Matt Scott, owner of Lemonjello’s Coffee in Holland, Michigan, says daily ACH payments on his small-business loan from OnDeck have been “a positive, learn-how-to-do-cash-flow thing.”/Photo by Kallie Walker Spidahl.
Matt Scott and Jason Curtis have a lot in common. They’re both small-business owners, and they’ve both gotten small-business loans from OnDeck Capital, an online lender that has lent about $3 billion since 2007.
But Scott and Curtis have very different feelings about how the lender collects payments every business day through the Automated Clearing House network. Banks and most other online lenders collect payments monthly.
Scott, owner of Lemonjello’s Coffee in Holland, Michigan, chose OnDeck precisely because he liked the idea of daily ACH payments.
“It felt like it was no effort to pay back,” Scott says.
But Curtis, owner of Carolina Furniture Liquidators in Hendersonville, North Carolina, felt the daily payments destroyed his cash flow. He had to take out subsequent OnDeck loans to keep up.
“It creates a situation where you need the next loan and the next loan,” Curtis says.
In some cases, OnDeck lets borrowers make weekly payments for term loans, and it is expanding the number of loans with weekly repayments, says OnDeck Chief Executive Officer Noah Breslow. Whether borrowers repay term loans daily or weekly depends on factors including time in business, industry, credit score and cash flow. “Lower-risk businesses are more likely to receive a weekly option,” an OnDeck spokeswoman told NerdWallet via the company’s customer service chat feature. OnDeck automatically collects payments on a weekly basis for its line-of-credit product.
Scott and Curtis demonstrate that OnDeck’s small-business loans with daily ACH payments may not be right for everyone. Before you take on the responsibility of daily payments, consider the pros and cons. To see how OnDeck’s small-business loans compare with other options, check out our small-business loans page.
Why borrowers like daily ACH payments
For some, it’s easier: When OnDeck started, it chose to collect payments daily rather than monthly because “business owners don’t always plan ahead for a large, one-time monthly payment,” OnDeck’s Breslow told NerdWallet in a recent interview. Many merchant cash advance companies also collect daily repayments, but the amount differs each day depending on the business’ sales: higher sales, larger repayment. OnDeck collects a fixed amount each day, except weekends and holidays.
Additionally, collecting daily payments helps OnDeck quickly see whether a business is struggling, Breslow says. After a business misses two payments, OnDeck stops the ACH withdrawals. OnDeck can work with the business on a payment plan, such as freezing payments for 30 days while the business owner catches up, Breslow says.
Daily payments can help smooth out cash flow: A single monthly amount due spread across multiple daily payments can make paying back a small-business loan more manageable for some. Scott, of Lemonjello’s Coffee, was qualified for a bank loan but opted for an OnDeck loan in part because he wanted daily payments.
He says the daily payments have helped him get better at managing cash flow in general. “For me, this has been a positive, learn-how-to-do-cash-flow thing,” Scott says.
Why borrowers dislike daily ACH payments
They can be hard to keep up with: Having payments automatically deducted from your bank account daily leaves little room for mistakes. Curtis, of Carolina Furniture Liquidators, took out a $25,000 OnDeck loan in 2014 because banks kept turning him down. Although it gave him the funding he needed to build inventory, he said the daily payments were tough on his business, which ebbs and flows.
“When things get quiet, those draws are still coming out of your checking account,” Curtis tells NerdWallet.
Curtis borrowed subsequent, smaller OnDeck loans to keep up with his payments. He estimated he repaid $40,000 total, including principal and interest. To get lower payments and pay monthly instead of daily, Curtis took out a Small Business Administration loan to refinance his OnDeck loans.
Shorter terms mean higher APRs: Daily loan payments don’t automatically equal a higher annual percentage rate as long as the term length, interest rate and fees are the same as a loan with a monthly payment, says Caitlin McShane, marketing and communications director at the California nonprofit lender Opportunity Fund. But loans with daily repayments typically have shorter terms, which do correspond with higher APRs, she says. OnDeck’s terms range from three months to two years and its APRs for term loans range from 16% to 98%.
“The shorter the term, the higher the APR,” McShane says in an email.
The bottom line
You have numerous factors to consider when comparing small-business loans, including how often you make loan payments. Most online lenders collect monthly repayments, but OnDeck collects ACH payments daily or weekly. Although some borrowers, like Scott, appreciate the simplicity of this model, others, like Curtis, find that it interrupts their cash flow. No matter your opinion, don’t base your small-business loan decision on this factor alone. Compare APR, total borrowing cost and term length across various lenders to find the best loan for your business.
Find and compare small-business loans
NerdWallet has come up with a list of the best small-business loans to meet your needs and goals. We gauged lender trustworthiness, market scope and user experience, among other factors, and arranged the lenders by categories that include your revenue and how long you’ve been in business.
Compare business loansTo compare and get more information about funding options for your small business, visit NerdWallet’s small-business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
Teddy Nykiel is a staff writer at NerdWallet, a personal finance website. Email: teddy@nerdwallet.com. Twitter: @teddynykiel
Feature image via iStock.
from NerdWallet Credit Card Blog
http://www.nerdwallet.com/blog/small-business/daily-ach-payments-ondeck/
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