merchant funding
The Growing Divide
February 28, 2014
It wasn’t too long ago that everyone in this industry knew everyone else. If not personally, then at least through their credit inquiries or UCC names. You crossed paths and acknowledged each other. It was a small world then. Today, not so much.
As the barriers to entry have remained low, the simplicity of ACH repayment has drawn in people by the thousands to become brokers, syndicates, and funders. Anyone can be any one of those three or all three at the same time. There’s still the originals out there, the guys who go to the trade shows and visit offices regularly to stay in touch. But then there’s another crowd, the newcomers that don’t file UCCs, attend shows, or interact much with everyone else. They’re funding a half million, a million, or even $5 million a month and no one really knows they exist except for their own clients. The merchant cash advance industry which was once a shadowy market in its own right now has its own shadowy sector within it.
At the Factoring 2014 conference in April, the President of Fora Financial is poised to debate the Business Development manager of Credit Cash on the subject of whether or not merchant cash advance transactions are true sales. The truth is that I have seen so many variations of funding contracts out on the street that the merits of that debate may be flawed. No one knows what a merchant cash advance is anymore. It’s a point I argued in You Can’t Ask How Big it Is Without Defining What it is in January’s issue of DailyFunder.
The industry is made up of people that deal in daily payments. How these deals are structured vary widely. Indeed there is a growing divide.
Emotions are running high in 2014 and some grievances are practically coming to blows. Stacking is as polarizing a debate as Obamacare. There are folks that believe there is no precedence for dealing with stacking, but stacking is as old as MCA.
Many years ago it was cut and dry. If one company purchased the future revenues of a small business, it was contractually impossible for a second company to buy that same block of future revenues. “How could someone else buy what has already been sold?” so the argument went…
In 2007-2008, stacking was a merchant problem, whereby small business owners would devise ways to get double or triple funded in a very short amount of time so that each company didn’t know about the other until long after the money had been wired. Much of the arguments in favor of stacking back then came from the merchants themselves who felt that MCA contracts bordered on being unlawfully restrictive because it prevented them from obtaining virtually any outside financing unless the MCA was satisfied in full. Without the capital to satisfy their entire outstanding MCA balance, they were locked into renewing with the same company indefinitely with little leverage to negotiate future terms, so the argument went…
Today, it’s the funding companies that bear the brunt of criticism from their peers for stacking, mainly because they do it willingly and are not being deceived by merchants. It is perceived as a funder problem.
In March of 2008 (a full 6 years ago), the Electronic Transactions Association (ETA) established the following guidelines on the issue in their MCA white paper:
In order to effectively manage risk and prevent a merchant from becoming over-extended, merchants should not knowingly be allowed to “stack” advances (obtaining an additional advance when an outstanding balance on a previous advance exists). In the event additional advances are sought, the original advance should be paid off directly to the previous Merchant Cash Advance Company [MCAC] by the new MCAC (to ensure that the merchant does not retain funds due to the previous MCAC) with a portion of the proceeds given on the current advance.
The ETA calls for many common sense standards such as fair retrieval rates, sound underwriting, and legal collections practices. The advice is timeless and I suggest everyone read it. The industry might be growing apart but many of the fundamentals are the same.
Still, with the new crowd of near-anonymous funders, it is impossible to know what everyone’s intentions are. Given the low barriers to entry, there’s also the question as to whether or not the newcomers are legally prepared to book such deals. The industry is fraught with risks and always has been.
I just hope that as the divide grows, we are all united by a common goal, acting in the best interest of small businesses.
How to Value a Merchant Cash Advance Company (or Alternative Lender)
February 9, 2014If you’re at all interested in the future of the merchant cash advance industry, you need to read Wall Street Evaluates Merchant Cash Advance in the first issue of DailyFunder. It offers a fresh perspective through the eyes of financiers outside the industry looking in.
Names include:
- Jason Gurandiano, Managing Director in Deutsche Bank’s Financial Technology Group
- David Cox, Managing Director at Evercore Partners
- Thomas McGovern, Vice President at Cypress Associates
- Steven Mandis, adjunct professor at Columbia Business School.
The article is relatively broad but it communicates some very important points:
1. Some players in the space exist as lifestyle businesses. They’re not scalable, their success is largely attributed to what the owner does for it, and company’s long term vision is to basically make sure the owner takes home a nice paycheck.
2. Some of the big players in the space are on similar growth trajectories. Nothing differentiates each of them from the pack, and none of them really have an advantage over the other.
