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[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, a

• 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.
    • deleted 7y ago
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    • zonethundery 7y ago
      In most states aren't loans for commercial purposes (or to certain kinds of entities [c-corps, llcs, partnerships] assumed to be commercial) are exempted from usury restrictions?
    • webmaven 7y ago
      > legally, it is not a "loan". It's a purchase of future receivables. Interesting. From this perspective, Stripe is actually getting into the factoring business: https://en.wikipedia.org/wiki/Factoring_(finance) https://en.wikipedia.org/wiki/Factoring_(finance)
    • GordonS 7y ago
      As @pc has been active here, I'd love to hear from him on this - in legal terms, according to your lawyers, is Stripe Capital considered a loan?
      • edwinwee 7y ago
        I'm definitely not a lawyer, but I work at Stripe. Capital works a bit differently. Yes, we offer loans, but we also offer cash advances (with a focus on loans right now). They're pretty similar—repayment via your sales, fast funding, a fixed fee with no interest, and a streamlined application, to name a few things. When we make an offer, we’ll make clear if it’s actually a loan or cash advance (and what that means for your business).
  • pc 7y ago
    Yeah, we've iterated a lot (and done a lot of customer interviews) to try to figure how to make the presentation as simple-to-understand as possible. It's hard to show a (de facto) APR precisely because it will depend on your subsequent sales. (And showing it could even be confusing because there's no compounding with our fee structure.) All that said, one of the key questions we care about when speaking with customers, prospective and current, is "Are the terms clear?". And if coming up with some kind of APR-equivalent modeling thing helps achieve that, we'll do it!
    • robryan 7y ago
      The issue is comparison, a lot of customers are going to have to build their own spreadsheets to try and compare the terms with alternatives. What you have is basically the industry standard for this form of capital, but definitely an opportunity to do better with transparency.
    • tomnipotent 7y ago
      Provide a tool that show's the loan repayment based on historical data e.g. a scenario. Let me go back 12 months, pretend I took a loan of $X amount at Y date and simulate the repayment based on a customers actual historical data.
  • snorkpete 7y ago
    Why is everyone using the term APR? It's not compound interest. If I take 2 or 3 or 5 years to pay back, I don't get charged more. The cost of the loan is fixed at 10% of the principal, regardless of how long you take to pay it back. There's no compounding, so using the term APR makes it sound nefarious when it isn't.
• deleted 7y ago
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• christophilus 7y ago
  Totally off-topic, but thanks for Stripe. It's a game-changer and has made my life as a developer so much easier.
• BukhariH 7y ago
  I really love what Stripe are doing here - whilst yes the the APR can be quite considerably higher. That's fair since Stripe are taking on quite a fair bit of additional risk. As the borrower this loan is significantly de-risked since there aren't any dreaded monthly payments you must make. Here's my attempt at a quick interest calculator for Stripe Capitals loans: https://docs.google.com/spreadsheets/d/1RH9PpJ9kdB7X4xcZvqb73aQV5aUiMTahwYq2ngPSf70/edit?usp=sharing https://docs.google.com/spreadsheets/d/1RH9PpJ9kdB7X4xcZvqb7...
  • hammock 7y ago
    You didn't include the fee in the payback, and you are confusing monthly with annual interest rates
    • BukhariH 7y ago
      Is the fee not charged upfront - that's why I excluded it from the payback period. Ahh you caught the mistake with the interest periods! Thanks!
      • hammock 7y ago
        >Is the fee not charged upfront How does that make any sense?
        • BukhariH 7y ago
          It's pretty common to have a fee for a loan that's paid upfront like an arrangement fee. But you're probably right in this case - Stripe likely include their fee in the monthly payments - updated the sheet. Appreciate the feedback!
  • davidpolberger 7y ago
    I created a version with sliders, making it easier to experiment: https://connect.calcapp.net/?app=atzggn https://connect.calcapp.net/?app=atzggn Also, you don't have to duplicate the spreadsheet to make it editable, you can just use it straight away. (Disclaimer: I created it with Calcapp, which is a SaaS product I built.)
• hammock 7y ago
  What's stopping a business from getting a loan and then transferring the funds - and directing part/most of their future receivables - to another entity, in order to drag out the loan term?
  • icelancer 7y ago
    Commercial credit markets are incredibly tight, which is the biggest thing for loans under 25k.
