The combination of online technology and investors who seek higher returns has created a flood of online business lending companies. Where there once was a handful, there now are dozens, hundreds maybe. Navigating the space is challenging, even for an experienced borrower. Rates, loan structures, fees, terms, etc can be hard to discern from the websites. CAMEO want to make sure that you – our business development and training professionals – keep up with this proliferation and help your clients determine which funding opportunities is most appropriate. To that end, we will try to keep members up-to-date with current trends.
For our first look into the this very vast arena, we look at a subset of business lenders whose loans are based on revenues and receipts. They offer small-capital, short-term loans.
Today, we look a four such lenders, including CAMEO member Opportunity Fund. And while there may be other lenders, the same methodology can be used to analyze them. The chart below shows how much money it would cost a business owner to borrow funds from these lenders. For comparison, we assume a $10,000 business loan for 12 months, and the borrower pays the average fees.
When reviewing the costs of short-term funding, we mostly talk about fees, not interest rates. The inconsistent terms can be confusing, even deceptive in some cases. But nevertheless, for our borrowers protection, we need to calculate the actual amount that the borrower will need to pay back over the time of the loan and need to do so in annualized terms, so that borrowers and their business counselors can compare it to the business’ margins, which is an annual calculation. Without that apples-to-apples comparison, a business owner can’t make an informed and productive borrowing choice. Borrowing at a annual rate that exceeds a business’ margins, will sink a business and rob it of its profits.
In the case of both On Deck Capital and Kabbage, a typical borrower can expect to pay back the principal (amount borrowed) + 15% of the amount borrowed. Based on these numbers, borrowing $10,000 will cost $11,500. However, the interest rate is not 15%. In fact, the effective annual interest on these loans can be up to 60% depending on terms!
The inconsistent terms can be confusing, even deceptive in some cases. But nevertheless, for our borrowers protection, we need to calculate the cost of capital (whatever its called) in annualized terms, so that borrowers and their business counselors can compare it to the business’ margins — which is an annual calculation. Without that apples-to-apples comparison, a business owner can’t make an informed and productive borrowing choice. Borrowing at a annual rate that exceeds a business’ margins, will sink a business and rob it of its profits.
The difference between the amount paid back and the effective annual interest rate is primarily due to two factors.
- The period for repayment in this example is six months, and not a year.
- The borrower is paying back the principal throughout the term of the loan / merchant cash advance.
In other words, if you average out the amount owed during the life of loan it’s about half of the original amount taken. Problems arise for borrowers who do not effectively predict their receivable cash flow because the penalties for insufficient funds accumulate daily and are added to the principle.
Analysis
Kabbage is acceptable for the 1 or 2 person eBay, Amazon, or Etsy merchant, who has a CLEAR understanding of their cash flow and sales cycle, and ideally will qualify for a lower interest rate. Although Kabbage’s fees are higher than the others, they are approximately half the cost of a traditional merchant cash advance, and can be considered for the online business owner who needs cash immediately for a business growth opportunity.
Opportunity Fund’s Easy Pay is best short-term loan provider for small businesses in this category. Opportunity Fund’s EasyPay product is appropriate for brick and mortar businesses and businesses that have trouble getting loans from traditional banks. A loan from Opportunity Fund is approximately half the cost of any national competitor, and approximately a quarter the cost of a traditional merchant cash advance. Business owners will realize a lower cost of funds by taking a longer payment plan.
Paypal Working Capital offers the cheapest source of funds to small businesses. However, the amount of available capital is tiny and requires the client receive lots of payments via Paypal. The maximum amount one can borrow is 8% of annual Paypal collections. For example, if the client does $15,000 in revenues per month or $180,000 per year through Paypal, the maximum amount available to borrow would be $14,400 ($180,000 x .08).
| On Deck Capital | Kabbage | Paypal Working Capital | Opportunity Fund (Easy Pay) |
|
|---|---|---|---|---|
| Type of Business | Online and Offline | Online merchants that collect via PayPal or sell through eBay, Amazon, or Etsy | Online merchants that collect via PayPal | Offline |
| Value of loan | $5,000-$250,000 (typically $30,000-$35,000) | $500-$50,000 | $1,000-$20,000; capping at a maximum of 8% of annual PayPal sales | $5,000-$100,000 |
| Length of Loan | 3 to 18 months (typically, 6) | 6 months | 3 to 11 months, depending on the plan | 12-48 months with no prepayment penalty |
| Origination Fee / Fee Deducted From Funds | 2% | None | None | 5% |
| Cost of Funds | Typically 15% of the amount borrowed for a 6 month loan | 8% – 24% of the amount being borrowed | 3%-10% of the amount borrowed; the shorter repayment term, the lower the rate | 8.5% – 15% |
| Collection Process | Deduct fixed amount from bank account on a daily basis | 6 monthly payments with the first two being a greater amount | A fixed percentage from 10% – 30% of funds deposited into your PayPal account | A fixed percentage of credit and debit sales, no more than 10% of overall sales |
| Credit Building Opportunity | Yes. You build your credit score. | No | No | Yes. You build your credit score. |
| Cost of Funds for $10,000 loan for 12 months | $3,460 | $3,200 | $1,300 | $1,760 |
| Notes | Assumes 2 six- month loans @ 15% with 2% fee | Assumes 2 six-month loans @ 16% (average between 8-24%) | Assumes 1 eleven-month loan at 10% and 1 one-month loan at 3% | Assumes 1 twelve-month loan @ 12% (average between 8.5 – 15%) |