New Subprime Small Business Loan Program Gets ABA Endorsement

Despite the dearth in lending on many fronts, about 50 banks have signed up to provide a turnkey business loan for customers with credit card and other receivables that may not qualify for traditional loans.

The Proceed Business Loan, offered through an affiliate of Promontory Interfinancial Network, LLC, Arlington, Va., and underwritten by On Deck Capital Inc., New York, provides financing to small business customers that do not qualify for their traditional loans with risk-adjusted, fixed-rate, fixed-term loans of up to $100,000.  Rates run anywhere from the high teens to near 36 percent, according to Brian Christie, Promontory vice president of business alliances. The 36 percent limit abides by the FDIC guidance for an interest rate ceiling, Christie adds.

Because On Deck underwrites the loans, banks don’t incur any additional risk, according to Christie. So there is no impact to a financial institution’s balance sheet, which is of particular concern in today’s financial markets.

“The Proceed Business Loan provides the perfect opportunity for banks to strengthen their relationships with small businesses and to provide them with needed funding in this challenging environment,” said Edward L. Yingling, president and CEO of the American Bankers Association, which has endorsed the loan program.

Loan eligibility and interest rates are based on proprietary scoring models that focus on business performance such as cash flow and other factors, rather than just the personal credit history of the business owner.  To be eligible for a Proceed Business Loan, a small business has to have been operating for at least one year.  All loans have a term of 12 months.

The product itself is positioned against merchant cash advances (MCAs), which small business owners have gone to in order to meet ongoing cash needs, despite the high interest rates. With an MCA, a business owner is advanced a cash sum -- usually less than $150,000 -- often within a week and without the amount of paperwork required by banks. The merchant agrees to pay back the principal plus a fee, which is typically at least 25 percent of the total amount advanced but sometimes much more. The MCA provider collects the money by taking a portion of the business’ credit card sales until the debt is paid. If figured on an annual basis, rates on a merchant cash advance sometimes exceeds 100 percent, according to Christie.

Christie expects more than 70 banks to sign up for the program by the end of the year. However, the marketing and other start-up activities mean no loans are in the pipeline yet.