A survey of existing customers by online direct lender Dealstruck underscores the importance of education and transparency in the space, a representative said.
To prove her point, Candace Klein provided a few examples of actual conversations she had with Dealstruck clients.
One gentleman had taken out a series of daily debit loans from other lenders, and told Ms. Klein he was staying on top of the APR rate, which he insisted was 14 percent.
“We took a closer look and he was actually paying 86 percent,” Ms. Klein said.
There are many stories like that, Ms. Klein said.
The problem is hidden fees and opaque explanations make it hard for people to accurately determine what they indeed are paying. In fact, 36 percent of respondents stated they were unsure of their current APR with an additional eight percent admitting they had no idea whatsoever.
“A big hurdle is educating borrowers,” she explained.
Merchant cash advance providers and factors often charge anywhere between 20 and 80 percent APR equivalent, with merchant debit products coming in on the high end, Ms. Klein said.
She estimates one third of Dealstruck’s efforts are devoted toward helping small businesses refinance factoring and merchant cash advance loans. Another third is spent educating borrowers about different products and which ones are best suited to their individual needs.
Using a product not designed for a specific need can create unhealthy habits leading to problems, Ms. Klein said. A company take out a daily debit loan to meet payroll or inventory needs, only to find themselves in the same situation in ensuing cycles. Before long they have a series of those loans and a large portion of their regular cash flow is devoted to servicing those loans and not meeting business needs.
Ms. Klein said Dealstruck’s customer acquisition strategy includes contacting companies using different loan products through publicly available information. They ask the owner for the reasons they need financing.
A company may operate in a 30-day cycle but deal with customers who have 60 or 90-day cycles. Such companies can struggle to meet payroll or to cover inventory, so they apply for payroll assistance and pay off the loan when their invoices are paid in a few weeks.
Because every company participates in a complicated sphere of many different revenue cycles, many will pay a discount of as much as 10 percent to any customer willing to pay immediately, Ms. Klein said. They can borrow on a short term basis from Dealstruck to receive the discount, pay off the loan, and save a few points on the transaction.
Ms. Klein said she was also surprised at the high correlation between hiring difficulties and financing revealed in the survey. Clients reported hiring 50 percent more hiring beginning in August as compared to June and July. That is the exact period where many also have an increased need for financing.
“There is a direct correlation between seeking employees and capital,” Ms. Klein said.