  • mod 7y ago
    There's a minimum amount due.
    • hammock 7y ago
      A minimum payment would set a floor on the effective interest Stripe earns, but still doesn't seem to solve adverse selection entirely if they are expecting the average payment to be much higher.
• antaviana 7y ago
  Is there any expectation or obligation that all proceeds of the business are handled by Stripe? I mean, if you have several payment methods on your website, one resource to improve your APR could be to make more promiment other payment methods for the duration of the loan.
  • mNovak 7y ago
    Probably they're assuming a business which is profitable enough for them to extend credit isn't going to mess around too much with how they conduct said business, in order to save a few hundred dollars
• kryogen1c 7y ago
  Just popping in to say this is one of the most impressive C-level replies i have ever seen. Straight acknowledgement of the criticism from OP, but explains the reasoning and demonstrates the benefit to both customer and stripe. Closes with willingness to change if business model doesnt produce results matched by test market. Doesnt read as defensive or marketing buzzwordy, just straightforward and simple. I hope to one day open some businesses and be cursed with high performance and pay a penalty to stripe.
  • owens99 7y ago
    It’s a solid response. Not sure if it’s worth pointing out but you are totally fan boying PC and making his response out to be way more than it is.
    • drinane 7y ago
      Just poppin' CAPS
    • meowface 7y ago
      Regardless of the particular response or the company, it's good to see transparency and lack of bullshit exec speak from C-levels. It might be more common among tech startups, but plenty of non-tech startup founders do it too. I wonder if the correlation might be age, since it seems to me that younger people try to avoid bullshit and seek out authenticity (giving or receiving) moreso than older generations, which were embedded in more traditional business models across all industries. (I could be completely wrong about this being related to age or generation, though; totally guessing. Authenticity does seem to be a universally growing trend.)
      • deleted 7y ago
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      • workaway 7y ago
        I think most executives could post a coherent and informed response online (with some notable exceptions), but older and more established companies tend to have layers of lawyers and PR specialists in between the CEO and the public.
• zaroth 7y ago
  It would a nice benefit if you could discount the credit card processing fees during the repayment period. E.g. You charge a 10% upfront fee for the loan, and repay at a 10% rate, from the perspective of the company they’re actually paying 12.9% to Stripe during repayment. If you could pay just the 10% or even if you just got a .5% reduction to 12.4% overall going to Stripe during the repayment period, it becomes more of a win-win and a nice customer loyalty type bonus.
  • pc 7y ago
    Interesting idea!
    • chirau 7y ago
      Patrick, is that you? I just wanted to say that I admire all that you guys are doing at Stripe. My favorite company currently. Please keep up the standard, even when you do eventually go public. I feel much better now that I have got that off my chest. Downvotes in 3..2..1
      • meowface 7y ago
        Please don't mention downvotes in your post. It's like compliment/upvote-baiting. (I find myself guilty of fanboying over certain musicians and founders sometimes, too, but keep in mind people on the receiving end of it sometimes feel automatically uncomfortable, even if you're saying things they like to hear.)
  • davidandgoliath 7y ago
    That's far more compelling. If a % of the ~$15k+ we give stripe annually (via cc processing fees) went towards loan repayment, we'd likely have perpetual loans open :)
  • GordonS 7y ago
    Ah, now this is a great idea! Stripe reduce their margin slightly on payments - but it makes for a much more compelling sell to potential borrowers.
• a13n 7y ago
  I think if you can make your model work with a competitive APR then you'll take over the world. At 20% APR I would guess it's just not worth it for the majority of businesses (ourselves included).
  • sudhirj 7y ago
    It’s a 20% APR only if you’re paying it back really quickly - and if you’re generating so much revenue that you’re going to pay it back quickly why would you need the money at all? For businesses that expect a slow payback, the APR isn’t nearly that much. I’d use it to reserve EC2 instances, for example. I get a 40% cost reduction on AWS over 3 years, and I’d expect to take that long to pay back the capital. The APR would be fine in that case, and I make 20% more than I would otherwise.
    • aeorgnoieang 7y ago
      > I’d use it to reserve EC2 instances, for example. That's a great idea!
