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The way Stripe Capital has structured repayment of the loan -- fixed fee, dynamic loan term -- is is an interesting way to make it hard to compare against other

• AdamSC1 7y ago
  It seems a bit as though the model is set up for independent operators and 'Mum & Pop' shops that use Stripe but don't have the business acumen to see the issue. Or, people who have a good history of selling with Stripe, but, lack the credit rating, history or collateral to use other lenders. It's a very carefully and cleverly thought out payment model, which leads me to believe they knew exactly which consumer base they were going after.
  • dawnerd 7y ago
    You nailed it on the last point. It also greatly helps small stores that have highly variable sales. Like with my ebay shop I can go days without selling anything, then have a weekend where I pull a few grand.
  • rossdavidh 7y ago
    Well, the "Mum & Pop" stores you mention, are far more likely to be at risk from taking out a loan that they end up not being able to pay back on time, and late fees and compounding interest make the total cost of the credit far more than they expected. It seems like the total risk here is visible, whereas the worst-case risk of a conventional APR model is difficult for inexperienced users to perceive.
  • zonethundery 7y ago
    This seems like a relatively standard MCA product, at better rates than typical MCA providers. Stripe's betting its underwriting is superior (very likely) and it has a lower cost of capital than competitors. Square Capital does the same thing. It seems novel for folks outside the industry but businesses are bombarded by MCA adverts on the daily and have been for years.
• deleted 7y ago
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• goatinaboat 7y ago
  structured repayment of the loan -- fixed fee, dynamic loan term -- is is an interesting way to make it hard to compare against other lenders You would need to consult an appropriate scholar to be sure, but it could be to be compatible with Islamic finance, which prohibits charging interest. Some banks do mortgages structured around fees rather than interest too.
  • lotsofpulp 7y ago
    Any transaction of money in exchange for time is interest.
    • eloff 7y ago
      But religion, unlike laws, thrives on technicalities. Some Jews won't push a button in an elevator on the Sabbath, but it's fine if its programmed to stop at every floor.
      • whatshisface 7y ago
        https://www.kosherswitch.com/live/tech/how https://www.kosherswitch.com/live/tech/how
        • deleted 7y ago
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        • robocat 7y ago
          Wow: that is some tortured denial of cause and effect. I am going to set up a switch that buys you a hamburger delivery. But it has a 1 in 1000 chance of stealing 1000000 dollars. Are you committing a sin when you push the switch because you are hungry?
        • ceejayoz 7y ago
          These approaches are so baffling to me. Their tagline is even "control electricity on Shabbat!" while telling you all the ways you're technically not controlling electricity. Loopholes that violate the spirit of the law but technically fit the letter of it make sense in doing your taxes, but it seems extremely risky to take that approach with a god. "Haha guys, very clever, you got me" doesn't seem like the end result for a being known for smiting.
• harshadante 7y ago
  Harsha from the Stripe Capital team here. We’ve designed the program so that most offers take about 8-12 months to pay back, and therefore the repayment rate would change to reflect that projected duration (which would ultimately impact the APR). The 15% repayment rate you see on the landing page is just an example. We do think this is a significantly improved overall user experience—it works straight out of your Stripe account. It’s automatic, based on your sales. The cost of the loan is a single fixed fee that adjusts to the loan amount paid over the course of the loan—there is no interest rate or additional fees. The effective APR is dependent on how long it takes to repay the loan.
  • tnorthcutt 7y ago
    This is really unclear from the landing page, but seems like crucial info. It's also not mentioned on the FAQ page from what I can tell. Might be good to add somewhere.
  • Townley 7y ago
    Are there any common scenarios among Stripe users/repayment schedules where the effective APR would be advantageous compared to a traditional loan (convenience of application process notwithstanding)?
  • mkagenius 7y ago
    > about 8-12 months to pay back Wow, that's a whopping 10-15% p.a. interest rate. Time to mint the money has come for Stripe, yeah?
    • shafyy 7y ago
      As said by Patrick in a different comment, it really depends on how your sales are going therefore comparing it to a traditional loan with a fixed p.a. regardless of your sales doesn't make a lot of sense. I didn't read the exact terms, but based on the landing page it seems like your downside is capped, which is a big thing. I.e. if you suddenly stop making sales, you don't repay them . (not sure if there's a clause that makes you repay if you never make sales for a couple of years after taking out the loan)
• amirhirsch 7y ago
  If it seems like you were paying it back too quickly you should switch most of your sales to another payment provider like PayPal or Square to throttle your Stripe revenue lowering your effective APR until it's compatible with a bank line-of-credit.
