A bit of background: Lenders like OnDeck offer short-term loans for small dollar amounts, generally under $100,000 for less than 12 months, with quick approvals. That’s a kind of capital that banks don’t usually offer. Earlier this month, when OnDeck sold bonds backed by its subprime business loans to Wall Street investors, the firm revealed that the weighted average APR on the loans it sold investors was 54 percent.
“We think it is,” said Andrea Gellert, the OnDeck executive. “APRs somewhat distort the true economic costs and the cost-return relationship on the loan.” To make that point, Gellert posited a hypothetical business owner who has a limited amount of time to buy discounted inventory. “If I buy that inventory for a dollar and sell that inventory for $2 in a six month period, that’s a 200 percent return. So my 54 percent cost makes absolute sense. I will make that tradeoff every single time.”
Alternative lenders like OnDeck are becoming increasingly popular. They topped $3 billion in loans last year, according to one recent estimate, double the amount of loans for less than $150,000 guaranteed by the Small Business Administration.
Read entire article at Bloomberg BusinessWeek.