• penagwin 7y ago
  I have two questions for you, so I figured I piggy back off this comment. * What does the entry level look like? This appears to be a decent way to launch a hobby into a business, but what is the income you're looking for? Does my app need to gross 1k/mo before it's an option? * What are the term limits? Or what if the app is shutdown, or underperforms? This appears to be a good way for people to launch hobby projects into full businesses, I was just wondering if that was indeed the case.
  • harshadante 7y ago
    We underwrite our loans based on factors that include your payment volume and history on Stripe. There’s no strict cutoff on how much sales you need to be eligible, but for now we require some payment history with us before we can qualify you for a loan. Eventually, we hope to be able to offer capital to virtually every business on Stripe—even those just getting off the ground!
• juliusmusseau 7y ago
  Very neat idea. But I worry that it's vulnerable to bad people. Got a hefty personal bill coming up, and you're pretty confident your SaaS business will be dead within 6 months but Stripe has no way of knowing based on current numbers? Thinking of getting a divorce (startup or marital)... maybe time to grab the largest advance possible before your soon-to-be ex(-co-founder) realises? The problem is that even if only 1% of Stripe's customers might match these kinds of profiles, that same 1% might be taking 20% of the Stripe Capital advances.
  • onetimemanytime 7y ago
    >>"But I worry that it's vulnerable to bad people." You worry too much for them, that's why they charge a hefty interest fee. A certain % of non-payments or partial payments are built in.
    • jonathonadler 7y ago
      They probably have some data science and a decent fraud model to keep risk within an acceptable band too.
      • onetimemanytime 7y ago
        either way it's a business move, they either win or loose. If they get screwed, they'll end it and take a loss. Part of business, they're not doing it as charity.
      • softawre 7y ago
        > Stripe > Decent fraud model Yeah, I would think so.
  • peripitea 7y ago
    I'm not an expert on small business loans, but I would guess that incentives take care of most of this problem. The higher the loan you have, the more cash your business must have been generating in the first place, therefore the higher incentive you have to figure out how to keep it running. There probably aren't too many scenarios where you are both eligible for a material loan from Stripe and yet not highly enough incentivized to figure out how to make the business work to the best of your abilities.
• gr2020 7y ago
  Purely out of curiosity - and you may not be able to, or may not want to answer - but how does a company like Stripe structure this sort of business? Are you making loans right out of your working capital, or do you have separate debt obligations of your own to cover these, or something else? I would imagine this sort of thing is regulated somehow, but I don’t really know... would love to hear whatever you can share!
  • willyg123 7y ago
    Surprisingly, this is a totally unregulated industry on the federal level. Legally, they aren't loans; it's a purchase of future receivables. Google "merchant cash advance regulation" and have your mind blown. California has light regulation in the form of disclosures similar to those for consumer credit. CA is also the only state that requires any licensing but the license is for the company, not for any of the brokers, and is super easy to obtain.
  • harshadante 7y ago
    We’re working with banking partners to originate the loans. We’ll fund some of these loans ourselves, and we’ll also work with investors to help us extend even more capital.
• rizwank 7y ago
  Quick question - does this model expand to multi million dollar advances, assuming the cash flow warrants it?
• arrosenberg 7y ago
  You are 100% correct in that. Whenever I consider this type of capital loan for my small business (physical products) the order of operations is always "Am I going to run out of cash or inventory if I don't use this?" before looking at how good the borrowing rate is. If I overpay on the APR, it's probably a good problem; if I don't sell through, then the bank is suffering with me (as you noted). SBA loans have better rates, but require more work. I particularly like the American Express model, where they extend credit to pay a merchant invoice directly. You repay the credit in 30/60/90 days and you pay 12% (which used to be 9%).
• chasedehan 7y ago
  While at first I saw this announcement and applauded (it seems like something Stripe would be great at administering), the structure of these loans is almost exactly the same as a payday loan, even if the APR is dramatically less. What is crazy, is how eerily similar Patrick's response is with the Payday Industry's response about why Payday Loans are good for consumers. >the downside risk of credit obligations they can't meet ... substantially outweighs the theoretical "risk" of a higher effective APR. "The $15 cost of a $100 payday loan also pales in comparison with the lost income when a car is out of commission and a job lost. Good payday lenders clearly disclose their loan terms and conditions, including the dollar amount of any fees and the APR."[1] Payday loans are clearly bad for the consumer, even as much as the industry tries to defend it. [1]https://www.americanbanker.com/opinion/why-payday-loans-are-good-for-millions-of-people https://www.americanbanker.com/opinion/why-payday-loans-are-...
