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Entrepreneurs who get merchant cash advances don’t often find them by searching the internet. They’re more likely to apply for one because a smiling salesperson walked through their doors.
Len Rogers says the broker who came into his Electric Bicycle Super Store in San Francisco to sell him a cash advance “took a very friendly approach.”
The pitch: “‘Look, I like your business. I’m here to help so I can get you some cash. … The terms are flexible,’” recalls Rogers, who took on two advances totaling $72,000 and made weekly repayments of nearly $1,800. “He befriended me. He was a good salesman.”
Online lending in an offline world
Merchant cash advances are a form of online lending, but much of the selling of these products happens offline by brokers who call and visit clients like Rogers. Many companies that fund merchant cash advances depend on these independent sales agents to connect cash-strapped entrepreneurs to their high-interest, short-term financing.
Merchant cash advance brokers sometimes have crises of conscience about the hard sell, especially because the high-interest rates and repayment schedules can kill clients' cash flow, says James Shepherd of CC Sales Pro, which trains independent brokers and earns referral fees for merchant cash advance sales with National Funding. The No. 1 reason brokers fail to make the sale is, “you don’t feel right about it,” he says.
“There’s a lot of turnover in our industry, whether it’s employees or independent contractors,” Shepherd says. “For every 10 [brokers] who enter the market today, only one will still be around six months from now.”
Working on commission
Sales can mean big commissions, Shepherd says. Brokering a $20,000 advance can earn a $2,200 commission.
This commission-driven model has raised concerns, because the mortgage meltdown was fueled by similar practices. As the U.S. Financial Stability Oversight Council said in a June report: “In other markets, business models in which intermediaries receive fees for arranging new loans but do not retain an interest in the loans they originate have, at times, led to incentives for intermediaries to evaluate and monitor loans less rigorously.”
Merchant cash advance lenders aren’t the only ones that rely on brokers to connect with customers. Financing companies that sell short-term small-business loans feed from the same independent broker networks, which has led to complaints about unscrupulous tactics. In a recent report to shareholders, OnDeck said that it had cut its reliance on third-party brokers. Other lenders have followed suit.
And there has been a strong industry push to better educate brokers, says Sean Murray of online magazine deBanked, which is developing its own training program with industry partners.
CAN Capital was virtually alone in offering merchant cash advances until its technology patent for splitting credit card sales was overturned in 2007. “These competitors chased us, copied us in some ways, but they kind of shortchanged it in other ways, too,” says Parris Sanz, chief legal officer of CAN Capital. “I think in some ways they undertook some business practices that didn’t help the reputation of the industry as a whole.”
‘Gotta fund ’em all’
Still, the industry is hungry for customers judging by its advertising to brokers. “Gotta Fund ’Em All” says the subject line of an email ad that encourages brokers to partner with Strategic Funding. “We’re Easy!” says an ad from Everest Business Funding, with a photo of a woman in a negligee stretched out on a couch smoking a cigar. “We are simplifying the funding process!”
“We want to steal all your deals from our competitors and give you faster and better approvals on your merchants,” Lendini touts.
“Funding the Unbankable: Send us your DECLINED & HIGH RISK Deals,” says an ad from Yellowstone Capital, one of the largest funding companies, which also employs its own brokers. “Are you ready to roll with MCA’s biggest ballers?”
You might never have heard of Yellowstone Capital, but you might have seen the profanity-laced viral video of company co-founder David Glass firing the company president in 2012. As detailed by Bloomberg, Glass was an inspiration for the 2000 film “Boiler Room” about high-pressured stock sales and says he trained actor Vin Diesel in cold calling prospective customers for the film. Glass pleaded guilty to insider trading charges in 2007, two years before he co-founded Yellowstone Capital with Isaac Stern.
Culture of risk and reward
Glass is no longer a part of the management team. But if the company’s holiday party is any indication, 2015 was a strong year for Fundry, Yellowstone’s parent company: In a video of the event that has since been taken down from YouTube, scantily clad waitresses serve shots and there’s a fist-pumping speech from Stern, who calls out employees who helped the company reach $420 million in loans during the year. “Lockbox Steve — $65 million!” Stern shouts to raucous applause.
The company is a big player in the high-risk market in merchant cash advances, says Murray of deBanked. Ads to brokers say, “Give us your D sheets,” referring to potential customers with the lowest credit ratings.
Yellowstone Capital did not return phone calls and emails seeking comment for this report.
'Take advantage of opportunities'
How does Shepherd of CC Sales Pro deal with any unease about the product? Make sure the client is someone for whom the high interest rate is worth the speed and delivery of the cash, he says.
For example, a pizza shop owner’s oven was destroyed in a fire. While the owner was waiting for a $30,000 check from his insurance company, he found a used oven for $15,000. “So he knew that money was coming, and he could get his business up and running faster,” says Shepherd, who says he got a $50,000 merchant cash advance for his own business in 2012.
“I always tell business owners, don’t get a merchant cash advance to solve your problems, get a cash advance to take advantage of opportunities,” he says. “If you get a merchant cash advance to solve problems — like cash flow or making payroll — you’re only throwing fuel on the fire.”