How a Nonprofit Hopes to Eat Subprime Small Business Lenders' Lunch

In the years following the financial crisis, Marco Lucioni noticed the rise of a new kind of small business loan. It offered merchants fast access to high-interest-rate financing that the lender recouped by collecting a percentage of the business owner’s daily receipts. Lucioni liked the repayment model, which made short-term loans less risky for the lender, but not the interest rates, which sometimes exceeded 100 percent on an annualized basis.

Lucioni took the model, often called alternative loans or merchant cash advances, and trimmed the borrowing costs. He called the resulting product EasyPay and sold it to nonprofit lender Opportunity Fund, where he went to work as vice president of small business lending. Since 2010, he’s underwritten 250 EasyPay loans for about $5 million, at an average APR of less than 15 percent.

Now Lucioni and Opportunity Fund want to borrow something else from the high-cost alternative lenders: customers. This month the San Francisco-based nonprofit launched a direct mail campaign targeting 24,000 California businesses that have used alternative loans in the past. “If you have taken out a merchant cash advance, I guarantee you that our refinance program will save you money and could even cut your payments in half,” Lucioni writes in the marketing pitch.

The nonprofit tapped state records to identify businesses that have taken out high-cost loans. Opportunity Fund’s attempt to take customers away from more expensive lenders comes at a time when alternative loans are gaining widespread acceptance. Ebay’s PayPal and Jack Dorsey’s Square offer daily repayment loans. OnDeck, a New York lender backed by Google Ventures, sold bonds backed by small business loans with an average APR of 54 percent. Former Small Business Administration chief Karen Mills called the emergence of alternative lenders a “breakthrough” in a recent Fortune column.

Opportunity Fund, a community development lender that relies on government support and private donations, isn’t going to upset the alternative lending apple cart on its own. Before launching the new marketing campaign, the nonprofit had made just $2.5 million in EasyPay loans this year. By comparison, a group of two dozen alternative lenders disbursed $3 billion in 2013, double the amount in small-dollar loans guaranteed by the SBA last year.

Although small in size, EasyPay may focus the conversation around small business lending on the question of cost. Opportunity Fund’s chief executive, Eric Weaver, recalls watching executives from alt-lenders tout their technology at a recent conference. “I raised my hand and asked, ‘Is it worth discussing whether this loan product you’re talking about is beneficial to small business?’” says Weaver.

That’s not always a simple question to answer. Alternative lenders typically justify high interest rates by arguing that their fast approval times allow business owners to seize opportunities they’d miss if they went through the lengthy process of obtaining a traditional bank loan. Others argue that the high percentage of business owners who come back for more than one alternative loan shows that borrowers like the product.

Deanna Sison, the owner of San Francisco soul food restaurants Farmer Brown and Little Skillet, is one repeat borrower. In 2012, she needed cash to settle a legal dispute with an employee and borrowed $30,000 from RapidAdvance, an alternative lender backed by Quicken Loans Chairman Dan Gilbert. In return, Sison agreed to let RapidAdvance divert 6 percent of her daily credit card receipts until she’d repaid the company $36,600.

“Initially it sounds good,” says Sison. “You can use the money to put out immediate fires. But the terms are so challenging, it’s easy to find yourself back in the situation you started in.” Indeed, Sison says she took a second loan from RapidAdvance to ease the cash-flow woes caused by the first. RapidAdvance Chief Operating Officer Joe Looney says there’s nothing in the company’s notes to indicate Sison was unhappy with the loans. “She was a great customer, and we’d be happy to have her back,” Looney says.

This year Sison found herself short on cash again. She’d opened a bar and needed to make last-minute remodeling changes to satisfy health inspectors. This time Sison reached out to Opportunity Fund. She completed a two-page application and within 10 days was approved for a $20,000 loan with more favorable terms: She would pay 21 percent in annual interest, still more than a credit card, but much less than the rates charged by alternative lenders.

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