Does your business need a loan for 1 to 36 months? In this article, we review and compare the three top providers of quick, short term loans for small businesses: Kabbage, OnDeck, and PayPal Working Capital. Up until a few years ago, small businesses did not have a lot of alternatives to traditional bank loans. Small businesses needing fast, short term funding often had to resort to costly merchant cash advances.
“Traditional” merchant cash advances, where a business gets a lump sum payment in exchange for a share of its daily credit card sales, have effective interest rates often exceeding 120%.
Today, there are more affordable options available for businesses needing short term funding. In this article, we review and compare three leading short term loan providers: OnDeck Capital, Kabbage, and PayPal Working Capital.
Best Short-Term Loan Provider for Small Businesses: OnDeck
We recommend OnDeck for businesses needing a loan that are making over $75K in yearly revenues. OnDeck is friendly toward a wide of range of brick and mortar and online/e-commerce businesses, even ones that banks tend not to lend to, such as restaurants, nail salons, and auto-body shops.
OnDeck offers 3 to 36 month terms, and you can borrow as little as $5,000 or as much as $500,000. A loan from OnDeck Capital costs approximately half as much as a traditional merchant cash advance.
To qualify for an OnDeck loan, your company must have 9 months of history and be generating over $75,000 in annual revenues. In addition, at least one of the business owners must have a personal credit score above 500 (requirements are slightly higher for OnDeck’s line of credit product).
Best Short Term Loan Provider For Businesses Doing Under $75K in Revenues: Kabbage
In order to qualify for a loan with OnDeck, your business has to be generating more than $75K in revenues per year. If you’re not quite there yet but are generating at least $50,000 in yearly revenues, we recommend Kabbage.
Kabbage loans are also approximately half the cost of a traditional merchant cash advance. Kabbage loans are for 1-12 month terms. You can borrow between $2K and $100K. Kabbage loans operate like a line of credit. You only pay interest on funds that you withdraw from your line.
Businesses that have been operating for at least 1 year and have $50,000 per year in revenues or more may get approved with Kabbage.
Potentially Cheapest Source Of Funds To Small Businesses: PayPal Working Capital
Of the three lenders covered here, PayPal Working Capital is the cheapest and most flexible lending option. There’s no maturity date for the PayPal loan, and instead of making weekly or monthly payments, you pay back the loan with a fixed percentage of your daily PayPal sales. On strong days, you pay more. On slower days, you pay less.
The amount of available capital from PayPal Working Capital is tiny in comparison to the other two lenders. To qualify, your company must receive at least $20,000 per year via PayPal, and the maximum amount you can borrow is 15% of your annual PayPal sales. For example, if your firm does $15,000 in revenues per month through PayPal ($180,000 per year), the maximum amount that you can borrow would be $27,000.
In general, PayPal Working Capital is less expensive than OnDeck and Kabbage, but you have to be a PayPal merchant to be eligible.
OnDeck vs Kabbage vs PayPal Working Capital Review Summary Table
Why did we choose OnDeck as the best provider of short-term loans for small businesses?
We believe that most small businesses have the best chance of being approved for a loan by OnDeck. Business owners only need a 500 FICO score, $75K in annual revenues, and at least one year of operating history to be considered for a loan. Many other providers of short-term loans require credit scores above 550 or 600 and a two year business history.
Another reason we like OnDeck is that they are fast to approve and fund your loan, compared to getting a loan from a bank. The application is online, and there’s very little paperwork that you have submit. You can get approved the same day that you apply and funding in as little as 1 business day. Usually, there is no hard credit pull, so applying for a loan will generally not have any impact on your credit score.
The third reason we chose OnDeck is loan size and terms. OnDeck tends to approve much larger amounts than their competitors. They provide loans up to $500K and may approve a loan for as much as 15% of a business’s annual revenues. They also offer loans for 3-36 month terms. You can choose the loan length based on what you plan to use the loan proceeds for and the size of monthly payment you can afford.
The interest rates charged by OnDeck are extremely high compared to a bank (a typical APR of 30 % – 50 %), but customers don’t seem to mind. OnDeck gets rave reviews. Repeat borrowers qualify for better rates.
When Should You Consider Kabbage Instead of OnDeck?
Kabbage issues loans for 12 months or less and has a maximum loan size of $100,000. If you need a small loan for a short period of time, Kabbage may be your best choice.
Very small businesses will have trouble meeting OnDeck’s minimum annual revenue requirement of $75,000 per year. On the other hand, Kabbage approves businesses that only have $50,000 in yearly revenues.
