SOS Capital revamps merchant cash advances

The merchant cash advance (MCA) industry doesn’t always have a solid reputation. Much like the consumer payday lending industry, MCAs can provide businesses with much-needed cash to keep their heads above water. However, this comes at a price (often in the form of very high interest rate loans), and sometimes that price can be too high to handle.

MCA companies repay loans by taking a percentage of a company’s daily earnings, plus interest. Unless a business can be sure of having enough revenue each day to support this repayment plan, this type of financing can be extremely risky for SMEs.

Given the notoriety of the industry, the launch of a new cash advance company for merchants is a leap forward. But one of the newest market entrants, SOS Capital, is rewriting some of the MCA rules by putting the borrower at the top of the priority list.

In an interview with PYMNTS, SOS Capital Founder and CEO David Obstfeld offered an honest assessment of what other cash advance companies are doing wrong and how to reshape an industry around the commercial borrower.

A common criticism of the MCA business is the high cost of borrowing. According to the Federal Reserve in its 2015 analysis of small business loans, micro businesses are more likely than large businesses to use a cash advance service to access financing. But with smaller operations, finances can be tight, causing loan repayments to strain cash flow.

According to Obstfeld, using brokers to find and sign agreements with borrowers can significantly increase the final cost of a loan for a business.

It’s a problem the industry as a whole is facing, he added. “Many other companies like me are in the same position,” Obstfeld said, adding that high brokerage fees have driven a shift in the MCA industry that sees players launching their own sales teams to reach borrowers directly.

With this in mind, SOS Capital is taking a new direction.

“Right now we get all of our deals from brokers,” Obstfeld said. “But we try to get customers through direct marketing; if they approach us directly, we can provide them with cheaper capital.

Going directly to commercial borrowers will not only reduce the cost of a loan, but it will also mean that SOS Capital will have more time with its customers. Obstfeld explained that in anticipation of this, SOS Capital is working to roll out a host of new features and services aimed at improving the customer experience.

The first of them, deployed earlier this month is Free Money Mondays – a promotion that sees Obstfeld itself choose a small business loan applicant each Monday to receive interest-free funding from the business.

The initiative is all about getting customers in the door. Regarding the rest of the year, the CEO said that SOS Capital will focus on customer retention.

“We are working on improving our website to be more user-friendly and simpler,” he said. “We will add more features.”

One such feature is access to resources such as free accounting services for commercial borrowers, which would provide clients with an accountant for tax and financial management advice.

Obstfeld admitted that considering SOS Capital is still a startup, the company is juggling multiple concepts at once and hasn’t yet organized a set timeline for rolling out these features, although he hopes they will emerge in 2016. goals in mind is key to getting the MCA industry back in the right direction.

“As the industry becomes more competitive, everyone is going to lower their rates,” he said. “But ultimately it won’t be profitable, because it’s a high-risk industry. I honestly believe that the way to differentiate yourself from your competition at this point is to offer different types of resources.

But SOS Capital will also take another approach to improving relationships with small business borrowers.

While brokers can significantly increase the cost of capital for commercial borrowers, Obstfeld said the MCA industry doesn’t have to get rid of brokers altogether.

SOS Capital is working on another company that works with brokers. “When a broker sends us an offer now, we send him the offer, and he has the right to sell this offer with a commission of 12 points,” explained the CEO. But a new initiative would see that commission capped at 8%, as SOS Capital closes the deal itself. “That way we provide cheaper capital,” he added.

Building relationships with brokers and connecting with small business borrowers will be critical not only to the success of SOS Capital, but also to enhancing the reputation of the MCA industry as a whole.

It’s a smart move as regulators begin to monitor the alternative lending market and the industry scrambles to stay ahead of those regulators by launching its own customer protection projects.

One such project is the Small Business Borrowers Bill of Rights, a set of guidelines for lenders, created by lenders. Published last year, the Bill of Rights is largely Towards the MCA community.

But the industry still has a long way to go before SMEs are fully protected. As regulators continue to investigate the alternative lending market, the Fed’s 2015 Small Business Lending Report found that only 15% of small business borrowers are satisfied with their experience seeking financing from a lender. alternative, compared to a satisfaction rate of 90% with traditional banks.

That doesn’t deter Obstfeld, however, who said that so far small businesses are happy with their experience at SOS Capital and that merchant cash advances may prove to be a more suitable financing option for SMEs.

“Right now we are much faster than the banks,” he explained. “Banks don’t see it as profitable to fund transactions under $1 million.”

And with approximately 5,000 different data points used to assess a potential borrower and mitigate risk, Obstfeld also highlighted efforts that protect and reduce the cost of the MCA process for everyone involved, especially the small business client.