By Ben Wieder
McClatchy Washington Bureau
WWR Article Summary (tl;dr) Be careful what you borrow! As columnist Ben Wieder reports, merchant cash advance providers don’t have to ensure that small businesses can afford to repay the funds borrowed. And for some entrepreneurs, that lax regulation may come at a steep cost.
The good news for Miami entrepreneurs Mariana Cortez and husband Sebastian Ghiragossian was that Whole Foods wanted to sell their popular vegan cupcakes in local stores, a highly-sought measure of success for any small-scale food producer.
Then an electrical problem threw a needed expansion of their Bunnie Cakes bakery six months behind schedule and wrecked the project’s budget. The couple turned to two online companies that promised them all the cash they needed in a matter of days.
That speed came at a cost. They received $133,000 and were on the hook for paying back a total of $193,000, roughly one-and-a-half times what they had taken out.
And the companies providing the funding, Can Capital and Yellowstone Capital, were given direct access to Bunnie Cakes’ bank account; they sucked out a portion of the bakery’s receipts each day until the full amount was repaid, in a matter of months, not years.
Yellowstone and Can are among the most prominent providers of online loans and so-called merchant cash advances that are increasingly popular with small businesses.
Unfortunately, a growing number of small business owners who have turned to these largely unregulated suppliers of capital have also filed for bankruptcy in the past five years, particularly in Florida.
Call them payday loans for your corner grocer.
“These things have the same functional problems as payday loans, except they’re worse,” said Mike Calhoun, president of the Center for Responsible Lending, a consumer advocacy group. “There’s very manipulative pricing.”
Why sign up for this costly type of financing? For one thing, despite the old bromide that small business is the backbone of the U.S. economy, many of those who run or are trying to start such an effort find it exceedingly difficult to get a traditional bank loan.