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We’re coming after you’: Inside the merchant cash advance industry

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“Why are you screwing us over?” the phone call begins. “We’re coming after you … you stole from the wrong company, my friend.”

“How did I steal from you?” the recipient of the call asks.

“You stole from us. You blocked my payment.”

“I blocked your payment because I don’t have sufficient money.”

“Well, that’s not my problem … next week you’re going to be crying, tears running down your face, you’re not even going to be able to get a hotdog, nothing … you think you’re going to fight us? Are you crazy? You’re crazy … do you know how much money we have? We have millions. We will never ever lose a battle.”

“Listen, if I have some money, I will pay you guys. I just needed a break. All I needed was just one month of break, just one month of break…”

“I don’t f—ing care. You better get your sh– together. We are coming after you.”

‘This entire ecosystem is on a treadmill for loan growth’

That phone call hearkens back to a different age in America, one in which unregulated loans sharks preyed upon desperate borrowers, and the system provided no refuge or assistance. But that phone call wasn’t recorded 100 years ago. It was recorded in December 2017 by a small business owner in Mississippi, who took out something called a merchant cash advance.

In the past decade since the financial crisis, the merchant cash advance business exploded. The widespread theory is that bank lending to small businesses dried up, thereby providing an opening and a need. According to an industry specialist named Bryant Park Capital, the MCA business hit $10 billion in 2015. A recent press releasecelebrating an industry merger said that today, “fintech” lenders accounted for 25% of U.S. small business loans, or $31 billion.

But as lawsuits and defaults pile up — and a search of court dockets reveals thousands of each — there are growing questions about what this industry actually is. Is it, as proponents say, a new and important way for strapped small businesses to access much-needed credit? Or is it just the latest and greatest way for unprincipled lenders to prey on desperate people, as they’ve done since time immemorial? “This entire ecosystem is on a treadmill for loan growth,” says one skeptic, who has spent years investigating the industry. “It ultimately will fail, taking with it a lot of good businesses and business owners.”

Ostensibly, merchant cash advances are part of the new and shiny world of fintech, where funders outside the banking industry promise technology that can allow them to provide capital more efficiently and effectively. Venture capitalists and regulated banks have poured money into companies such as OnDeck Capital (ONDK) which went public in late 2014, and which offers small business loans, and CAN Capital, a merchant cash advance company, which in April 2015 raised $650 million from Morgan Stanley, JPMorgan Chase, and other banks.

Merchant cash advances technically are not loans (although often even industry participants will use the lingo of “borrowers” and “lenders”). Rather, they are akin to something called factoring, which is when a funder advances cash against an invoice, generally at a discount to the face account and is paid when the invoice is paid. In an MCA, a funder buys a specified percentage of a company’s future receivables. It’s riskier for the funder than factoring is because the receivables, unlike an invoice, don’t yet exist. The risk to the merchant is supposed to be less than that of a loan, because the payment is not supposed to be fixed, but rather is supposed to be tied to the actual business they do. Although MCAs at their best carry enormously high annualized interest rates, advocates argue they can be useful in certain circumstances — say, a seasonal retailer needs to stock their store with merchandise before the holidays or a business needs to purchase a piece of equipment to win a contract.

A dark side to a mostly unregulated business

Some industry participants say the industry often functions in an above-board way that is beneficial to merchants. Of course, happy merchants aren’t as public, and it’s impossible to know how the business breaks down. Because MCAs are not supposed to be loans, they are almost entirely unregulated. They aren’t subject to usury laws or banking laws like the Truth in Lending Act.

Source: Bethany McLean Contributor of Yahoo Finance
Image Source: PxHere

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