"It was five years ago. The market crashed, people were losing stocks and houses, and everybody in my town was closing their doors," Diniz says of other retailers. She needed a loan, but after the financial crisis, banks were much warier about lending, especially to brand-new businesses. A retired business adviser in town recommended she contact Opportunity Fund, one of the largest micro-lenders in the state.
Opportunity Fund has provided micro-loans (from $2,600 to $10,000) and small-business loans (from $10,000 to $100,000) to California entrepreneurs for the past 20 years. The average small-business owner who works with the organization has an annual household income of just $22,000. Clients own dry cleaners and restaurants, trucking companies, and daycare centers. Most are Latino or African-American, and many are recent immigrants who don't speak fluent English.
Diniz's financials were strong enough that she qualified for a small-business loan right away. But many entrepreneurs who were coming to Opportunity Fund were unable to qualify for loans, even if they had strong sales. An entrepreneur might have a poor personal credit score, for example, or run a highly seasonal business, like a flower shop.
So the organization decided to create a loan that could be repaid through automatically deducting a small share of credit- and debit-card sales. The technology wasn't new — it had long been used by merchant cash-advance providers. "The intention of EasyPay was: How can we look at this business a little differently? How can we give more weight to the cash flow side of the business?" says Alex Dang, a business development officer.
The automatic daily payments decrease the risk of lending considerably, allowing Opportunity Fund to serve more businesses and to extend larger loans than it would have otherwise. Established business owners, like Diniz, like the product because it's convenient. EasyPay loans have a fixed interest rate of between 8.5 and 15 percent, typically have longer repayment terms than cash advances, and take a smaller share of sales — usually about 6 percent. Like payments on any other loan, payments contribute to a borrower's credit score.
Opportunity Fund has lent $5 million through 250 EasyPay loans so far. (In February, Opportunity Fund was awarded a $50,000 grant from Wells Fargo, a sponsor of National Journal's Next America project.) Meanwhile, merchant cash-advance providers lend about $2 billion to small businesses nationwide each year, says Janinne Dall'Orto, senior manager at First Annapolis Consulting, a consulting firm that studies the payments industry. Merchant cash advances aren't regulated, so there aren't legal limits on the fees companies can charge. A typical $10,000 advance, due in six months, might carry a $3,500 fee.
One reason Opportunity Fund can afford to charge low rates is because it's a nonprofit and a community-development financial institution, or CDFI: it's partly supported by philanthropists and the government. It's a lender out to charge borrowers what they can afford, not to deliver big profits. "One question that we ask every borrower is: What is a comfortable payment for you? And then we work around that," Dang says of EasyPay loans.