3. EBITDA is a bad valuation measure and growth is a good one.
On point #1, a lifestyle business is no good to a professional investor in this space. Aside from the success usually being owner-dependent, one question an investor is certain to ask a prospect is, “If I gave you $100 million today, what would you do with it?” There are many wrong answers to that question. If you said solicit more ISOs, buy more leads, or hire more sales people, they’re going to wonder why you haven’t done those things already.
On the same token, those answers would communicate that you’re going to do the exact same thing you’re already doing. It’s a mistake to think that scaling in such a manner will keep the original margins intact. It also does nothing to protect the company against change or enable it to grow exponentially.
On point #2, it’s great to be big, established, and growing at a moderate pace, but what good is that to an investor looking to double, triple, or quadruple their money? And who’s to say that a moderate growth strategy will continue as it has in the past?
Many many many (did I say many yet?) people have come into this space with visions of grandeur, to be bigger than CAN Capital in less than 24 months. What do their plans usually consist of? Pay higher than average commissions and fund deals they shouldn’t be funding. To date, none of those companies are bigger than CAN Capital and some of them are out of business. A growth plan can’t consist of funding deals you don’t want to and paying commissions you can’t afford. That’s called a suicide mission and it’s very effective.
Some big funding companies may appear sustainable on the outside but they’re woefully fragile on the inside. Jason Gurandiano said it best with this quote, “The general knock on merchant cash advance has been that they are an ISO-centric model.” I’m not discounting the value of ISOs in this business. To some extent they rule the roost, and that’s the problem in the eyes of investors. Many merchant cash advance companies rely on a handful of symbiotic relationships. The ISO relies on the funding company for commissions and the funding company relies on the ISO for deals. But what happens if:
- The ISO is enticed with higher commissions or better service with somebody else
- The ISO’s deal flow slumps
- The ISO goes out of business
- The ISO uses unscrupulous sales practices when selling the funding company’s product
- The ISO uses their relationship as leverage on the funding company to make bad decisions
- The funding company needs to reduce commissions but the ISO can’t sustain it
An ISO-dependent merchant cash advance company doesn’t have much control over growth. Believe me, I’ve been on those phone calls where the ISO is asked to send more business. But what happens if they have no more to send? Or what if they would just rather do most of their business elsewhere?
Again, there is absolutely nothing wrong with a purely ISO-centric model in general, but it is much less attractive to investors looking to do a deal in this industry and that’s the theme of this post.
Point #3 is unique because it addresses the how to value a company once you’ve found one worth investing in. Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) is not a viable valuation formula here as it doesn’t make sense to measure the worth of a company dependent on expensive debt by stripping away the cost of that debt.
According to Aswath Damodaran, debt to a financial service company should be treated like a raw material. In his 2009 paper, Valuing Financial Services Firms, he states, “debt is to a bank what steel is to a manufacturing company, something to be molded into other products which can then be sold at a higher price and yield a profit.” It is a perfect analogy for a merchant cash advance company.
Damodaran’s analysis covers a range of situations but I find an Asset Based Valuation intriguing. It states, “How would you value the loan portfolio of a bank? One approach would be to estimate the price at which the loan portfolio can be sold to another financial service firm,” There isn’t a lot of precedent for that in this industry unfortunately. Damodaran continues though with, “but the better approach is to value it based upon the expected cash flows.” For certain, one would have to take into account the renewal rate, renewal commissions, the average recovery timeframe, and the default rate.
If you bought $100 million in RTR today, how much would you get back 1 year from now or 2 years from now? This number is going to differ from company to company.
An Asset Based Valuation might be in order for a funding company that is winding down and shedding its existing portfolio, but it’s not appropriate for one with growth. One should assume that they’re buying a growing business when investing in a merchant cash advance company, not a packaged portfolio.
One question an investor might ask is, “what am I buying?” The average merchant cash advance company can be perceived as nothing more than a vehicle to maximize the spread between revenue and borrowing costs. They’re not really businesses in the traditional sense, more like arbitrageurs. They buy leads and/or they pay commissions, there are some fixed costs, but there’s not a whole lot more to it. There are virtually no barriers to entry and anybody can replicate the model. So you invest in the people who are doing it currently and their system (assuming it’s working so far). The value of that might only be equivalent to 1x – 4x annual profit. Why pay more when competition can drag margins down, regulations could disrupt the space in the future, or the investor could just as easily start their own company with the funds they have instead?
