Len Rogers’ business, the Electric Bicycle Super Store, was growing fast — so fast that he decided to move into a much bigger space. It seemed like a necessary step in expanding his operations, but he didn't realize that he'd soon be learning two lessons the hard way:
Good deals are hard to find.
Keep an eye out for vultures.
The 49-year-old entrepreneur moved into his new space at a high point. San Francisco Mayor Ed Lee had recently cited his company as one of six small businesses "shaping the future" of the city.
But with the move, his store rent more than doubled to $6,000 per month. He also had to spend an additional $2,500 per month on an apartment since the new site wasn't a live-work unit. Meanwhile, business wasn’t as strong as he had expected. “The sales volume was not rising as fast as the overhead,” he tells NerdWallet.
Six months into his new lease, he was at risk of falling behind on rent. Rather than tell his landlord the bad news, he decided to "get ahead of the situation" by hunting for financing, he says.
Turned down flat
He detailed his experience in a summary he wrote when he was given San Francisco's 2016 Micro-Enterprise of the Year award.
Rogers turned first to institutions he knew offered loans with low annual percentage rates: banks, the Small Business Administration, nonprofit lenders. And he thought he'd be approved. Instead, he was rejected by lender after lender. The bank where he had his business and personal accounts denied his application for a $10,000 line of credit. “I was turned down flat even though they could see how much money I was grossing,” he wrote.
Another bank turned down his application for a business credit card with a $20,000 limit. He was told he could have one with a cap of $500, an offer he found “pretty insulting since I had been banking with them for over 15 years."
That’s when Rogers found himself in the world of merchant cash advances. It started when he received a persuasive sales pitch from a broker with a company called Merchant Solutions Group.
The broker “took a very friendly approach,” Rogers tells NerdWallet. “‘Look, I like your business. I’m here to help so I can get you some cash. … The terms are flexible.’ He befriended me. He was a good salesman.”
Through the broker, he received a $20,000 merchant cash advance with a seven-month term from a company called Americor. That took care of his immediate money problems. But it quickly led to new ones.
For one thing, he had to make a $975 weekly payment for the next seven months, which translated to an APR of more than 30%: "It got me back in the black, but now you’ve got these seven months of payments," he says.
So he refinanced the first advance with another one from a company called Happy Rock. This one was worth $40,000 and had a $52,000 repayment and a 12-month term. Rogers estimated that the APR was at least 33%.
The transaction put him in a deeper hole. “The payments were $1,785 and the pressure to produce was now even greater,” he wrote.
Rogers had to make sure there was money in his bank account the day his payment was due. “If you had to discount some merchandise to make a sale then you do that,” he tells NerdWallet.
He also would work extra days “just to make sure I had the appropriate amount of money.”
“It was a slow process, and it wears on you,” he says. “It was like these vultures kind of picking at you. … They were just getting their beakful of meat every week.”
A way out
Rogers eventually found a way out. He refinanced with the help of nonprofit lenders and organizations, including Opportunity Fund, Main Street Launch and Urban Solutions.
Talk of vultures aside, Rogers says he understands the lure of merchant cash advances. They provide quick and convenient cash, which is helpful for small-business owners in a bind.
“I would say to a small-business owner, ‘At least know that there are these merchant solutions out there, but use them as a last resort,’” he says. “It’s an exorbitant amount of money. ...
“You can get addicted to merchant cash advances.”
Reached for comment, Rogers’ broker initially said he would agree to an interview, but he did not reply to follow-up phone calls and emails. A Happy Rock representative declined to comment. Americor could not be reached for comment.