Wells Fargo Plays Both Sides of the Cash Advance DebateBy
Give Wells Fargo credit for supporting an innovative business loan developed by a California nonprofit microlender. The bank is among the sponsors of a $100,000 award being announced today by Opportunity Finance Network to help promote the product, called EasyPay, as an alternative to high-cost merchant cash advances. Never mind that Wells Fargo finances the merchant cash advance companies, too.
Small retailers and restaurants that need money sometimes turn to merchant cash advances for fast, if expensive, financing. A retail store might get an advance of $10,000 in exchange for repaying $13,000 during the next 6 months. The repayments are collected automatically as a fixed percentage of the merchant’s daily credit- and debit-card sales. That appeals to businesses because they pay less when sales are slower, and getting the advance is far faster than applying for a bank loan. Such arrangements aren’t loans, but if they were, their interest rates would be sky high (60 percent on an annual basis, in the example above).
Opportunity Fund, a California community development lender, is making the cash advance model much more friendly to businesses with EasyPay. Like a merchant cash advance, an EasyPay loan gives businesses as much as $100,000 in a lump-sum payment and collects a fixed percentage of the merchant’s daily credit- and debit-card sales. Unlike cash advances, EasyPay is a real loan, with a fixed simple interest rate that works out to be about 12 percent on an annual basis. At that rate, the nonprofit is not covering its costs, says Marco Lucioni, the lending director who created the product. Opportunity Fund subsidizes the loans to keep them cheap and also reports borrowers’ repayments to credit bureaus. That helps them qualify for future loans, which cash advances don’t do.
The lender, which operates only in California, has made hundreds of these loans in the Los Angeles area and is beginning to do them in San Francisco as well. Lucioni expects EasyPay to eventually make up half of Opportunity Fund’s portfolio. “In many cases we have clients who are actually coming to us because they want to pay off an existing advance,” he says. Paying off a cash advance early makes the effective interest rate even higher. Lucioni says many businesses want to do it anyway, because merchant cash advance companies divert as much as 25 percent or 30 percent of the merchant’s credit-card sales for repayment, while Opportunity Fund takes a much lower split.
The press release accompanying the Wells Fargo Next Awards for Opportunity Finance notes that cash advances “routinely carry exorbitant interest rates” of more than 100 percent on an annual basis. That turns off many businesses, says Lucioni: “Right now the financing is so expensive, a lot of the businesses that could be using it don’t.”
Wells Fargo may enjoy praise for supporting nonprofit lenders such as Opportunity Fund. Absent from the press release is any hint that the bank is also financing those high-cost cash advance providers. Its Wells Fargo Capital Finance subsidiary provides financing for two of the largest merchant cash advance companies, RapidAdvance and AdvanceMe.
The bank sees no contradiction in backing both. In an e-mailed statement, Wells Fargo said it is “committed to supporting the wide range of financing needs required by our country’s diverse small business community.” That includes financing for-profit merchant cash advance companies and “innovative nonprofits like Opportunity Fund who have built their EasyPay product modeled after the merchant advance technology platform and are finding new ways to reach small business in low-to-moderate income communities and disadvantaged markets,” the bank said.
There’s clearly demand for a type of financing that businesses can repay out of their daily credit-card sales. If new products like EasyPay take off, they might put pressure on the for-profit advance providers to lower their costs. Wells Fargo’s backing both. Maybe that’s just the kind of awkward position it’s easy for a bank with $1.3 trillion in assets to get into.