how much of a loan is needed, how quickly funding should occur and the purpose of the loan. You’ll also be asked about your role in the company, your ownership percentage and your social security number.
OnDeck’s automated systems then review the information to determine an OnDeck score, which combines your business health with your personal credit information. Approval can occur either on the spot or might require a more in-depth look to provide the best funding solution.
The general minimum underwriting guidelines for OnDeck include:
- 1 year doing business
- Personal FICO score of 600
- $100,000 annual business revenue
- Must have a business bank account
In general, OnDeck is a source for short-term loans of up to $500,000 for large projects such as renovations and expansions of business operations. Repayment terms can be up to three years, and the interest rate starts around 10%. OnDeck also provides working capital lines of credit for smaller lending needs with shorter repayment terms.
Kabbage positions itself as the one solution for business growth goals. The financing provided by Kabbage is for working capital — to move your business forward and for covering expenses such as payroll, inventory, utilities and any other ongoing business expenses. Kabbage is similar to OnDeck, except instead of a traditional loan, Kabbage offers a shorter-term revolving line of credit. A loan is an obligation that you pay back over a predefined term, such as 3 years in the OnDeck example. Lines of credit continue to be available as the business pays the outstanding line down.
Kabbage’s application process is nearly identical to that of OnDeck and involves a short online application. Borrowers can qualify in as little as 10 minutes. A key factor is linking revenue data online or through Kabbage’s mobile app. Unlike other lenders, Kabbage looks at all of your revenue streams, including PayPal, Amazon, Etsy, eBay and others, in addition to business checking. This is done by permitting Kabbage to log in to your business financial services accounts to determine your business’s performance.
Kabbage looks for the following in determining approval:
- Over 1 year in business
- $50,000 annual business revenue, or $4,200 per month over the last 3 months
- Personal credit is just one of the factors reviewed, so there are no pre-set minimum credit scores
OnDeck Loan Options
OnDeck’s main product is its term loan for businesses. These loan amounts range from $5,000 to $500,000, fund in as fast as 24 hours, and have interest rates that start at 9.99%. This rate is called an annual interest rate (AIR), which means it is the interest rate borrowers pay in annualized terms, excluding fees. This is in contrast to an annual percentage rate (APR) that includes fees. OnDeck cautions that only businesses with the strongest creditworthiness and cash flows and excellent payment histories with prior OnDeck loan products usually qualify for the lowest rates. The average rates for these term loans are 25.6% simple interest and 49.2% AIR.
Once approved, OnDeck provides the loan terms in simple language through its SMART Box Capital Comparison Tool. This tool offers several metrics, including the total cost of capital, annual percentage rate, average monthly payment and a simple “cents on the dollar” figure to see what will cost. Term loan fees are easy to understand as well, with loan origination fees prominently displayed in the SMART Box. This fee varies to a maximum of 5% of the principal loan amount.
OnDeck terms loans are repayable from 3 to 36 months, with the choice of daily or weekly repayment schedules. Simple interest rates begin at 9%, with an APR that ranges from 10% to 100%, depending on the term. According to OnDeck’s most recently reported figures, the average APR is 48.7%. Interest is calculated at origination, but OnDeck also offers a prepayment discount of up to 25% of the remaining interest. Origination fees are deducted from the loan proceeds upon funding.
OnDeck Lines of Credit
In addition to its term loan product, OnDeck offers a line of credit. These lines are smaller amounts, from $6,000 to $100,000, have an APR starting at 13.99%, and provide instant funding options once approved. Interest accrues only on the amounts your business draws from the line, so you can control what you pay based on what you borrow. Just like with the term loans, the average APR is considerably higher than the lowest advertised rate, and average 32.8%.
The instant funding option only applies to transactions between $1,000 and $10,000. Draws go to your linked business account.
Kabbage Lines of Credit
Lines of credit are Kabbage’s sole product. Kabbage focuses on delivering smaller lines with shorter terms, so small businesses have a reliable, continuing source of funding. Use the line by withdrawing from the Kabbage app and dashboard or by using the Kabbage Card, which works like a debit or credit card.
When selecting a line amount, users immediately see a payment schedule and a clear and easy-to-understand line fee disclosure. Funds hit your business bank account within 1-3 business days but can be directed to your PayPal business account in minutes. With Kabbage, the interest rate borrowers pay on their lines of credit is called a “fee rate.” This is a monthly charge, and with 6- to 12-month lines, borrowers can lower the overall loan cost by paying off in advance. The 18-month term, however, bills the fee upfront with 1/18 of the total fee due each month, regardless of balance.
OnDeck and Kabbage Reviews
What are others saying about OnDeck and Kabbage? The reviews for both are overwhelmingly positive. Both have five-star ratings on Trustpilot, with most users raving about the fast, easy, and reliable funding options offered by each.
OnDeck currently has a 4.9 TrustScore — out of a possible 5 — with many users noting not only the ease of the funding process but the excellent customer service as well. Kabbage’s reviews are similar; the company has a 4.8 TrustScore, with a common refrain noting the speed of funding and how the company provides alternatives for those with lower credit scores.
Both, however, have user comments that note the relatively high cost for the loans and lines of credit. Note, however, that these comments are asides and aren’t part of overall negative reviews.
Beyond user reviews, Kabbage was selected as one of Forbes’ Fintech 50 2019 companies for its innovation in providing small business lines of credit. Also, Kabbage is an Accredited Business with an A+ rating with the Better Business Bureau, and an average of 4.5 stars out of five in customer reviews on the BBB website.
OnDeck is also an Accredited Business with the BBB, and has an A+ rating. Customer reviews on the BBB website rate OnDeck slightly lower than Kabbage, however, with 3.5 stars out of five.
A New Way of Lending for a New Way of Business
Both OnDeck and Kabbage offer unique options for small businesses to obtain funding. The choice between the two ultimately depends on your business’s individual needs and performance. For small amounts of funding to propel your business forward, Kabbage offers simple terms and quick access. OnDeck’s products are more closely aligned with traditional lending when it comes to underwriting, with a forward-looking delivery model.