When Derrick Earls’ business won a major contract with Urban Partnership Bank in 2013, he was relieved. His Chicago company, Earls Property Preservation Inc., became the primary vendor for maintaining properties the bank had acquired as foreclosures. Earls was looking forward to having a steady cash flow.
Yet he says he found himself with unpaid invoices from the bank. Earls felt he was constantly waiting for payment, while Urban Partnership assured him that “the check was in the mail.”
As his payroll deadline loomed and bills began stacking up, Earls decided to ask that same bank for a small-business loan. His business had strong revenue and he had a personal credit score of 750, he said, but his bank balance was negative as a result of unpaid invoices.
Earls said the bank denied the loan.
‘Blood in the water’
That’s when the offers from providers of merchant cash advances and other lenders started flooding in. “I was bombarded with a lot of material,” Earls says. “It’s like they smelled blood in the water or something.”
Attracted to the promise of fast funding, Earls applied and was approved for a $25,000 loan from National Funding. He wasn’t concerned about his daily payment. “At the time, when I was stressed to make payroll and pay bills, I didn’t care,” he says. “I gotta eat that cost.”
Earls’ loan carried an annual percentage rate of 44%, which isn’t as astronomical as those some borrowers face. But it was still a significant burden. Luckily, National Funding worked with him to pause daily payments — without charging a fee — when he needed a few extra days, and he was able to pay off the loan early after he finally received payment on some outstanding invoices.
Despite paying thousands in interest, Earls says he has since taken out another high-interest loan — and would again.
“If I don’t get that loan,” he says, “my business doesn’t stay open.”
“As business owners, when you have to go out there and work every day and your client does not pay you and you don’t have the resources, you still have to pay your staff,” he adds. “You have to do what you have to do.”
Earls’ loan was not a traditional merchant cash advance, meaning it wasn’t based on his credit card or debit card sales. It was a loan with fixed daily Automated Clearing House payments, so he was on the hook for a daily automatic withdrawal from his bank account, regardless of his cash situation. Still, some critics say loans with daily payments are a twist by some lenders on merchant cash advances — without the “merchant cash advance” label.
But that doesn’t mean they’re better.
The fixed payment could very well be greater than a business owner’s margins and slowly eat away at his or her cash position, says Jonathan Brereton, CEO of nonprofit lender and advocacy organization Accion Chicago. The variable payments historically associated with merchant cash advances are still likely to be higher than the business can afford, he notes, “but they are at least mapped to the inflow of revenues so owners are less likely to overdraft.”
In early June, Earls spoke at the Opportunity Finance Network’s Small Business Financing Forum, an event that helps community development financial institutions and other mission-driven lenders learn how to connect with small-business owners. He told the gathering that he has two major frustrations with traditional lenders: a lack of marketing to small-business owners and a long, stringent application process.
Earls emphasized that he understood banks’ and nonprofits’ struggles to get information about their products into the hands of business owners who need financing — especially because predatory lenders do so much marketing.
And even if traditional lenders reach small-business owners, it can take weeks or months for borrowers to receive funding from a traditional loan, including those through the U.S. Small Business Administration. For small-business owners who find out on Monday that they’re not going to make payroll that Friday, it’s just too long to wait.
“If I have a decent credit score and the revenue is there,” Earls said after the event, “then why does it take seven to 10 weeks to process a loan from [an organization] that’s trying to help me, but it only takes a day for a predatory lender to approve it?”
Need for speed
Unscrupulous lenders — as well as a crop of more trustworthy online lenders — often have more relaxed requirements and underwriting standards, which speed up the entire lending process.
But the need for speedy cash spurs Earls and business owners like him to take out loans from questionable companies that conceal their sky-high APRs.
“I need that money to come in just so my staff can get paid and my business stays open,” he says.
“I would do it again if I had to.”
Urban Partnership Bank declined to comment for this story.
To get more information about funding options and compare them for your small business, visit NerdWallet’s small-business loans page.