A Local Look at Small Business and Hard Money

Over the transom from the Audit/SABEW local business-press initiative

As some Audit readers know, we’ve started a push with the Society of American Business Editors and Writers to try to find and review noteworthy local and regional business reporting that gets lost in the news crush.

Here’s a post from SABEW’s president, Rob Reuteman, urging members to send us their stuff, and here’s one from me explaining how it’s going to work.

The idea was to get a peek at what the locals are doing, some insight into local economies and, maybe, if our hunch is right, a few surprises. One motivation was a gnawing sense we were missing some good stuff, a sense that is invariably confirmed every year around prize time, when out of nowhere a small paper like the Bristol (Va.) Herald Courier walks off with the Public Service Pulitzer for a series exposing the mismanagement of state natural gas royalties.

We’ll figure how we’ll handle the submissions depending on the volume and, well, quality (we’re critics, okay?), but from the early entries, we’re off to a promising start.

This-multi-part probe in the Washington (D.C.) Business Journal of a fallen leader of the murky business known as “merchant cash advance industry” falls into the things-I’m-glad-to-see category.

Merchant cash advance, we learn, is basically payday lending for small business; in return for upfront cash, businesses allow the lender a percentage of gross receipts from their credit card swipes.

The piece looks at the rise and fall of Lee Jundanian, who founded something called RapidAdvance in 2005, was named Maryland Entrepreneur of the Year by Ernst & Young in 2008, and filed for bankruptcy two years later.

True, not everyone is going to care to page through a long look at a local crash-and-burn case; and, also true, the merchant cash advance business is relatively small: MCA operators issue between $750 million and a $1 billion a year in loans. And while the series, by Bryant Ruiz Switzky, is reported to within an inch of its life, it must be said there aren’t a lot of fun personal details about Jundanian.

But we do get one key insight into character. WBJ leafed through 100 or so lawsuits filed by RapidAdvance against its borrowers for non-payment and finds that Jundanian offered some of the hardest money in a hard-money business. According a 2007 report by an industry leader trying to stave off regulation, the “safe retrieval percentage”—one that won’t strangle the borrower’s business—is between 2 and 9 percent of revenue, though it can routinely go to a business-destroying 20 percent. WBJ’s analysis of 39 cases found that Jundanian’s business took 35 to 50 percent in a third of the cases, with an average of 28 percent overall. The results were predictable.

What I found especially valuable was the window it offered on the harrowing pressures faced by small businesses in the wake of the financial crisis and the Great Recession. This strikes me as a grossly under-reported phenomenon.

WBJ called dozens of businesses sued by RapidAdvance and found, among the many disconnected phone lines, several compelling vignettes, including that of Bryan Light, who runs an auto-parts store in Alvin, Texas.

Light was forced into the arms of RapidAdvance when his kidney failed while the economy crashed; he got a $24,000 advance in June 2007, agreeing to fork over 45 percent of every credit card swipe until he repaid $35,280. Like a lot of borrowers in that business, he was accused of cheating by having customers pay cash or use a different credit-card terminal. Here’s Light:

“There were a couple of occasions where we didn’t take any credit card sales for two weeks. They wanted to know why. It was like, ‘I’m sitting here starving and you want money?’” Light said. “I sent proof that we had no deposits that month. I sent them all the information they wanted and it did no good. They were bullying me around for no apparent reason other than that they weren’t getting paid back fast enough. It was a nightmare.”

Light made it, no thanks to RapidAdvance:

“Things have improved, thankfully, but paying them back nearly put me out of business,” he said.

Matt Hutchins, who runs a business rebuilding muscle cars in East New Market, Maryland, had a similar story, minus the medical problems:

“We were going to just pay it right off. We didn’t expect to drag it out,” he said. “And then the whole economy just dropped off.”

What I like are the quotes from these salt-of-the-earth businesspeople:

“They accused me of operating a separate terminal,” he said. “I was like, ‘Whoa. I don’t even know how in the heck to even do that.’”

Oh, and this business is not mostly but entirely unregulated.

Great stuff. Thanks to SABEW for helping us get started. Fellow SABEWians: keep ‘em coming. Send links to theauditcjr@gmail.com.

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.