The Slippery Slope of the ACH Loan Industry
Merchant cash advance (MCA) and small business ACH loan companies are currently funding $3-5 billion a year and have a potential for $300 billion per year predicts Tom Green of LendingClub. Private and publicly traded MCA companies such as OnDeck and IOU Central have become a dumping ground for Private Equity and Hedge Funds enticed by their high theoretical yields. Businesses are snatching up advances like candy and MCA/ACH companies are more than happy to oblige with astronomical fees. Steve Nicastro of NerdWallet wrote, “Total annual borrowing cost with all fees and interest included, typically ranges from 70% to 350%.”
If you are unfamiliar with merchant cash advances or small business ACH loans, they are a short-term advance of funds against a business’ future receivables or future credit card sales. To pay it back, a fixed dollar amount or percentage, is taken via ACH from the company’s checking account every day or directly from their credit card sales. Since the Great Recession, businesses are desperate for an alternative form of funding with banks severely limiting small business loans. The merchant cash advance and ACH loan business is a booming and relatively young industry.
Companies are allowed to over borrow, often “stacking” one ACH loan on top of the other. Many companies are taking on too much debt and not able to handle the daily ACH payments. In addition, regulation on this type of lending is close to nonexistent. The transaction is set-up as a future asset purchase and not a loan, so existing laws, such as usury and interest rate limits may not apply.
Compounding the issue, scores of unethical and outright criminals are working as MCA and ACH loan brokers according to an article on Bloomberg News, “The field is rife with unsavory brokerages, staffed by many of the same people who pushed subprime mortgages a decade ago and worked the bottom rung of the stock market in the boiler rooms of the 1990s.” They cite one person who opened a loan brokerage in New Jersey after being convicted of stock fraud.
Continuing in the Bloomberg article, a major player in this space has teamed up with brokers convicted of stock scams, insider trading, embezzlement, gambling, and dealing ecstasy, according to interviews with the brokers and court records. Brokers bring much of the business to these lenders. One company acknowledges: If partners “mislead loan applicants or are engaged in disreputable behavior, our reputation may be harmed, and we may face liability.”
Merchant cash advance companies have little to no recourse if a merchant goes out of business and defaults on a cash advance. This sounds all too familiar with the subprime mortgage crisis just a few years back. The entire industry is very thin, like a house of cards, and is precarious at best.
We speculate that the next downturn in the US economy has the potential to take down hundreds of MCA companies, thousands of their employees and brokers and more importantly, the biggest victims would be the hundreds of thousands of small businesses who could be forced into bankruptcy.