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The Future of Small-Business Lending Looks a Lot Less Sketchy The Future of Small-Business Lending Looks a Lot Less Sketchy

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The Future of Small-Business Lending Looks a Lot Less Sketchy

A California nonprofit reinvents the merchant cash advance with loans that could expand access to capital and won't bankrupt small-business owners.

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(Shutterstock)

Every day, 10 percent of Claudia Diniz's sales disappear. Opportunity Fund, a nonprofit lender, siphons off the money and treats it as payment on a $35,000 loan Diniz used to stock the shelves of her Los Gatos, Calif., clothing store. Diniz, 37, loves how easy the process is. "We have months that we sell and months that we struggle," she says. "So I say, when I sell well I pay more—and when I'm struggling I pay less."

Opportunity Fund developed the EasyPay loan in order to serve businesses who don't qualify for regular term loans. The organization also hopes the loan will prevent entrepreneurs from turning to merchant cash advances, a similar but much more expensive form of credit. "It's just ridiculous, how much money they pay," Diniz says of friends who are paying off cash advances from private companies.

 

Although she's never had to resort to high-interest loans or merchant cash advances, Diniz knows what it's like to be desperate for credit. She decided to open a store after her son was born, figuring that owning her own business would allow her to control her hours. Envisioning a rival to Lululemon Athletica, an upscale chain, Diniz—who is originally from Brazil—called her store Viva O Sol Brazilian Fitness & Fashion.

"It was five years ago. The market crashed, people were losing stocks and houses, and everybody in my town was closing their doors," Diniz says of other retailers. She needed a loan, but after the financial crisis, banks were much warier about lending, especially to brand-new businesses. A retired business adviser in town recommended she contact Opportunity Fund, one of the largest micro-lenders in the state.

Opportunity Fund has provided micro-loans (from $2,600 to $10,000) and small-business loans (from $10,000 to $100,000) to California entrepreneurs for the past 20 years. The average small-business owner who works with the organization has an annual household income of just $22,000. Clients own dry cleaners and restaurants, trucking companies, and daycare centers. Most are Latino or African-American, and many are recent immigrants who don't speak fluent English.

 

Diniz's financials were strong enough that she qualified for a small-business loan right away. But many entrepreneurs who were coming to Opportunity Fund were unable to qualify for loans, even if they had strong sales. An entrepreneur might have a poor personal credit score, for example, or run a highly seasonal business, like a flower shop.

So the organization decided to create a loan that could be repaid through automatically deducting a small share of credit- and debit-card sales. The technology wasn't new—it had long been used by merchant cash-advance providers. "The intention of EasyPay was: How can we look at this business a little differently? How can we give more weight to the cash flow side of the business?" says Alex Dang, a business development officer.

The automatic daily payments decrease the risk of lending considerably, allowing Opportunity Fund to serve more businesses and to extend larger loans than it would have otherwise. Established business owners, like Diniz, like the product because it's convenient. EasyPay loans have a fixed interest rate of between 8.5 and 15 percent, typically have longer repayment terms than cash advances, and take a smaller share of sales—usually about 6 percent. Like payments on any other loan, payments contribute to a borrower's credit score.

Opportunity Fund has lent $5 million through 250 EasyPay loans so far. (In February, Opportunity Fund was awarded a $50,000 grant from Wells Fargo, a sponsor of National Journal's Next America project.) Meanwhile, merchant cash-advance providers lend about $2 billion to small businesses nationwide each year, says Janinne Dall'Orto, senior manager at First Annapolis Consulting, a consulting firm that studies the payments industry. Merchant cash advances aren't regulated, so there aren't legal limits on the fees companies can charge. A typical $10,000 advance, due in six months, might carry a $3,500 fee.

 

One reason Opportunity Fund can afford to charge low rates is because it's a nonprofit and a community-development financial institution, or CDFI: it's partly supported by philanthropists and the government. It's a lender out to charge borrowers what they can afford, not to deliver big profits. "One question that we ask every borrower is: What is a comfortable payment for you? And then we work around that," Dang says of EasyPay loans.

In its bid to provide an alternative to merchant cash advances, Opportunity Fund is something of a David competing against a Goliath. The merchant cash-advance industry is expanding rapidly, fueled by private investment and demand from business owners like Diniz's neighbors in Los Gatos. Dang says some of his clients report fielding repeated calls from marketers within the merchant cash-advance industry, and some have taken out several cash advances—a second to pay off a first.

But Mark Pinsky, president and CEO of the Opportunity Finance Network, a network of CDFI's, says that EasyPay loans still have the potential to scale—through Opportunity Fund, other CDFI's, or other kinds of lenders—and make an impact. "I think it's going to put a lot of downward pressure on merchant advances," he says. Savvy business owners always look for the best deal. In California right now, the best deal might be with Opportunity Fund.

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