DoorDash is getting into the merchant cash advance business. Here’s the fine print

The food delivery industry has exploded since the pandemic began and restaurants closed for indoor dining. While most, if not all, restaurants are open again, many customers are still choosing the safety of their homes for their meals. Whatever your preference as a consumer, restaurants strive to get their food to you in the fastest, easiest and safest way possible. Some restaurants already had traditional delivery services or had already partnered with third-party delivery companies such as GrubHub, UberEats or DoorDash to provide this service. Others had to work quickly to use a third party or hire drivers themselves. While there are pros and cons to each method, and many strong opinions as to which is best for small businesses, that’s not what I want to focus on. What’s important is how widely used these third-party delivery services are and why this ubiquity plays a role in the long-term viability of high street businesses.

DoorDash has recently entered the merchant cash advance business. From my cursory research, it appears to be the only third-party delivery service that intrudes into this type of fundraising activity. For the uninitiated, merchant cash advances are a way for small businesses to get cash quickly, as services typically award money to businesses based on their potential future sales. So if the business closes, the financier is out of luck, as these arrangements generally do not require personal collateral guarantees, unless otherwise specified in the contract.

Sounds like a good deal, right? Not enough. I have personally seen how quickly these arrangements can turn into a debt trap that can decimate small businesses.

It is true that at first glance, they do not sound threatening. MCA services advertise that you only have to pay if you sell, with no interest rates and no prepayment penalties.

Here is what actually happens:

The company offers to “advance” you $100,000 and says that in the end, you will owe them $130,000. There is no interest rate but there is a fixed daily or weekly fee which is calculated based on your historical sales (this is why the fee is not advertised but is usually around 8%, 10% or 12%). This is how the financier will be reimbursed. In this case, the business has historically made about $4,200 in sales per day, which means their account would automatically be debited $500 per day. It is expected that it will take you a year to repay the money. Without requiring guarantees or personal guarantees, it would seem that DoorDash – or any other merchant cash provider – is defenseless if you go out of business, but that’s not all.

When calculating these advances as an APR, they can quickly skyrocket to double and triple digits (this one being 76.92%). High costs combined with daily/weekly repayment schedules can create significant cash flow issues for a business. Often, small businesses must soon take out another advance, starting a cycle of debt that is almost impossible to escape. The icing on the cake ? Technically, they’re not loans, so there’s no federal oversight, and there’s no benefit to paying them off early. In fact, if you paid off the above advance in six months versus 12 months, that would be an APR of 153.84%! This is why these companies advertise that there is no penalty for early payment; it benefits them, not the borrower.

I’m afraid small business owners will see the now familiar name of DoorDash and think it’s a viable and secure option. Predatory lenders may go by many names, but the goal is always the same: to benefit the finance company, not the borrower. Of course, the language used to describe merchant cash advances by the finance companies that provide them is always eloquently disguised. Whether it’s the fine print or the allure of “only pay if you sell”, they’re all the same. It is, of course, disappointing to see another company choose profit over struggling small businesses. to witness it, DoorDash reported this month that it generated $1.3 billion in revenue for the fourth quarter of 2021. That was a 34% jump from a year ago.

With that in mind, my only question is before you even accept a cash advance from a merchant: exhaust all other options first and talk to a financial expert. There are often other options available that you may not have heard of before that a qualified business or financial advisor could help you obtain.

DoorDash executives declined to be interviewed by phone for this article and were only willing to answer questions by email. When asked, “If one of your clients takes DoorDash Capital and their business stays at exactly the same volume, what is the rate they can expect to pay based on APR?” Their answer didn’t answer my question: “The average fee is usually less than 11% of the bid amount, but the rate depends on the qualifications of the merchant. It’s a one-time fee of the bid amount It is also important to note that our merchant partners repay the advance as a percentage of sales against a fixed weekly/monthly amount, giving them greater flexibility during periods This line is a typical defense of the merchant cash advance industry.

I just deleted DoorDash from my phone. I’d rather put my lazy rear in the car, get my food, and then support a business that chooses to play the merchant cash advance game.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.

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