Shares of OnDeck Capital (ONDK), an online platform for small business lending, surged in its debut Wednesday, jumping more than 30% on the New York Stock Exchange.
The company raised $200 million after its initial public offering, with shares priced at $20, higher than the $16 to $18 forecast, becoming the latest alternative online lending service to go public.
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“What our innovation has been is to use technology to dramatically lower [the high cost of small loans] and that opens up the floodgates of capital,” said founder and former CEO Mitch Jacobs.
The service, which launched in 2007, marries finance and technology to offer short-term, small business loans, and threatens to disrupt traditional banks in the same way services like Airbnb disrupted hotels. Small business owners can apply for a loan on the OnDeck website, streamlining a lengthy loan process used at traditional banks. With its proprietary OnDeck score, the service relies on an algorithm to evaluate the health of a business, responding to funding requests in as quickly as ten minutes.
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“When I started this, the basic idea was ‘look, there’s a lot of human intelligence out there around balance sheet and cash flow and income statement,'” Jacobs said. “These are very good ways to assess the credit worthiness of a business and what we need to do is collect that kind of information, but just do it faster and cheaper. That’s what I set out to do.”
OnDeck has loaned $1.7 billion to more than 25,000 small businesses since 2007.
The company is part of a larger movement looking to appeal to a market often overlooked by traditional banks. OnDeck’s IPO comes one week after peer-to-peer lending service Lending Club (LC) surged in its trading debut. Unlike OnDeck, which uses its own capital to lend to small businesses, Lending Club acts as a type of matchmaker – connecting investors to borrowers.
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While alternative lending may make the lending process easier for small businesses, OnDeck has been criticized for the high interest rates it charges, to make up for some of the risk associated with the loans. Annual rates average 54%, according to a document published online by DBRS. That same document shows OnDeck used independent brokers for 47% of its loans last year. Critics contend those brokers have a greater incentive to place businesses in costly loans.
Jacobs, who is no longer involved with the company, defends OnDeck’s policies, saying the return outweighs the cost.
“What people need to know, is that while rates can be high, cost is low,” he said.
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