The words "cool" and "small business financing" don't often go together. However, a California non-profit has managed to combine the best feature of a merchant cash advance, with the best feature of a conventional loan. The resulting product, called EasyPay, can only be described as cool.
What is a merchant cash advance? In a merchant cash advance, a business sells future credit card receipts in exchange for an immediate lump sum cash payment. Rather than paying back the cash advance and interest, the business agrees to pay a fixed dollar amount. A set percentage of their incoming credit card / debit receipts go to the merchant cash provider until the agreed upon amount is paid back.
Businesses tend to like that the payment amounts fluctuate with their revenue. If the business is having an off month, the payments are lower. On the other hand, businesses don't like the cost of a merchant cash advance. A business owner borrowing $30,000 will often have pay back $40,000. Typically, the payment terms are designed for the money to be paid back in between 6 and 12 months. The "effective" interest rate on a merchant cash advance can often be over 100%.
Medium-term loans can offer much lower interest rates. For example, business loans from Lending Club, have interest rates between 5.9% and 29.8%, and terms ranging from 1 to 5 years. These lower interest rates and longer terms are sought after by small businesses.
EasyPay loans combine the most desirable aspects of medium term loans, with fluctuating payments based on credit / debit card receipts.
*EasyPay loan interest rates are usually in the 10-12% range.
*Payments are based on credit card receipts.
*The target repayment date is typically two or three years from when the loan is made.
Before you get too excited about getting an EasyPay loan, you should know that the program is limited to California. EasyPay is run by Opportunity Fund, a non-profit which focuses on microfinance. They have made over $5 million in loans to over 250 California businesses.
Marco Lucioni, the Director of Lending for The Opportunity Fund, said the idea for their "hybrid" approach came in response to seeing many small businesses get into trouble taking out merchant cash advances. The interest rates on merchant cash advances are so steep, that many businesses end up in a worse position after taking the loan. Because of the cash flow problems created by the first cash advance, many businesses would end up taking multiple cash advances, an industry practice called "stacking". EasyPay is an alternative to the super-high interest rates of traditional merchant cash advances.
Right now, Opportunity Fund is subsidizing the small EasyPay loans. As they work out the kinks, they expect the cost per loan to continue to drop. At that point, EasyPay would be a wonderful model to be followed by microfinance organizations across the country.