In addition, Kabbage loans have added flexibility because they work like a line of credit. You get a maximum amount of money that you can draw from as needed, and you only pay interest on money that you use. As you pay off what you borrow, those funds become available to you again (like a credit card). OnDeck also offers lines of credit, but the qualification requirements are stricter than Kabbage.
While Kabbage customers don’t provide as glowing reviews as OnDeck’s, Kabbage also gets good reviews.
When Should You Consider PayPal Working Capital?
PayPal Working Capital (PPWC) is a good option for businesses that do at least $20,000 in annual PayPal sales and need to borrow a small amount of money.
The most attractive thing about PPWC is that your credit score is not a factor, so as long as you have a good PayPal history, you should be able to qualify.
PayPal Working Capital is also the cheapest of the three lenders we’re comparing. The APR ranges from 15 % to 30 %. Payment is tied to your daily PayPal sales, and you get to choose the percentage of your daily PayPal revenue (anywhere from 10% to 30%) that goes towards repayment. If you have a really great day, you will pay more that day towards repayment. If you have a slow day, you won’t pay as much that day. If you make no sales at all one day, payments continue the next day that you make sales.
PayPal Working Capital gets generally excellent reviews from borrowers, who love its flexibility. There’s no fixed due date to pay back the loan, although PayPal does require you to pay at least 10% of the outstanding balance every 90 days.
The downside to PayPal Working Capital is that you are limited to borrowing no more than 15 % of your annual PayPal sales. Businesses needing larger amounts of capital should consider OnDeck or Kabbage.
When applying for a short term business loan, the three main qualification requirements that the lender will consider are credit score, revenues, and time in business.
Of the three companies included in this article, the easiest to qualify for is PayPal Working Capital. PayPal doesn’t check credit score at all. If you’ve been accepting payments via PayPal for at least 3 months, you can qualify for PPWC, as long you have made at least $20,000 in PayPal sales.
Kabbage is easier to qualify for than OnDeck in terms of business revenues. They require at least $50,000 in annual revenues; OnDeck requires 50% more at $75K. However, in terms of credit score, OnDeck is easier to qualify for. At least one business owner must have a 500 or better FICO score to qualify with OnDeck. With Kabbage, you need a 550 credit score at minimum.
Who Provides The Lowest Interest Rate (APR) Loans?
Annual Percentage Rate (APR) is the cost of a loan over one year, including interest and fees. Compared to the interest rates on a home mortgage or car loan, the APR for all the providers mentioned in this article seem exceptionally high. OnDeck and Kabbage have APRs in the range of 30-50 %. PayPal is the cheapest alternative lender–its APR usually ranges between 15-30 %.
However, it is important to remember that your mortgage is secured by property, and your car collateralizes your car loan. Loans to small businesses carry a much greater level of risk for the lender. OnDeck and Kabbage do place a lien on your general business assets to lower this risk, but there’s no specific collateral to secure the loan. In addition, short term loans are relatively fast and easy to get, and this convenience comes at a price. This is why the APR on short term loans is relatively high.
Even though short term business loans from OnDeck, Kabbage, and PayPal have high APRs, keep in mind that you end up paying them off much more quickly than you would pay off a conventional bank loan. The total out of pocket cost of a short term loan is often less than the out of pocket cost of a bank loan. In other words, if you need funds to buy inventory, make payroll, or meet some other short term business need, paying 50 % APR over 9 months may be preferable to paying 5 % APR over 10 years.
Kabbage and OnDeck have Comparable Interest Rates
All three companies don’t disclose APR when working with borrowers. Instead, they like to focus on the dollar amount that the borrower will have to pay back over the life of the loan, which is called the factor rate.
A factor rate of 1.3 means that the borrower would have to pay back 1.3 times the original loan amount. For example, on $100,000, a company would have to pay back $100,000 in principal and $30,000 in interest/fees over the course of the loan. One common mistake is to think a factor rate of 1.3 equals a 30% interest rate. This is most likely not true. Depending on several factors, a 1.3 factor rate might equal a 70% APR!
The average APR for OnDeck term loans was 40.6 % in the first quarter of 2016. Kabbage did not tell us their average APR, but we expect the typical Kabbage and OnDeck borrower to pay between 30 % and 50 % APR. This interest rate could be lower or higher depending on the creditworthiness of the borrower, the amount of the loan, and when the loan is paid back.
