DoorDash is getting into the merchant cash advance (MCA) business. The restaurant delivery platform recently announced the launch of DoorDash Capital to provide financing and working capital to restaurants. While this may sound like good news to restaurant owners, merchant cash advances are risky.
If the business cannot pay back the advance, both the business’s assets and the owner’s personal assets may be at risk. If your business is struggling under the terms of an MCA agreement, you need an experienced debt relief specialist at your side. Let’s take a look at what DoorDash restaurants need to know.
What is DoorDash Capital?
The financing unit of DoorDash has entered into a strategic alliance with Parafin, a fintech business lender, to provide merchant cash advances to restaurants that participate in the DoorDash platform. But eligibility is based on sales performance with DoorDash.
It is important to know that an MCA is not a loan, but rather the purchase of future receivables in exchange for upfront, lumpsum cash. The advance is repaid through a percentage of daily sales – typically about 10 percent – directly from the merchant’s bank account. The repayment term is usually 1 year or less, and there is no collateral required.
Why Do Restaurants Need Merchant Cash Advances
Restaurants that have been fortunate enough to survive the Covid-19 pandemic may still be struggling and in need of working capital. If traditional bank loans or lines of credit are not an option, a merchant cash advance can be used to fund all types of projects, including:
Covering Daily Operations
Restaurants often rely on MCAs to fund daily operating costs, such as replacing and updating menus, purchasing new staff uniforms, or promoting the establishment by placing ads or hosting special events to improve sales.
Front-of-the-House-Improvements
A merchant cash advance can also be used to upgrade dining rooms, tables, booths, bars, stools and replace simple items (e.g. plates, glassware, silverware). An MCA can also be used to revise the table layout or add an outdoor dining area, which seems to be a permanent feature even as the pandemic appears to be abating,
Cutting Back of House Expenses
A restaurant can also use a merchant cash advance to focus on back-of-the-house expenses by upgrading water heaters, dishwashers, and cooking equipment to high-efficiency models or making other necessary renovations.
The Risks of Merchant Cash Advances for Restaurants
An MCA allows a restaurant to improve and upgrade without the restrictions that may come with a traditional business loan, but there are risks. Unlike a loan, merchant cash advances are not strictly regulated; a handful of states like California and New York have minimum disclosure requirements.
In addition, an MCA is not based on an interest rate, but rather a factor rate that is expressed as a decimal rather than a percentage. The factor rate is typically in the range of 1.2 to 1.5, but when converted into an APR (annual percentage rate) the figure can climb into the double or triple digits.
This makes a merchant cash advance a very expensive type of financing.
While DoorDash says it does not require a personal guarantee for an offer, merchant cash advances often include a confession of judgment (COJ) whereby the restaurant owner accepts liability for the advance and waives any defenses. This allows the funder to quickly get a court order to seize the business assets in the event of default. In short, a restaurant that cannot repay a merchant cash advance may be forced to close.
The Takeaway
Like other tech platforms, DoorDash is looking for ways to diversify its business model. Whether getting into the merchant cash advance business will benefit restaurants remains to be seen. In the meantime, if your restaurant or small business is at risk of defaulting on an MCA, contact an experienced debt relief specialist immediately.