With a plethora of new innovative business lenders opening up monthly, their lending models have come into view more closely as the market gradually becomes more aware of them. “Innovative” is my label, but most others pile these companies into the “alternative” lenders category.
I’m referring to companies delivering business financing directly from investors to small business owners. Whether merchant cash advance, non-bank lenders or digital platforms acting as the broker/intermediary, these companies are becoming more obvious – and important – to small business owners who still don’t qualify for capital in the brave new post-crisis banking world.
One open debate that is growing around this sector is on the appropriate level of pricing for funds to the small business sector. Most of these companies are collecting 18 to 36 percent for their funding, with actual yields figuring much higher due to the rapid pace at which they reel payments back from borrowers.
Two articulate voices made a case for the opposing views this week. Ami Kassar, writing in Inc. (“Cash Advance Loans: Bad for You, Bad for the Economy,” March 18, 2014) warned business owners about the “treadmill” of debt that can result from aggressive merchant cash advance companies overextending companies, resulting in perpetual renews and higher loans that will be very difficult to repay.
On the other side, Ty Kiisel points out, “Although specialty financing costs a premium, it makes capital available to business owners who wouldn’t find much luck at the local bank” (Forbes.com, “CNBC List of Top Main Street Lenders Forgets the Elephant in the Room,” March 18, 2013).
Who’s right? In many respects, they both are. Pricing models for many MCAs and lenders in this space are absolutely predatory, and will hasten the demise of many small business owners. Most business lenders know well that many business owners, who will sign on to any terms to get funding, have no clue as to their own financial metrics.
But for other funders (and their customers), this pricing represent a fair rate of return for funding coming from investors making high risks bets with no equity upside. Compared to angel investors, these funds can be a bargain. These borrowers can repay sums and realize strong personal returns on the business growth that was fueled by capital denied to them by a lower-priced bank.
What do you think?