Let’s say you put your small business’s product on Groupon, and you’re seeing a huge spike in sales. This is wonderful for your small business, but there’s one problem: you don’t have the capital necessary to cover the extra cost of increased sales.
You can’t go for an SBA loan to cover the cost because SBA funding will take 1 – 6 months to appear in your bank account. You need something that can be turned around in 1 – 4 days to get these orders out.
OnDeck is a short-term lender with a fast turnaround time on loans. Their application process is a breeze, their loan requirements are much less stringent than a traditional bank loan, and you can get the funding as fast as the same day you apply.
But there is a catch: these short-term loans can be more expensive when compared to traditional loans. Kabbage and OnDeck assume a higher risk by providing a wider variety of businesses the money they need faster, thus they charge higher interest rates and fees. Below, we dive into just how high those fees are, what you’ll have to go through to get a loan, and which lender is a better fit for your business.
Kabbage offers lines of credit up to $150,000 with 6-, 12-, and 18-month repayment terms. Once you are qualified you can get your money almost instantly and you’re not obligated to use the line of credit — one of the biggest benefits of a business line of credit vs. a term loan.
To qualify for a Kabbage line of credit, your company must be in business for at least a year and you need to have minimum annual revenue of $50,000 (or $4,200 a month for the past 3 months). They will also take into account your personal credit history. (You can check your personal and business credit for free on Nav.)
Kabbage has a page that allows you to instantly calculate the average cost of their credit lines. Kabbage charges a monthly fee rate that’s determined based on your credit risk factors and ranges from 0.25% to 3.5% of the loan amount, which equates to an estimated APR of 9%-36%.
The ease of use is appealing for busy business owners who want to have purchasing power in their wallet when they need it.
OnDeck actually a few different types of financing products for business owners. They have a term loans ranging from 3-36 months and a 6-month line of credit. (Note: OnDeck also offers equipment financing, though that financing type may not be a good fit for most businesses, so we just stuck to lines of credit and term loans for this review.) They offer their term loans from $5,000-$500,000, and lines of credit up to $100,000. The application process takes about 10 minutes and you can get your money in one day.
To qualify for an OnDeck term loan, your business must be at least 1 year in business, have $100,000+ in annual revenue, and you must have a personal credit score of 500+. Companies looking to qualify for the line of credit will need to be in business at least one year with $200,000+ in annual revenue, and at least one owner with a 600+ personal credit score.
To apply for an OnDeck loan, you’ll need to go through 5 steps: input the name of your business followed by more detailed business information, next is personal information about the owners, financial needs and bank statements.
OnDeck’s line of credit product is similar to Kabbage’s financing product. A $10,000 line of credit through OnDeck paid back over 6 months is charged a rate of 36% plus a $20 monthly maintenance fee. Thus, the total payback amount is $10,961.46 + 6x($20 maintenance fee) = $11,81.46. The total cost of the loan is is $1,181.46, just under Kabbage’s $1,200 for a similar product.
OnDeck’s term loan product offers larger loan amounts at lower interest rates. For example, OnDeck advertises here that a $25,000 loan with a 6 month term has an average interest rate of 17%. If you add the origination fee, the APR is 25.96%. The total financing cost will be $1,879.11.
It can be difficult to try to decipher OnDeck’s loan products. Their product description pages pose confusing terms regarding the total cost of their loans. For example, on this page, they list an APR of 36% for all lines of credit, but they leave the $20 monthly maintenance fee separate from their APR, which would actually make the APR a few points higher. On this page, they list simple interest instead of APR, and note below the 2.5% origination fee which also brings the cost of their loans up significantly.
So. Which One is Best?
|Kabbage – line of credit||OnDeck – business line of credit||OnDeck – 24 month term loan|
|Qualifications||business must be in business for at least 1 year. They will also take into account your revenue for the past year and personal credit history.||business must be one year in business, with $200,000 in annual revenue, and at least one owner with a 600+ personal credit score.||business must be at least 1 year in business, have $100,000+ in annual revenue, and a personal credit score of 500.|
|Amount||up to $150,000||up to $20,000||$5,000 – $250,000|
|Repayment Period||6-, 12-, or 18-month||6 months||3 – 24 months|
|Average cost of $10,000 loan over 6 months||$1,181.46||~ $751.65|
|Average cost of $25,000 funding over 6 months||—||$1,879.11|
|Early prepayment penalty||No||Yes||No|
|Time to fund||24 hours or more||24 hours or more||24 hours or more|
|Personal Guarantee Required||Yes||No||Yes|
For businesses that want the flexibility of borrowing a variable amount each month, a line of credit will be the better option. With a line of credit, you will only have to repay for the money you withdraw. Through Kabbage’s line of credit there is no prepayment penalty, but keep in mind that Kabbage front-loads their fees, meaning you will pay more in the first 2 months of your line of credit and less in the last 4 months. OnDeck’s line of credit is slightly cheaper, but they do charge a prepayment penalty.
If you need a larger loan amount or are simply looking for the lowest cost option, OnDeck’s term loan will likely be the better choice. However, if you think you can qualify for OnDeck’s term loan, you should consider looking at other lenders with more transparent rates and lower APRs.