The shadowy world of merchant cash advances

0:01Stacey Vanek Smith:NPR.

0:11Cardiff Garcia:This is The Indicator from Planet Money. I'm Waylon Wong and we have NPR business correspondent Alina Seljuk back with us today. Hello, hello. Always great to see you. And Alina, you've taken a field trip recently into a particular corner of the financial world. It's a pretty shadowy corner. It's an industry that offers very fast cash for very high fees to businesses in distress. Your file shows you're nearly approved for$159 ,000. OK, that does not sound real, but it sure does sound like a nice chunk of cash I could use. The thing is, these can be real. Real money from real lenders who are largely unregulated.

0:53Cardiff Garcia:During the pandemic, these firms went after struggling restaurants and music venues. Now they found a new market of small businesses that desperately need cash to pay tariffs. Today on the show, the story of a financial lifeline that can turn into a financial chokehold. And how one business owner went from a year that was slated to be his best to a year of owing a fortune to lenders that took their money straight from his bank account.

1:20Stacey Vanek Smith:I'm a million dollars in debt with merchant cash advance loans right now.

1:25Cardiff Garcia:That's coming up after the break.

2:03Cardiff Garcia:Okay, so a few months ago, I met with a big group of small business owners. And there was this moment when someone brought up these loan pitches, these never-ending calls and texts that they're getting promising quick cash. And so we were like, is this like predatory loans? And the room almost vibrated.

2:23Stacey Vanek Smith:Yes. I can talk for hours about MCA. I get five calls a day. That is the story that no one's talking about in our country right now.

2:33Cardiff Garcia:But we will talk about it. So I heard someone say MCA. So that stands for Merchant Cash Advances. And this is the very shadowy financial world we are talking about. And the voice who said that is Joshua Esnard, who got deeply in debt to these companies. I visited him in North Carolina. Hey, how are you doing? Good to see you. He has a warehouse slash office near the Raleigh-Durham airport. And Josh has this fun business origin story, which is that he spent his childhood getting his hair cut at home by his dad, who's like MacGyver, very DIY dad. And then Josh finally rebelled as a 13-year-old.

3:13Stacey Vanek Smith:I got my TJ Maxx clothes, the platinum fubu. Yeah, the fat Albert fubu. I'm ready to go talk to the girls and stuff, but I got this buzz cut. So I'm like, I want to fade in an edge up.

3:26Cardiff Garcia:And so teenage Josh invented a way to fix his hair himself. He carved a template out of a plastic folder with edges that you can press to your head and guide clippers for sharp lines. And eventually Josh patented this tool and took it to Shark Tank. And now his company is 10 years old. It's called The Cut Buddy. It makes all kinds of hair grooming products now, including special shavers that are quiet and ergonomic. And the business turns$6 million in revenue a year. And last year was slated to be the best one yet by sales. But then tariffs.

4:02Stacey Vanek Smith:Tariffs. All right, so let's look at this.

4:07Cardiff Garcia:And so we're looking at Josh's customs forms. You know, his warehouse is a maze of boxes stacked on pallets. Almost all of them are stamped China. And we'll look at one shipment from May. President Trump's new tariffs hiked Josh's import fees to 152 percent. So instead of like 230 bucks in tariffs, you paid over$4 ,000.

4:30Stacey Vanek Smith:Yeah, yeah. The entered value of the goods was 3 ,000 bucks and my tariff bill was$4 ,600. Yeah, so I paid way more than they actually cost.

4:46Cardiff Garcia:Yeah, so just to underline this, his tariffs cost more than his product. And that's a single small shipment. He tried to avoid tariffs by biding time, but holding shipments in China means failing contracts with big stores. Leaving shipments at customs means huge warehousing fees.

5:02Stacey Vanek Smith:So when you're desperate and Customs has your product at the dock and you got to deliver to Walmart, Target or whatever, and you have to clear that out or else they're going to send it to the same warehouse where Indiana Jones artifacts were stored. And then you're screwed because if you don't deliver to these retailers, they drop your product. So you got to pay it. So where do you get the money from? You get it from the mob. And that's the MCA.

5:29Cardiff Garcia:MCA, Merchant Cash Advance, which apparently to Josh feels like borrowing from a loan shark. And to be clear, the industry is pretty chaotic. So yes, a predatory lender might offer MCAs or it could be a fund on Wall Street. It could be some guy or it could be a lender suggested by Amazon. And here's the big thing about merchant cash advances. They are technically not loans. Right. When an MCA lender gives you a huge chunk of cash in a matter of hours, what they're doing is technically buying something from you. They are buying a stake in your future sales. So technically, it's like a purchase, not a loan.

6:07Cardiff Garcia:And that means most lending laws do not apply. The lenders don't have to be licensed. And the fees they can charge legally have no cap. We've talked to debt lawyers and government investigators who have seen rates of like 30%, 90%, 300%. And the way the MCA lender gets repaid is often by directly dipping into the borrower's bank account. As that business makes sales, the lender simply withdraws its cut. It's like someone opening your wallet, seeing what you got there that week, and taking a cut every week. Now, this might seem like a wild ride to jump onto, but the big context to this is that business owners can feel like they have very few options in an urgent cash crunch.

6:53Cardiff Garcia:Big banks rarely give the time of day to small business lending because it's messy and risky. A merchant cash advance is fast and easy, but costly. So Josh's tariff succeeded his budget five times, and he ended up taking out three merchant cash advances. Their total was$950 ,000. Including the fees, his actual debt reached$1.2 million. So basically, there goes his profits for the year, right? Exactly. All profits went to tariffs and debt payments. Josh really cut costs. He started skipping his own paycheck. At one point, he appealed to the U.S. Small Business Administration, the SBA, which had given him a loan before.

7:36Cardiff Garcia:But here's a plot twist. The agency, as of last year, no longer refinances merchant cash advances. They're now red flags. In one of our meetings over Zoom, Josh put it in horror film terms.

7:49Stacey Vanek Smith:The way I look at it is like a zombie attack. These zombies are the MCAs calling you and harassing you, trying to give you money in 24 hours with like a crazy fee. And then you're running for help to the SBA, which is the shelter, and they just close the door on you. because they think you may have gotten bit by these zombies.

8:12Cardiff Garcia:And these are the fast-moving zombies. Yeah, these are the 28 Days Later zombies. They're not Night of the Living Dead slow zombies. Over the years, the federal government has investigated some MCA lenders, prosecuting some egregious cases. And several states have waded in with some regulation or pending legislation. And we did talk to one trade group that represents Wall Street-backed lenders. And the CEO there says regulators should weed out the bad apples pushing predatory loans. They should require lenders to be licensed. Our colleague Scott Horsley reached out to a few that were pitching Josh, but only got one text back that said, how did you get my information?

8:52Cardiff Garcia:And just to bring Josh's story full circle, he did get a rescue squad. His past lender, a nonprofit called the Business Consortium Fund, agreed to pay off his MCA debt and turn it into a traditional loan. So he now owes interest on top of his$1.2 million, but it's a manageable rate and he has five years to pay. Well, now that the Supreme Court has ruled some of the tariffs illegal, maybe Josh could get a refund. Maybe that'll help, too. Some of that refund money could really come in handy. Yeah, I bet. Alina, thanks so much for bringing the story to us. It was super interesting. Thanks for having me.

9:31Cardiff Garcia:This episode was produced by Inja Correras with engineering by Sina Lafredo. It was fact-checked by Sierra Juarez. King Cannon edits the show and The Indicator is a production of NPR.

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