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OnDeck, one of the largest US small- and medium-sized business (SMB) lenders, has signaled its intention to resume loan originations in June, according to Crowdfund Insider. OnDeck’s online lending platform utilizes an algorithm to determine loan eligibility by tapping into aggregated data to analyze business performance.
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The firm recently paused new term loan and line of credit originations to focus on its existing customers, alongside its new status as an approved Small Business Administration Paycheck Protection Program lender. This halting of loan originations followed a troubling Q1 2020, in which OnDeck reported a net loss of $59 million and pursued a fire sale.
OnDeck isn’t the only alt lender that halted loan operations due to the challenges presented by the pandemic. OnDeck attributes its Q1 net loss to a surge in coronavirus-related loan delinquencies on its platform, which more than tripled by the end of April, likely because the alt lending space is under pressure as SMBs become riskier borrowers as their revenues decline and defaults become more probable.
Alt lenders have responded to the increased risk of default by battening down the hatches and reducing and/or suspending new loan originations, in a bid to boost liquidity by drawing down credit lines. For example, fellow alt lender Kabbage sharply ceased lending operations — even cutting off credit to some existing customers — to protect its business in April.
But resuming normal business might prove difficult — and we think the alt lender, along with other larger players, will likely be sold as the sector consolidates. OnDeck’s difficulties were exacerbated, rather than originated, by the current economic crisis: It was already struggling because the alt lender market is becoming increasingly saturated, and the economic decline associated with the pandemic is now putting its business model to the test.
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While it’s positive that OnDeck feels it can restart lending, doing so might prove challenging since SMBs’ risky status hasn’t changed since it paused lending — SMBs face the grave threat of extinction amid the lockdowns enforced by the pandemic. We think this will play out with more established alt lenders, like OnDeck, being sold and smaller players going out of business. This would lead to a less saturated market, where larger players that stay in business through M&A activity or otherwise might emerge from the pandemic as winners once market conditions stabilize.
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