  • derefr 7y ago
    One would assume that there is a difference between what is a "predatory" offering to irrational individuals, and what is a "predatory" offering to mostly-rational corporations. For the same reason that individuals gambling is considered not-so-sensible, but corporations holding liquidity in the form of investments isn't so much; or the same reason that individuals purchasing on a lease are usually being screwed, while corporations leasing e.g. equipment aren't. Unlike people, businesses don't tend to take these deals if they're sub-optimal for them. If they're taking them, they are usually the best solution, even after all the NPV calculations.
  • bernardom 7y ago
    This is so wrong. A payday loan is due on your next payday, no matter what. This loan flexes the term based on ability to pay. The better analogy would be a fixed-cost loan with variable installments based on your income- a much, much friendlier loan structure for consumers. What makes payday loans unaffordable is their structure, more than their cost. In California, a typical payday loan goes like this: 1- You write me a $300 check and date it for two weeks from now (when you get paid) 2- I give you $250 in cash 3- Two weeks later, I cash the check If you had to borrow $250, what are the chances that you have $300 left over on your next paycheck? Zero. So really, it's: 3^- You come back to the store and say "don't cash that check, I'll get hit with a $25 overdraft fee." 4- I say "ok, give me $50 and I'll move your due date back 2 weeks." 5- You say "phew, thank goodness!" 6- Two weeks later, goto 3* So the one-time payment is what makes it horrible. Even if they charged 0% APR and all you had due was $250, you'd still be hosed. An installment loan, though, where you pay $50 every two weeks for N months is clearly better, as proven by step 4 here.
• richardlblair 7y ago
  While all true statements, anyone who has been anywhere near [brandname] Captial products know the reason why you are offering this structure is to get around lending laws. Just be honest, you don't want to deal with the regulatory issues that surround offering a fair compounded interest rate.
• cj 7y ago
  Why the fixed fee in the first place? You could charge a flat interest rate but require the customer to pay you back a minimum of x% of their stripe volume per month. Allow the customer to pay a higher percent of volume if they choose, and reward them for paying you back by lowering the effective rate. I somewhat agree with the point the GP made, the fee structure is very much an early repayment penalty in disguise.
• CPLX 7y ago
  I wonder if you’ve considered the perverse incentive you’ve created. It may prove fatal to this model. In short, you’re charging the highest interest rate to those whose businesses do better than you expected and the lowest rate to business who underperform your projections. As such, you’ve created a financial incentive to underperform, and are entering this business of lending money by literally penalizing the least risky borrowers and rewarding the riskiest borrowers. When you incentivize something you get more of it. Your borrowers know their business better than you, and you’ve provided them with a mechanism to exploit that asymmetry in information. You sort of have to assume that your incentives will be effective: the customers who have the most reason to believe they are growing faster than baseline will avoid your product and those who are pessimistic will embrace it, greatly increasing your default rate.
  • chii 7y ago
    > the customers who have the most reason to believe they are growing faster than baseline if you have reasons to believe that you can grow faster than "the baseline", it makes sense to use that evidence to borrow from a traditional bank. If you are undertaking a risky business move, the bank will not want to lend you the loan, and this model stripe has is going to be the next best thing.
  • gesticulator 7y ago
    Perhaps, but it’s really only worse looking at it from the APR. The business is still performing better nominally when they outperform so there’s no incentive to do worse on a nominal basis.
  • dylz 7y ago
    Yeah, but at the same time Stripe Capital only lends to people that have history selling on Stripe, and if they're anything like other processors they'll be holding some percent for chargebacks and other stuff anyway, lowering the default risk even if a company decides to take a "loan" and then swap processors overnight as soon as they get the money.
    • londons_explore 7y ago
• heliodor 7y ago
  Most comments talk about APR and look at this from a personal loan point of view, not understanding the dynamics of a business that make this loan structure well aligned with the business's needs.
• sudhirj 7y ago
  This can do with even simpler phrasing - Stripe carries the risk of the business underperforming in exchange for the business carrying the “risk” of over performing. In a regular loan, the bank makes you bend over backwards to prove you’re risk free, and then charges you interest to give you the loan anyway, and you’re on the hook to pay back a constant amount whether you’re under or over performing, at risk of going bankrupt.