The food delivery business has exploded ever since the pandemic began and restaurants closed for indoor dining. While most, if not all, restaurants are now back open, many customers still choose the safety of their home for their meals. Whatever your preference is as a consumer, restaurants are working to get you their food in the fastest, easiest, and safest way possible. Some restaurants already had traditional delivery services in place, or had already partnered with third-party delivery companies like GrubHub, UberEats, or DoorDash to provide this service. Others had to work quickly to either utilize a third party or hire drivers themselves. While there are pros and cons to each method, and many strong opinions in terms of which is best for small businesses, that is not what I want to focus on. What's important is how widely used these third-party delivery services have become and why that ubiquity plays into whether main street businesses remain viable for the long term.  

DoorDash has recently gotten into the merchant cash advance business. Based on my cursory research, it appears to be the lone third-party delivery service breaking into this kind of financing business. For the uninitiated, merchant cash advances are a way for small businesses to get cash fast, as the services typically extend money to companies based on their potential future sales. So if the business closes, the financier is out of luck, as these arrangements typically don't require personal guarantees of collateral unless stated otherwise in the contract. 

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

It's true that at first blush, they do not sound menacing. MCA services advertise only having to pay if you're selling, no interest rates, and no pre-payment penalties.

Here's what really happens:

The company offers to "advance" you $100,000 and says that at the end you'll owe them $130,000. There is no interest rate but there is a fixed daily or weekly fee that is calculated based on your historical sales (which is why the fee is not advertised but is usually around 8 percent, 10 percent, or 12 percent). This is how the financier will be repaid. In this case, the company has historically had around $4,200 in sales a day, meaning its account would automatically be debited $500 a day. The expectation is that it will take you a year to pay back the money. Without requiring collateral or personal guarantees it would seem DoorDash--or any other merchant cash provider--is defenseless if you close up shop, but that's not the full story.

When calculating these advances as an APR, they can quickly skyrocket into double and triple digits (this one being 76.92 percent). The high costs combined with the daily/weekly repayment schedules can create major cash flow problems for a business. Often, small businesses soon need to take another advance, starting a debt cycle that is nearly impossible to escape. The cherry on top? Technically these are not loans so there is no federal oversight and there is no benefit for paying them off early. In fact, if you paid the above advance off in six months versus 12 months, that would be an APR of 153.84 percent! That's why these companies advertise that there's no pre-payment penalty; it benefits them, not the borrower.

My worry is that small business owners will see the now familiar DoorDash name and think this is a viable, safe option. Predatory lenders can go by many names, but the goal is always the same: Benefit the financing company, not the borrower. Of course, the language used to describe merchant cash advances by the finance companies who provide them is always eloquently disguised. Whether it be in the fine print or lure of "only paying if you're selling," they are all the same. It is of course disappointing to see yet another company choosing profit to the detriment of struggling small businesses. To wit, DoorDash reported this month that it generated $1.3 billion in revenue for the fourth quarter of 2021. That was a 34 percent jump from a year ago.

With this in mind, my one ask is before you ever accept a merchant cash advance: Exhaust all other options first and speak to a financial expert. There are often other options available, that you may have never even heard of before, that a qualified business or financial advisor could help you get.

DoorDash executives declined to be interviewed on the phone for this article, and were only willing to answer questions over email. When asked: "If a client of yours takes DoorDash Capital, and their business stays at exactly the same volume, what is the rate they can expect to pay based on a APR basis?" Their response did not answer my question: "The average fee is generally less than 11 percent of the offer amount, but the rate is dependent on the merchant's qualifications. It's a one-time fee of the advance offer amount, paid over the duration of the advance. It's also important to note that our merchant partners pay back the advance in terms of percentage sales versus a fixed weekly/monthly amount, which gives them greater flexibility during slower periods." This line is a typical defense of the merchant cash advance industry. 

I just deleted DoorDash from my phone. I would rather get my lazy rear end in the car, go pick up my food, then support a company that chooses to play in the merchant cash advance game.