Some time ago, in a different era, leading a different company, wearing a questionable suit, I wrote a piece about a trend in new “fintech” products that was bothering me: Fast cash advances for small businesses, available at a click, carrying rates so high you wouldn’t believe, and collections behavior more suited to a TV loan shark.
That was 3 years ago. Over the last 5 years, those “merchant cash advance” companies, or MCAs, have grown from an $8 billion industry to a $19 billion industry. The capital they provided to American small businesses accounted for a full quarter of the United States loan volume in 2018. Venture capital flowed to Kabbage, OnDeck, CAN Capital and others. OnDeck went public in 2014.
The stories kept coming, and the loans started crossing my desk, as new clients started showing up with loans over 30% APR, confessing they had stacked over-advances on the original cash advance, digging them even deeper into a hole that wasn’t designed for them to dig out in the first place.
What, exactly, should factoring accomplish?
Factoring’s not new. Like a lot of systems related to how we trade, and manage assets, it was an invention of Mesopotamian traders, improved on by the Romans, and used in some form ever since.
It’s a simple idea: Get the capital where it needs to go, when it needs to be there, by purchasing against receivables. But it’s not a loan, and it’s not regulated as such.
But what happens when you take humans out of the equation, and make your stockholders’ outcomes more important than the outcomes of the businesses you’re serving? When you hide behind an algorithm, with the approach of a payday lender?
You get MCAs, and you get quick cash advances that were never designed for success.
It’s very old fashioned of me, but I try to make our lending and funding decisions with the outcome for the customer in mind. I can look at spreadsheets all day, but when I have to make a final decision on taking a risk, I’m thinking of the person. What’s their work ethic? What’s their dream? What will they dare to get that dream? And how can working capital get them there, without hamstringing their success?
“Move fast, break things” doesn’t work on your small business
I think we are all starting to understand that many tech companies have had their priorities in the wrong places, measuring the wrong outcomes, leaving out the most important stakeholders. Uber left out drivers and bulldozed local communities into submission. Facebook liked to “move fast, break things” but wouldn’t admit it had created an echo chamber that was helping its metrics but hurting our society. And MCAs have been more worried about satisfying investors and the stock market than helping the average merchant succeed. I see the proof of that all too often.
Here’s a few big issues with MCAs, from research at the nonprofit Opportunity Fund:
The average monthly loan payment for businesses in the dataset is nearly double (178%) the net income available to their owners.
If you’re Hispanic, that statistic gets worse: for Hispanic-owned businesses in the Opportunity Fund dataset, the average monthly payment was more than 400% of their take-home pay.
MCAs like to use something called a CoJ, or “confession of judgment”, which, once signed (often as a condition of funds) allows them to raid bank accounts at will. They can and will use this to seize financial assets and do daily withdrawals.
Many business owners who get MCA cash advances end up taking out another, just to cover the first one, and sometimes more. In the Opportunity Fund study, over 25% had “stacked” loans from multiple MCAs.
The average loan in the Opportunity Fund dataset carried an APR of 94%. Yes, you read that right.
And then, a pandemic
Now we’re in a much different situation, a much more desperate one for many American small businesses. MCAs are not only positioned to take advantage of a capital vacuum - just Google for “cash advance business” and see what comes up - but also to pull their bets as soon as their math doesn’t work. And for many businesses that can’t open and can’t make profits, that moment is already here.
And so, predictably, there are signs of major trouble at MCA & fintech companies. Lending Club just laid off 30% of its staff. Kabbage had to go on a lending hiatus.
Fintouch, not fintech
I love what technology can do for underwriting. I love how we can provide real-time cashflow information back to our clients. But technology shouldn’t enable this many shortcuts.
Technology shouldn’t enable us to shortcut the long-term needs of the business in favor of short-term remedies. Technology can’t replace learning about the history of the business, its founders, its goals, its successes that don’t show up in a balance sheet.
I named this company “Dare Capital” because “dare” means “to give” in Latin, and I want Dare Capital to give. Give understanding. Give capital. Give success. Give growth. But most of all, to give the gift of a true relationship - where I get to see the success, celebrate the growth, right alongside you. I’m not in this to pay off investors. I’m not here to get you cash and walk away. I’m in this to dare.
That’s fintouch - and I gotta say, it’s working for our clients a whole lot better than fintech ever has.
Cole Harmonson is the CEO and co-founder of Dare Capital.