As of the three months ended , our customers pay between 0.005 and 0.043 cents per month in interest for every dollar they borrow under one of our term loans. Historically, our term loans have been primarily quoted in Cents on Dollar, or COD, which reflects the monthly interest paid by a customer to us per dollar borrowed for a loan. As of the three months ended , the APRs of our term loans outstanding ranged from 12.7% to 99.4% and the APRs of our lines of credit outstanding ranged from 19.9% to 61.9% .”
And as documented in their own filings, the average APR for all of their term loans and line of credit is nearly 50% a year, or 45.4%! This is average. 4% and for their lines of credit 61.9%.
What is even more interesting is how high their actual charge off % are, even after using what they describe as multiple analytical tools, proprietary scoring models, FICO, etc. Nearly one in every six loans in their portfolio as of are charged off. The actual percentage as documented in their 10Q is 15.1%. The bigger question is what happens if /when an economic downturn occurs and more and more business paying these very high interest costs simply can't afford to pay their On Deck loan and or line of credit on time.
Published research documents that the true APR are usually 40% to 70%, regardless of how they quote the cost by using terms like COD, percentage of each dollar, etc.. This is something that any small business owner seeking capital must carefully take into account before getting stuck with a loan they can't afford.
There are similar online lending platforms that offer lines and loans of credit to small businesses today
Like a sheep in wolves clothing, the MCA product is a troubling and rapidly growing segment of the small business online lending industry today. A small business owner must be very careful and understand the true cost APR of this kind of capital. If they don't, they run the risk of true financial Armageddon, and a wise small business owner should seek all other reputable options for capital before selecting to get a seemingly low cost, fast MCA for their small business enterprise.
Any assessment of the MCA model leads to a simple question: why would any business ever do this? Why would a business burden themselves by taking out a loan with a stated APR of 100% a year?
The same note reveals the highest APR for their terms loans is 99
Why does this matter? Let's use an example so you can see why this is bad news for those who use an MCA.
Customer pricing is determined primarily based on credit risk assessment generated by our proprietary data and analytics engine and cash flow assessments of the customer's ability to repay the loan. Our decision structure also considers the OnDeck Score, FICO Score, loan type (term loan or line of credit), term loan duration, customer type (new or repeat) and origination channel. OnDeck assesses credit risk across several dimensions, including assessing the stability and credit worthiness of both the business and the personal guarantor and of the borrower's industry. Some of the most important factors assessed relate to the borrower's ability to pay, overall levels of indebtedness, cash flow and business outlook, and their personal and commercial credit history. These factors are assessed against certain minimum requirements in our underwriting standards, as well as through multivariate regressions and statistical models. In addition, general market conditions may broadly influence pricing industry-wide.