  • adventured 7y ago
    They surely have built-in terms covering that premise. Otherwise you could switch 99% of your payment processing off of Stripe and pay them a trickle of your sales over a decade. For example, I wouldn't be surprised if they legally tie repayment to your actual business sales (or any sales conducted through a qualified payment processor, comparable to Stripe; some legal structure that catches this), not just your Stripe sales. In the pitch they only mention repayment directly coming out of your Stripe sales, because that simplifies the pitch. Otherwise it exposes them to an extremely obvious angle for being taken to the cleaners both by scammers and plain desperate business operators. They lend a business $100,000. That business immediately switches 99% of their processing to someone else. Repayment occurs at a comical rate - forever. There's no chance they left themselves open to something so obvious, it'd never get past even a mediocre lawyer. Edit: what you would do is build a requirement into the loan contract that you must pay out of all sales conducted by your business and or all sales handled by any payment processor (I'd go with all sales, if I were Stripe), not just sales that go through Stripe. A slight variation of that, would be that Stripe is granted the legal right to audit your business first, in the event of a certain % drop in sales / repayment. The second step, if they catch you evading them in the audit, is that the contract stipulates they have the right to collect from all business sales. The point of this step-based process, is to avoid constantly throwing a serious flag at operators on modest drops in sales. So if sales - repayment - drops by a modest N%, they do nothing initially, perhaps send a friendly message to check in; if sales (supposedly) drop dramatically (either short-term or longer-term), they ramp up their approach accordingly including becoming more aggressive in talking to you and possibly including an audit (business review) request. Keep avoiding them, it becomes a serious legal matter, as it would with any major creditor. In any large scale financing business like this, the creditor must be very well equipped to pursue legal remedies against the borrower. You can bet that Stripe has built in an angle to pursue attempts to evade them, in small ways and up to entirely ghosting them on the loan.
• u10 7y ago
  Alternative financing is always going to be expensive. Most businesses won't have access to bank rates, so they often have to access capital via alternative lenders (factoring, Merchant Cash Advance, high-interest fixed-term loans) that often charge upwards of 50-60%. Comparatively, 20% APR isn't so bad.
  • throwaway_law 7y ago
    >Most businesses won't have access to bank rates 50-60% would violate most if not all usury laws, unless you are a bank. Even in my state the usury is capped at 18%, so to even charge 20% you have to be a bank or its an illegal loan.
    • eloff 7y ago
      I think factoring finds a way around that. It's often higher than 20%. I don't pretend to understand how it works, but it seems like a great business model.
    • jonknee 7y ago
      Usury laws typically apply to consumers, not loans to businesses. They also probably wouldn't count this type of financing as a loan. Regardless, this exact method of financing already exists and is very popular so I'm going to go on a limb and say that it's legal.
      • throwaway_law 7y ago
        I actually assumed Stripe had a bank license/charter (a quick Google search after your comment suggests they do not). >Usury laws typically apply to consumers, not loans to businesses. That may be a fair characterization, but its definitely a jurisdictional issue state to state. I know some States for sure exempt commercial loans, others exempt loans over certain amounts, and some exempt loans to certain businesses by industry (but not a outright exemption on commercial loans). Obviously Stripe has a good public image, but unfortunately with SV unicorns like Uber, AirBnB, CoinBase (almost any cryptocoin/blockchain start up), its not unfair to say we should just assume business practice comply with the law.
• hbosch 7y ago
  Well, and of course Stripe doesn't (and hasn't) peddle itself as a value option or a business that gives you the "best deal". The best part about Stripe is convenience, as with all their products. If you take out a small business loan through Stripe, and you use their other checkout or payment tools, it makes repayment automatic. That's the selling point. I don't think anyone looks to Stripe for low fees or value loans.
  • TuringNYC 7y ago
    That is not what I understood to be the driver. It would be nice if some Stripe-based store-owners reading this could opine on this? I assumed the primary value was tying debt service to revenues at a micro level. I assumed the secondary value was that -- since Stripe had intimate knowledge of your store, revenues, cash flows, correlations to customers -- that they could better price your loan and give you a more competitive rate on the loan.
• jakelazaroff 7y ago
  Isn't this inherent in a fixed fee, though? The faster you pay it off, the higher your effective APR will be. Whereas with a traditional loan your APR is fixed, but you end up owing more money the longer you take to repay it. Seems to me like they're targeting businesses that do not meet your assumption of high sales volume.
  • buildawesome 7y ago
    They're not not targeting higher sales volumed merchants. It just happens that more lower volume merchants use working capital advances to boost their free cash flow or invest it into something that will net more profit even at the cost of a discount rate.
• tempsy 7y ago
  How does this offering compare to Square? Square Capital has been around for years now.
  • edoceo 7y ago
    And PayPal and CapitalOne and loads of others, Stripe has nothing new here - just an old product to a new(ish) segment they have a direct line to
• Spooky23 7y ago
  Are factors ever a good deal?
• pc 7y ago
  [Stripe cofounder.] > But one thing strikes me as odd about this whole arrangement. The better a business performs, the quicker it is able to repay the loan, and the higher its effective APR becomes! It's essentially a prepayment penalty in disguise. So you'd better make sure the loan doesn't help your business too much, or you'll end up getting hosed by the loan fee. Yes, this is right -- if your business suddenly starts doing a lot better, your effective APR will be higher. What we heard overwhelmingly from customers, though, is that the downside risk of credit obligations they can't meet (liquidity problems are asymmetrically damaging!) substantially outweighs the theoretical "risk" of a higher effective APR caused by significant outperformance in the business. (Stated differently, we're taking the risk of your business underperforming, in return for you paying us back somewhat faster -- but still at a capped rate -- if things go better than you expect.) I think the model we have makes more sense for most businesses. But there's no dogma; we'll certainly revisit this over time if we find that a lot of customers seek a different risk profile.
