By Phyllis Furman – November 4, 2013
Aaron Hoffman, the owner of Philly cheese steak restaurant Wogies in the West Village, needed $50,000 – fast. Three years ago, Hoffman and his wife decided to expand their business and build a small bakery in the basement of their restaurant to bake their own rolls. They ordered the equipment and proceeded with their plans, only to learn that no bank would give them a loan.
Hoffman turned to a friend who worked at AmeriMerchant, an alternative source of capital for small businesses. Within a week or so he got the money, albeit at a cost far greater than he what he would have paid a bank. “The banks didn’t want to have anything to do with me,” Hoffman said. ” He’s not alone. In fact, the alternative small business funding arena is booming, even though this type of capital can be far more costly than a traditional bank loan.
Small business owners say they have no choice. Bank credit remains tight and home equity loans, once a key source of cash, are no longer an easy option. “All indications are the market is exploding,” said Ami Kassar, founder and CEO of MultiFunding, a business loan advisor. Filling the void are companies like New York City-based AmeriMerchant, a merchant cash advance provider that advances money to small firms like restaurants and small retailers, and gets paid back by taking a fixed percentage of their daily credit card transactions.
CEO David Goldin, who founded the company 12 years ago, said he expects his business to be up 100% this year and has just entered its busiest time of the year as merchants gear up for Christmas. American Express recently entered the merchant cash advance biz. And U.K.-based peer-to-peer lending platform Funding Circle, which matches individuals and institutions with small business borrowers, just plowed into the U.S. market.
New York-City based OnDeck, which provides quick working capital loans that get repaid from a small business’ checking account, said its third quarter loan volume is up 150% vs. last year. Launched six years ago, the alternative small business lender now has 225 employees and is one of the city’s fastest growing companies. “Our growth is extremely rapid and it’s accelerating,” OnDeck CEO Noah Breslow said. “The banks have been slow to go back into small business lending.” For small business owners, choosing this mode of raising capital can come at a high cost. The APR – annual percentage rate – on a loan from OnDeck is typically around 50%. The loans are generally paid back within six months.
The cost of a merchant cash advance can be even greater. Small business owners pay AmeriMerchant a 20% to 25% premium for the loan. That means if they get an advance of $100,000, the cost is $20,000 to $25,000. AmeriMerchant’s cash advances are not loans and therefore don’t have APRs. But if they were loans, the APRs would range from 30% to 60% or more, depending on the size of the advance and how long it takes to repay it, Goldin said. A bank might charge 5% to 7%. The average cash advance ranges from $18,000 to $25,000 and is generally paid back within six and 18 months.
On the plus side, once approved, a small business owner can get funding within five days or less. Collateral and personal guarantees are not required. “It’s more flexible and more accessible,” Goldin said. Hoffman wasn’t happy about having to pay a big premium. But the cash advance he received allowed him to diversify his business. “Nobody wants to pay 20%,” Hoffman said. “Unless you have a rich uncle, you are out of luck.”
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