You may have recently read a popular article in Bloomberg Business titled “How two guys lost God and found $ 40 million”, on the cash advance industry. The article caught my attention and quickly spread via social media to my family and friends, most of them from the tight-knit Lubavitch community across the world.
The reason for our sudden interest in this corporate story was that the two “guys” who lost religion while building their fortunes grew up in ultra-Orthodox Jewish communities in Brooklyn. The writer even called one of them an ex-Lubavitcher and claimed that the cash advance business was “invented” in a basement in Crown Heights ten years ago by another. Lubavitch, Sam “Mula” Chanin. Chanin was a successful entrepreneur in the credit card processing industry with a team of salespeople going from store to store listing merchants with the allure of the lowest rates in the industry. In 2006, Chanin’s partner heard about another company that had started offering merchants cash advances based on their future credit card receivables. Chanin saw this as a huge opportunity for himself and his business.
My addiction to cash advances started in late 2011 when I took the first cash advance for my business, The Fresh Diet. I was familiar with the industry as many of my friends and relatives had been in the business for years by then. In 2008, one of these friends let me use desks and computers in his Madison Avenue office for my new call center in New York. I spent months watching his cash advance business, and I was well aware of the risks. But before I tell you about my love-hate relationship with cash advances, I should explain how they work.
Although the cash advance industry has evolved over the past 10 years, the basic principle has not changed. A merchant receives an advance on their future credit card receivables based on their processing history. These “loans” are only secured by your future receivables; Thus, if a business suddenly experiences a drastic decline in its activity, reimbursements are reimbursed at the rate of activity. Unlike conventional loans, the monthly payment is not a predefined number, but a percentage of future income. Cash advances are also not personally guaranteed (in most cases), nor tied to company assets, making them high-risk “loans” for the “lender”, who has little credit. recourse if things go wrong.
One of the biggest draws for small business owners is how quickly a cash advance loan is closed. In some cases, funds can be received within days, and most can be received within weeks, which is a big part of why desperate entrepreneurs and small business owners opt for these high interest financing alternatives. While a person may qualify for a more conventional loan, such as an SBA loan or a line of credit from a bank, these loans take 30 to 90 days or more to complete. The quick turnaround in cash advances is the active ingredient in addiction. And it’s an addiction that can hurt the future of any business.
Cash advance rates are typically between 20% and 36% and are repaid within six months. The amount of funding is usually one month’s income; So a small business with $ 100,000 in sales per month can quickly get $ 100,000 in financing, with a total ROI of $ 120,000 to $ 136,000. For the cash advance company to pay off in six months, it would have to “withhold” about $ 20,000 per month or 20% of monthly income. In many cases, traders have to accept more cash advances to meet the deficits caused by the initial advances. In these cases, the cash advance companies will require them to repay the outstanding cash advance “debt” with new “debt.”
It’s a vicious circle that I know very well.
At the end of 2010, I needed additional capital to fund my annual January marketing campaign. My business had grown 100% from the previous year, and we raised our first fundraiser from an angel investor earlier in 2010, but the business was unable to make a big investment in marketing. In order for us to continue on our growth path, I knew I needed to invest at least $ 500,000 in a January direct mail campaign. Going to our bank was not an option. They had already cut our little line of credit, and since banks usually don’t fund marketing initiatives, they were unlikely to give us a loan. Our angel investor was also not an option: we had just received our first investment, and we were hoping to look for another investment with a higher valuation a few months later.
So I did. Telling myself that it would be a one-off thing, I took an advance of $ 500,000 on our Mastercard and Visa debts. To convince my partners, I explained that our American Express receivables would not be affected; this was a great advantage since Amex represented almost 50% of our revenues. Because I had a good friend in the business, I knew I would be able to get the lowest rates and the longest return on my investment. And that’s exactly what happened: We received $ 500,000 by wire transfer after just a few weeks of trading with Merchants Cash & Capital. No guarantees, no fixed assets, it was that simple. The funds arrived just when we needed them, and I started writing checks to kick off our biggest marketing campaign. The marketing campaign worked as expected, and this January was our best month. This helped maintain our 100% year-over-year growth targets and doubled our execution rate.
My bet seemed to pay off. Yes, I paid a high fee for capital, but it was money well spent as it gave us a chance to continue to grow our business. Over the months, our business continued to grow 100% year over year and we repaid our cash advance on time. As a fast growing company continuing to invest in our infrastructure and technology, we relied heavily on our cash flow, so not having 100% of it hurt us, but we felt we had the growth to raise additional capital from our investor. I started to focus on the increase and quickly forgot about the cash advance. Then came summer 2011. It wasn’t pretty.
To be continued……..
The story has been changed slightly.
The timeline has been shifted by one year and updated with correct history from 2011 to 2010 and 2012 to 2011.
Due to the timeline error I changed the fact that we increased 100% in 2011 for the second time in a row to, in 2010 we increased 100% year over year to compared to the previous year.