  • iambateman 7y ago
    This is such a great response...different customers have different needs, and sometimes covering downside matters more than optimizing interest rate in the best-case scenario.
  • laurentb 7y ago
    In this case, then surely showing a calculator straight on the page allowing people to see what APR they would get based on their payment/sales configuration would make the whole process more transparent and easier to understand by people who might not be savvy enough to understand the nuances then?
    • willyg123 7y ago
      I have worked in the small business lending space before. Stripe cannot price in terms of APR because legally, it is not a "loan". It's a purchase of future receivables. If it was a loan, the APR would be considered usurious in most states.
• ryanmonroe 7y ago
  It took you less than 30 mins from the time this was posted to calculate the APR for two possible repayment schemes and compare that to loans available elsewhere. I'm not seeing the problem. I think it's fair to presume that businesses in the market for a loan will be at least as capable of understanding the loan structure as you, some internet commenter with no personal financial interest in the issue, were with less than a half hour of time.
  • lotsofpulp 7y ago
    >I think it's fair to presume that businesses in the market for a loan will be at least as capable of understanding the loan structure as you, some internet commenter with no personal financial interest in the issue, were with less than a half hour of time. This is not true in my experience. A lot of people just wing it through life without doing or being able to do any calculations. Not that it excuses them.
    • deleted 7y ago
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• ergothus 7y ago
  > It's essentially a prepayment penalty in disguise. I can see that. But put another way, it's a flat fee. No disguise. I see issues with you being able to get better rates elsewhere, but by calling it a fixed fee instead of using an APR with fine print saying there's a prepayment penalty, I see the OPPOSITE of disguise.
• uerobert 7y ago
  This is what is known as Merchant Cash Advance (MCA) https://en.wikipedia.org/wiki/Merchant_cash_advance https://en.wikipedia.org/wiki/Merchant_cash_advance, nearly every business with at least $20k credit/debit card sales a year has access to through their payment processor, bank, or companies that specialize in that sort of arrangement, of which there are tons. It is not a loan, what you are doing is basically selling your future card sales at a discount.
  • ksec 7y ago
    Is there a similar term for Cash Receivables not from Credit / Debit Card but from Business to Business 30 Days credit?
    • unilynx 7y ago
      Factoring ? https://en.wikipedia.org/wiki/Factoring_(finance) https://en.wikipedia.org/wiki/Factoring_(finance)
      • clairity 7y ago
        factoring comes in different flavors too. for instance, you can flat-out sell future aaccounts receivables (at a discount, so it has an imputed interest rate), or you can use it as collateral for a loan (with an explicit interest rate).
    • toasterlovin 7y ago
      Asset Based Lending is the blanket term for borrowing against receivables and/or inventory: https://en.wikipedia.org/wiki/Asset-based_lending https://en.wikipedia.org/wiki/Asset-based_lending
• acd10j 7y ago
  I think this is good model, Good performing business always have option of taking loan from alternative places instead of Stripe at better rate. Fixed fees no compounding helps businesses avoid debt trap. Which is a reason of so many business failures.
• downandout 7y ago
  For instance, suppose I take out a $25K loan with a $2.5K fixed fee. Now 15% of my sales go toward repayment. Let's say I pull in a little over $30K in sales a month. The loan will be repaid in about six months, and my effective APR is 20%! Might as well put it on a credit card! Not everyone has a credit card with a $25,000 limit on it. That really is the point of factoring future receivables like this. Stripe has visibility into your income that a traditional lender does not have, and can use this data to make loans that traditional banks and credit card companies would not make. That has value to people with more limited credit options than you apparently have, and is well worth the fees that Stripe is charging to the businesses that need it.
• pmart123 7y ago
  Form my recollection, Square launched something very similar a few years ago?
  • nspady 7y ago
    That is correct. Similar model for repayment based on % of sales https://squareup.com/us/en/capital https://squareup.com/us/en/capital
• ummonk 7y ago
  It sounds like it is closer to equity than to debt.
• subpixel 7y ago
  Help me understand why I care about effective APR in a scenario where it has no impact on the amount I am charged? The customer for this product is agreeing to a fixed amount of interest in the form of a “fee” and nothing increases that fee. A customer who wants $25,000 for less will get a line of credit, but will then risk their assets as collateral.
• heliodor 7y ago
  > an interesting way to make it hard to compare It's simply a side effect of the non-typical structure of the loan. The loan structure is a new offer for the market an aligns with the customer's business needs for the first time ever. Saying you can get another loan elsewhere is incorrect for a certain segment of businesses. Talking of APR comes from a saver mindset on a fixed budget, which is what people do, not corporations. Corporations focus on generating money first, and optimizing last.