Merchant Cash Advance Companies Try to Fix Relationship With Factors

This story appears in the June 12 print edition of Transport Topics.

Small trucking companies commonly turn to freight factors to quickly receive money, but merchant cash advance lenders and other small business lenders are courting these carriers, too, while repairing their negative reputation.

Ehrlich

Factors purchase existing invoices from trucking companies for cash up front minus a standard fee.

Merchant cash advances, or MCAs, also give trucking companies immediate cash but do so for a percentage of future revenue, typically between 10% and 20%. Many cash advancers obtain direct access to the business’ bank accounts and automatically debit a total that fluctuates based on daily revenue. Others debit a fixed amount daily based on a historical analysis of the company’s revenue. Unlike loans, merchant cash advances don’t have a fixed deadline for repayment.

Many lenders compare merchant cash advances with payday loans since both are unregulated and the annual percentage rates can range from 60% to more than 100%.

Factors and merchant cash advance companies have had an icy relationship.

“Let’s say you get an advance of $100,000. Eight months ­later, you pay back $135,000. It’s a pretty high rate, and they’ll sweep your bank accounts for the payments. It’s the lender of last resort,” said Todd Ehr­lich. CEO at BAM Worldwide, a freight factor and asset-based lender. “They’ll approach a small business that won’t be around in three months, advance them money and attach themselves to the bank accounts and drain them. You’ll have cases where a small business has multiple MCAs at the same time.”

Jason Bishop, vice president at Strategic Funding, agrees that there are unsavory characters, but his company has a good reputation and doesn’t advance money to troubled companies.

“Where we all get damaged is the stackers, the MCAs who trying to take advantage of the last gasp of breath of a company. They’re funding the merchant at a high rate over a three- or four-month period. Those are the folk that kill the industry’s reputation. I can’t wait for the day when we get them out,” Bishop said.

“There are good actors and bad actors in any space,” said Stephen Sheinbaum, founder of BizFi. “There were some very responsible payday lenders as well. However, our rates aren’t nearly as high as theirs.”

Strategic Funding and BizFi work with freight factors because of their good reputations, the executives said, adding that the relationship has thawed between the industries in the past 18 months.

Business conditions within the merchant cash advance and small business lending worlds have been mixed in 2017. Bishop told Transport Topics that applications and deals have significantly increased in 2017, but Sheinbaum and Ehr­lich said activity is slower than 2016.

“Funding companies in general are being a little bit tighter and stricter than they’ve been in prior years. So they’re not issuing as many advances as they might’ve in the past,” Sheinbaum said.

OnDeck Capital Inc., which also provides money to small trucking companies, is an online lender, although there are daily payments automatically debited from the merchant’s bank account, similar to a merchant cash advance. But the loans have a fixed repayment schedule and interest rates and affect the credit score.

OnDeck reported $11.1 million in losses in the first quarter, although it was better than the $12.6 million loss a year ago. The lender was in the red each of the past six quarters. CEO Noah Breslow told industry analysts that while it processed the second-highest amount of applications in the first quarter, the top priority is profitability.

“This starts with tight credit management. Specifically, we have decided to be more selective regarding who’s approved to OnDeck loans and more conservative regarding their offers,” he said. “Consequently, we now plan to originate less overall volume in 2017 than 2016 and expect our unpaid principal balances to decline from current levels during the year.”

LendingClub, a peer-to-peer small business lender, reported a $29.8 million loss in the first quarter versus $4.1 million in profits one year ago. The company lost a combined $180 million during the past four quarters, although CEO Scott Sanborn said he was “pleased with our execution in the first quarter.”

In May 2016, LendingClub fired founder and CEO Renaud Laplanche over problems with its lending practices, including a $22 million loan sold to investment bank Jefferies.