With that said, the average merchant cash advance company is more attractive to a lender than an equity investor. Additionally, they can also offer a nice monetary return by allowing people to participate in the funding of individual deals. Both are indeed what many investors choose to do, either lend money to these companies or syndicate. Why buy the cow when you can get the milk for free?
Merchant Cash Advance companies that make the headlines with big equity investments are not average. They create value, rather than just engage in arbitrage. They’re building something, changing something, disrupting something. They don’t profit off spreads in the market, they create the market and dominate it. Today this typically happens through technology, and not just any technology, but technology that leads to substantial future earnings. There’s a difference between spending a million dollars on a platform to make things more efficient and spending a million dollars on a platform that causes earnings to increase by 1,000%. Too many companies view technological investments in the former sense, a cost that eats into the spread instead of one that can blow the roof off of it.
Investors are looking for companies that plan to soar from Point A to Z, not ones that are moseying along from A to B.
RapidAdvance was said to have gotten an Enterprise Valuation in excess of $100 million when being acquired by Rockbridge Growth Equity. For the most part that number reflects Total Debt + Total Equity – Cash. When you buy a company, you’re buying their debts as well. 90% of their enterprise value could potentially have been the value of their outstanding debts. Of course I doubt it was, but it should put their eye opening valuation into perspective.
Contrast the RapidAdvance deal with the most recent valuation of Lending Club at $2.3 billion. Lending Club earns substantially lower returns per deal but they have an engine for growth that is virtually unmatched. In the month of August 2012, they booked $70 million in loans. In January of 2014, they booked $258 million. That’s 3.7x the monthly volume they were doing less than 18 months ago. That’s what an investor calls an opportunity.
How do you value a merchant cash advance company? There’s no easy way to do it and it largely depends on whether or not they’re an arbitrage shop chugging along or one creating substantial value.
There’s plenty of free milk out there. Why would someone pay top dollar for your cow?
– Merchant Processing Resource
Merchant Cash Advance Term Used Before Congress
December 18, 2013
I’d like to think that the term, merchant cash advance, is mainstream enough that a congressman would know what it was. I have no idea if that’s the case though. What I do know is that Renaud Laplanche, the CEO of Lending Club gave testimony before the Committee on Small Business of the United States House of Representatives on December 5, 2013.
Watch:
In it, he argued that small businesses have insufficient access to capital and that the situation is getting worse. We knew that already. However, he went on to explain that alternative sources such as merchant cash advance companies are the fastest growing segment of the SMB loan market, but issued caution that some of them are not as transparent about their costs as they could be.
The big takeaway here is that he didn’t say they are charging too much, but rather that some business owners may not understand the true cost. I often defend the high costs charged in the merchant cash advance industry, but I’ll acknowledge that historically there have been a few companies that have been weak in the disclosure department. That said, the industry as a whole has matured a lot and there is a lot less confusion about how these financial products work.
Typically in the context Laplanche used, transparency is code for “please put a big box on your contract that states the specific Annual Percentage Rate” of the deal. That’s good advice for a lender and in many cases the law, but for transactions that explicitly are not loans, filling in a number to make people feel good would be a mistake and probably jeopardize the sale transaction itself. If I went to Best Buy and paid $2,000 in advance for a $3,000 Sony big screen TV that would be shipped to me in 3 months when it comes out, should I have to disclose to Best Buy that the 50% discount for pre-ordering 3 months in advance is equivalent to them paying 200% APR?
This is what happened: I advanced them $2,000 in return for a $3,000 piece of merchandise at a later date.
I got a discount on my purchase and they got cash upfront to use as they see fit. Follow me?
Now instead of buying a TV, I give Best Buy $2,000 today and in return am buying $3,000 worth of future proceeds they make from selling TVs. That’s buying future proceeds at a discounted price and paying for them today. As people buy TVs from the store, I’ll get a small % of each sale until I get the $3,000 I purchased. If a TV buying frenzy occurs, it could take me 6 months to get the $3,000 that I bought. But if the Sony models are defective and hardly anyone is buying TVs, it could take me 18 months until i get the $3,000 back.
In the first situation, if the TV never ships I get my $2,000 back. In the second situation if the TV sales never happen, I don’t get the 3 grand or the 2 grand. I’ll just have to live with whatever I got back up until the point the TV sales stopped, even if that number is a big fat ZERO.
