By guest authors Irina Patterson and Candice Arnold
This is the ninth interview in our series on financing for entrepreneurs. I am talking to Mitch Jacobs, founder and CEO of On Deck Capital, a small business online lending platform.
Irina: Hi, Mitch. Let’s start with your background and how you arrived where you are today.
Mitch: I began a career in entrepreneurship, somewhat unintentionally, as a junior at Dartmouth College. I launched a company that enabled local businesses to accept the student ID card as a form of payment off campus. It had a different name at every campus.
At Dartmouth, where I founded it, it was the Green Card, but it was generically called Transaction Service Providers. That business grew quickly. I ultimately rolled it out to 300 campuses across the United States and sold it in 1999 to a public company called Student Advantage. From that I learned a lot about payments infrastructure as well as about Main Street small businesses.
In 2001, I launched a company, Tranvia, that provided Main Street small businesses with a single, transparently priced service that provided them with gift card transaction processing, e-commerce transaction processing, and MasterCard/Visa transaction processing all on one platform, all with what’s called interchange pricing. That worked out well.
I built it up to tens of thousands of businesses and $2 billion in volume and sold it to a company called Ceridian in 2005. So by the time my contract with the acquirer was up, I’d had almost 15 years of experience working with local businesses.
A pain point I had heard from them continually throughout that time was that they felt they ran a great business, but every time they approached a bank for financing, they would get declined. That led me to investigate why, and my discoveries led to the creation of On Deck Capital.
Irina: What was the essence of your discovery?
Mitch: When I was investigating, back in 2006 – a time when liquidity was everywhere and anyone could borrow – why was it that small businesses were getting declined. What I found – and this is really the key to what we’re doing – is that the U.S. banking system universally uses the business owner’s personal credit score to underwrite small businesses loans.
The problem with that is that business owners tend to have weak personal credit scores, not because they don’t represent a good credit risk but because of the way the credit scoring system works, it evaluates a household.
And a small business owner’s household often looks like a disaster waiting to happen, solely because they’re using debt to finance their businesses. They’re using a lot of it, it’s all extended, and in the process of managing their businesses, they tend to go late with some frequency on some payments that are due. As a result of all those factors, as a household, they look like they have the potential for bad debt and therefore are assigned a low credit score.
Our view back in 2006, which has led us to where we are today, was that banks are only doing that because these are only very small loans that business owners are looking for. It’s typically less than $100,000.