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Sep12

Helping Small Businesses Avoid Debt Traps: One Loan at a Time

Posted on Sep 12, 2014 by Gwendy Donaker Brown

In June, CFED launched an open call for solutions to discover and highlight strategies that address the key financial challenges facing microbusiness owners. We’re thrilled to recognize the Opportunity Fund as one of ten stellar submissions for their creative interventions and begin to explore opportunities to further their work. Each idea was evaluated to assess feasibility, viability, perceived propensity for scale, innovativeness and relevance, in terms of its potential to address financial challenges or expand financial capability of microbusiness owners.

What’s your favorite local business? Do they accept credit or debit cards? If the answer is yes then chances are that the business owner has been offered a merchant cash advance (MCA). MCAs are offered by unregulated, non-bank companies that offer quick money, but at a high cost. These alternative financing products ensure repayment by taking a fixed portion of up to 50% of every credit/debit card sale—with annualized interest rates reaching 170%. Because the portion of daily sales surrendered is so high, MCAs can choke a business of the cash it needs to survive. And because getting a bank loan is harder than ever, many small businesses think an MCA is their only option.

With state and federal regulators sitting back as the merchant cash advance industry rapidly expands, Opportunity Fund knew we had to create an affordable alternative. In 2013 we launched EasyPay, an innovative alternative loan product that functions just like a Merchant Cash Advance, with a few important differences. First, EasyPay is affordable – taking no more than 10% of total business cash flow, with interest rates starting at 8.5%. Second, EasyPay is flexible – giving business owners up to 36 months to pay back their loan, rather than the average 8 month payback period with MCAs (see image for an example). And last, EasyPay helps build credit – unlike cash advance lenders, Opportunity Fund reports payments to the credit bureaus so microbusiness owners can build their credit history and score.

With the extra security of automatic daily payments, EasyPay makes it possible to finance businesses who might not qualify based on our standard underwriting due to weak credit or collateral. As a result, Opportunity Fund is reaching harder-to-serve business owners whose only alternatives are high cost MCAs. Already, Opportunity Fund has lent $4 million in EasyPay loans to help 216 California entrepreneurs start-up or scale-up their businesses and we hope to serve at least 500 businesses annually by 2018.

While Opportunity Fund is also pushing for regulation of the subprime small business financing industry, we aren’t waiting around. We’re proactively reaching out to businesses around California to help them refinance their MCAs with an EasyPay loan. If you know a business that might benefit from EasyPay – let them know that affordable alternatives do exist.


Want to learn more about Opportunity Fund’s EasyPay Loan?
 Check them out at the Assets Learning Conference in September. They’ll be featured in the Shark Tank Small Business Challenge, a concurrent session from 10:15 to 11:45 AM on Wednesday, September 17, that will highlight a number of innovative approaches to microbusiness owners’ financial challenges and allow audience members to select a favorite.

About the Author

Gwendy Brown is Vice President of Research and Policy at Opportunity Fund, California’s leading microfinance organization. In addition to advocating for responsible business and consumer loans, Gwendy also works to advance college affordability and access to savings opportunities for all Californians.

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