Best Buy is worse off in the first situation, but critics pounce on the 2nd situation. APR, it’s not fair! Transparency, high rate, etc.
Imagine if every retailer that ever had a 30% off sale or half price sale one day woke up and realized the sale they had was too expensive and not transparent enough for them to understand what they were doing. If only consumers had given the cashiers a receipt of their own that explained that they would actually only be getting half the money because of their 50% off sale, then perhaps the store owners would have reconsidered the whole thing. 50% off over the course of 1 day?! My God, that’s practically like paying 18,250% interest!!!
To argue that a business owner might not understand what it means to sell something for a discount is like saying that a food critic has no idea what a mouth is used for.
I will acknowledge that issues could potentially occur if an unscrupulous company marketed their purchase of future sales as if it were a loan. That could lead to confusion as to what the withholding % represents and why it was not reported to credit bureaus. I’m all in favor of increasing the transparency of purchases as purchases and loans as loans, but let’s not go calling purchases, loans. Americans should understand what it means to buy something or sell something. Macy’s knows what they’re doing when they have a Black Friday Sale. They do a lot of business at less than retail price. They are happy with the result or disappointed with it. They’re business people engaged in business. End of the story.
In recent years, the term, merchant cash advance, has become synonymous with short term business financing, whether by way of selling future revenues or lending. When testimony was entered that many merchant cash advance providers charge annual percentage rates in excess of 40%, I do hope that Laplanche was speaking only about transactions that are actually loans. As for any fees outside of the core transaction, those should be clear as day for both purchases and loans. I think many companies are doing a good job with disclosure on that end already.
Part 2
The other case that Laplanche made was brilliant. Underwriting businesses is more expensive than it is to underwrite consumers. Consumer loan? Easy, check the FICO score and call it a day. That methodology doesn’t even come close to working with businesses. He stated:
These figures show that absolute loan performance is not the main issue of declining SMB loan issuances; we believe a larger part of the issue lies in high underwriting costs. SMBs are a heterogeneous group and therefore the underwriting and processing of these loans is not as cost efficient as underwriting consumers, a more homogenous population. Business loan underwriting requires an understanding of the business plan and financials and interviews with management that result in higher underwriting costs, which make smaller loans (under $1M and especially under $250k) less attractive to lenders.
Read the full transcript:
LendingClub CEO Renaud Laplanche Testimony For House Committee On Small Business
Merchant Cash Advance just echoed through the halls of Capitol Hill. And so it’s become just a little bit more mainstream, perhaps too maninstream.
Thoughts?
Is Everyone Buying into the Technology Craze?
December 6, 2013
Following a wild 18 months of press releases and technology revolutions, I’m hearing that some ISOs are having technology fatigue. VCs and Private Equity want to invest in companies that are automating everything, but that doesn’t necessarily mean account reps are ready for it. The worst fear an account rep has is using an automated system to spit out numbers with a contract, get that contract signed by the merchant, and then have the figures revised or nullified during a later human review. Going back to the merchant with a 2nd contract with new numbers (often times worse) is a major credibility killer for them. It has bait and switch written all over it, even if they’ve made perfectly clear to the merchant that the terms they sign for are subject to a final underwriting review.
This problem has existed for years but that pressure has really been amplified by the recent tech race. Some funders are doing pretty good with it. Others aren’t. There are plenty of account reps that can’t function in a world where the answer is always 1 or 0 regardless. MCA came of age because of the shades of grey. I used to work for a company that was famous for listening to every merchant’s “story.” That factor can’t get baked into an algorithm.
As you might or might not suspect, there are funders thriving simply because they aren’t heavily tech oriented. ISOs get to talk to a human, negotiate the terms with an underwriter, and get exceptions that algorithms are programmed to disallow. When the algorithm says the deal is approved for a maximum of $10,000 and your merchant gets an offer from a competitor for $12,000, you’re going to need to get a human involved to match it. And if you’re a company that simply won’t bend your limits in situations like that, then that ISO isn’t going to send you deals in the first place.
Not everyone in the merchant cash advance business is convinced about automation. Then again, it’s not easy to convince people in this business about many things:
So what’s your criteria again???
We all know this guy
So it’s not actually approved then…
Oh really? What’s this ISO’s name?
As an account rep, I once had a funder make me get six re-signed contracts. Each time I got it re-signed, they decided they weren’t comfortable and revised the offer down. The final advance amount was more than 80% lower than the original approved amount. Streetz is rough.