APR includes the cost of fees. On its term loans, OnDeck charges a 2.5 % origination fee, which is taken out of the loan upfront before the funds are deposited in your account. On lines of credit, OnDeck charges a $20 monthly maintenance fee. This is waived for the first 6 months if you withdraw $5,000 or more in the first 5 days of opening the account. Kabbage does not charge any upfront fees or servicing fees.
PayPal Working Capital has the Lowest Interest Rate
The effective APR for a PayPal Working Capital loan ranges from approximately 15 % to 30 %. Remember that PayPal Working Capital is a cash advance which you pay back bit by bit with a fixed percentage of your daily PayPal sales.
Your APR depends on the loan amount you apply for, your volume of PayPal sales, and the daily repayment deduction percentage that you select. If you select a higher repayment percentage, you will pay back the loan more quickly and will pay less interest.
Personal Guarantee & Collateral
A personal guarantee means that you are personally responsible for payment of a loan. If your business goes under and you can’t afford the loan payments, the lender can make you turn over your personal assets (e.g. your car or home) to pay off the loan. To learn more, see our guide to understanding & negotiating a personal guarantee.
Of the options described above, OnDeck is the only one to require a personal guarantee. If you borrow from Kabbage or PayPal Working Capital, you’re not pledging your personal finances to pay it back. That being said, there’s one advantage to OnDeck that its competitors don’t have. Paying back an OnDeck loan can help improve the credit rating of your business and lead to greater access to capital in the future at lower rates.
Collateral is an asset or assets that you pledge as security for a loan. Most traditional bank business loans require you to put up specific collateral, such as business equipment or machinery, as backing for the loan. None of the companies included in this article require specific collateral. However, OnDeck places a lien on your general business assets for all loans, and Kabbage does so for loans above $20K. This means that the lender can seize any and all business assets if you’re unable to pay back the loan. PayPal does not require a lien.
OnDeck, Kabbage, and PayPal Working Capital all get pretty good customer reviews. PPWC gets the best reviews. Despite the fact that they have a pretty high cost of capital, most customers seem to be willing to go back for a second or third loan from these alternative lenders.
OnDeck gets an average 9.7 out of 10 point rating on TrustPilot and 3.5 out of 5 star review on Yelp. They have an A+ rating on the Better Business Bureau. Business owners were happy with the speed of getting an OnDeck loan and the fact that they could get a loan at all after being rejected by numerous banks.
There have been some complaints from people who from people who found OnDeck’s interest rates confusing and who got the impression that they could save on interest if they paid the loan back early. You cannot save money by prepaying an OnDeck loan–you will pay the same interest rate even if you pay it back early. We recommend that small businesses take the time to understand the APR of any loan before committing to it. For a complete review of OnDeck loans, click here.
Kabbage gets good reviews, but not as good as OnDeck or PPWC. It has a 9.2 out of 10 on TrustPilot and an A+ Better Business Bureau rating. Customers gave good reviews because of the speed of getting the loan. Businesses liked the minimal paperwork–you can apply simply by linking your business bank account, Amazon seller account, Quickbooks account, or other business accounts.
On the negative side, however, there were some complaints that monthly payments were too high. Since Kabbage loans have to be paid back in 12 months or less, the monthly payments can be higher than an OnDeck loan and place stress on a small business. The nice part, of course, is that you have control over how much money you withdraw from your Kabbage line of credit, and thus over how much you pay in fees. Click here for a complete review of Kabbage.
PayPal Working Capital Reviews:
Of all three companies, PayPal Working Capital got the best customers reviews. In our own in-depth review of PayPal Working Capital, customers gave it an average 5 star rating. Businesses liked PayPal’s flexibility most of all. The repayment method suits the highs and lows of a small business because you can pay more on good days and less on slow days. Business owners also appreciated the opportunity to select their own repayment percentage. Many PPWC borrowers go back for a second or third loan.
The bad reviews for PayPal come from business owners who faced difficulty repaying. For example, one business owner said he went into debt from a 25 % daily deduction for repayment because he was unable to increase his sales by 25 %.
Small business owners are lucky to have so many options today to get short term working capital. OnDeck, Kabbage, and PayPal are all good companies. We recommend OnDeck overall for small businesses because they loan large amounts of money quickly and offer 3-36 month terms. Kabbage is a good option for small businesses that generate lower revenues or that prefer a line of credit. Finally, PayPal Working Capital is a relatively inexpensive choice for businesses that process payments on PayPal and need just a small amount of working capital.