More Merchant Cash Advance Memes on DailyFunder
Dear Ami
November 19, 2013I don’t know Ami Kassar personally, but I read the articles in his NY Times blog, a column dedicated to chastising merchant cash advance companies. In it he yearns for the glory days of 10 year loans at 8% interest for local mom and pop shops. Having been a broker for 3 years myself, believe me when I say I wish rates were lower and terms were longer. It’d be an easier sell. But having also been a very senior underwriter and risk manager, I know exactly why the terms are what they are.
The below post was intended to be a comment on Ami’s latest post, Assessing a Kevin O’Leary Investment on Shark Tank, but it shattered the 1,500 character limit so I’m posting it here. As it was intended to be a comment and not its own post, I did not expand or delve into as much as I wanted.
—-
Ami,
We get it. You don’t think expensive capital is right or moral and in a perfect world where small businesses have perfect credit and a 0% likelihood of delinquency or default, there probably wouldn’t be a merchant cash advance industry.
Unfortunately, the reality is that many small businesses are high risk borrowers for one reason or another. This isn’t because a bank says so but because there is substantial data that shows there is a high likelihood of delinquency or default. Almost all of the small businesses that existed in my neighborhood 25 years ago are gone. They were replaced by new businesses, which were replaced by new businesses, which were replaced by new businesses. To say that a store with 2 years in business and 700 credit in my neighborhood is a safe long term investment would be a huge mistake. Residents tired of eating the same food, local bars lost their cool factor, the CD store got replaced by digital downloading, the supermarket got replaced by one that only sold organic food, and Blockbuster Video is gone. The Exxon became Shell which turned into Gulf which got torn down and rebuilt as a bank. New extensions to a mall 3 miles away damaged 40+ retail businesses on Main Street. A failed health inspection killed a restaurant, bad Yelp reviews killed the bowling alley, and the 78 year old master tailor didn’t relate to the new generation of residents. A flood closed a clothing store for 2 months, a fire killed a coffee shop, and a hurricane wiped away a strip mall.
Shall I keep going? Partners had a falling out, a son ran his father’s cafe into the ground, development killed a farm stand, and increasing rent put a barbershop over the edge.
I’m not knocking small business, just acknowledging that it’s one of the toughest things in this country to manage. God bless the people that try and especially the ones that last decades.
You know what else happens with a lot of small businesses? They declare losses for tax purposes and make organizing financial documents secondary to all else. To a lender, there is a layer of risk built upon a mountain of risk.
You cited IOU Central as a shining example of rate fairness, but failed to acknowledge that they are wildly unprofitable and have teetered on the brink of insolvency for a year. IOU Central is a publicly traded company and I mean them no disrespect, but check out their books. Lending isn’t supposed to be charity.
SBA loans and defaults are synonymous with each other. It’s great for businesses, but the poor economics of them fall on the taxpayers.
There is this belief that merchant cash advance companies are predatory, but the rates they charge are what the market has priced as sustainable for both parties. There’s more than a hundred funding companies offering the same product. You want to know why the competition hasn’t dropped rates to 10% APR yet? It’s because they’d all be out of business. Rates have come down a little bit, but there is only so far they can drop. Small business is risky business.
As a broker out on the street shaking the wary hands of shop owners, I understand your frustration with the high cost. Believe me, the merchant cash advance companies wish they could lower the prices too. Some have done so at their own peril and closed up shop. Others are on their way to that point now. Would you rather only a tiny fraction of small businesses get non-bank financing at a rate in line with your comfort level and let the rest burn? Small businesses of all credit types and financial standings for years have cried, “HEY, WHAT ABOUT US?!” and in response, private companies made access to capital possible. Often times the money is expensive, very expensive. You are concerned that small business owners are making a mistake when they enter into these agreements yet you admittedly lock them into these deals yourself. It seems as though some of your clients would rather have the opportunity to do something positive with expensive money than have no opportunity at all.
I can think of few things tougher than running a small business. The way my old neighborhood looks today is proof of that. I barely recognize the place. You know what wasn’t around 25 years ago? Merchant cash advance companies. Who knows what would’ve happened if they all had access to capital despite a less than stellar credit rating. Some of those stores may have grew, evolved with the changing times, or become franchises. Things might’ve been different. We all want lower rates, sincerely we do. Competition will drive it down as far as it can go and there’s plenty of that today. Once we hit the floor, if we’re not there already, you will have to ask yourself this question. Are you living in a perfect world or the real one? Let the small businesses decide if the opportunity they’re given is one they want to take.
Merchant Cash Advance Hits Shark Tank
October 26, 2013
If you missed Friday night’s episode of Shark Tank, you absolutely must catch a rerun of it. Jason Reddish and Val Pinkhasov came on the show to pitch their merchant cash advance company, Total Merchant Resources. It was one of the best few minutes in merchant cash advance history for several reasons:
- Mark Cuban, the 213th richest man in the U.S. feared the growing popularity of expensive short term financing would invite tough government regulation.
- Kevin O’Leary understood that there were no barriers to entry and thus anyone with money can get into the industry.
- Robert Herjavec thought the capital was too expensive for small businesses.
- Kevin O’Leary said that non-bank alternative lenders like Total Merchant Resources were necessary to keep businesses afloat.
- Jason Reddish went at the Sharks like a Shark himself.
TMR walked away with a rather small 400k valuation through the deal they made with Kevin O’Leary that gave them 200k for 50% equity. It was O’Leary’s claim that his connections and capital would blow the lid off their business that was too good to pass up.
O’Leary had a compelling argument for why his terms were non-negotiable. Anyone can be in this business. The valuation itself was moot because two guys with a relatively small operation just became partners with a famous venture capitalist worth $300 million. Had I been in their circumstances, I would’ve taken the deal as well.
O’Leary’s name in the space makes TMR relevant and a company to watch out for, but they are by no means guaranteed success. They are up against much deeper pockets. Dan Gilbert, the 126th richest man in the U.S. owns RapidAdvance (through Rockbridge Growth Equity), a firm that got an enterprise valuation of over $100 million. Google and Peter Thiel have their hand in On Deck Capital. Google also has a stake in Lending Club, a peer-to-peer lender worth $1.55 billion that threatens to disrupt the alternative business loan market with their new loan product come early 2014. Capital Access Network funds nearly three quarters of a billion dollars a year. Every day another power player swoops in and raises the stakes, putting O’Leary in a position he’s probably not used to being in himself, in the shark tank.
At the end of the day, there are a lot of profitable ISOs and small funders. Pinkhasov and Reddish did what no one else to date has done, gone on TV and pitched Mark Cuban on merchant cash advance. And for that, they will go down in history. We’ll follow their story as it develops and I invite them to e-mail me if they’d like to comment.
You can follow the thread about their appearance on the show and find the link to the video on DailyFunder.
Is PayPal’s Working Capital Program a Mistake?
October 5, 2013
A few weeks ago, PayPal announced the launch of their Working Capital program as a way to help small businesses in need. They classify it as a loan but the explanation for how it works is textbook merchant cash advance. A percentage of each PayPal sale is withheld and applied as a reduction to the merchant’s balance. PayPal joining the booming merchant cash advance/alternative lending market is really no surprise. After all, RapidAdvance just got acquired by the same group that owns Quicken Loans. We’re in a new era of alternative finance.
PayPal is respected as a payments company but are they ready for the high risk world of merchant cash advance financing? Critics are not so sure. Industry insiders have watched dozens of funding providers jump into the market with aggressive rates, attempt to undercut the competition, and acquire a lot of marketshare. The results are usually disastrous.
For years, journalists believed that the high cost of capital provided by non-bank lenders was fueled by the desire for immense profit. They didn’t understand the risks involved or realize that some funding providers weren’t even turning a profit at all. Last year, Opportunity Fund, a non-profit small business lender revealed that to make loans at 12% APR would fail to even cover costs. The for-profit sector of the industry charges factor rates (different than Annual Percentage Rates) between 1.14 and 1.50, not including fees. I explained this variance once before in The Fork in the Merchant Cash Advance Road.
So did PayPal learn anything from an industry that has been in existence for 15 years? It doesn’t look like it:
Doing some simple math (Total to be repaid / Loan Amount), the factor rates range from 1.04 to 1.12, figures that will probably only make sense if their average client has greater than 720 FICO, many years in business, and is virtually perfect on paper and in reality. Perhaps PayPal knows that and will decline 95% of applications or perhaps they believe their clients will buck the trend. I mean, is it possible that a corporate monster like PayPal could make a boneheaded mistake?
A 1.04 deal? Seriously? This has disaster written all over it. There are some people that believe that the losing proposition is intentional…
You can follow the discussion about this on DailyFunder.
