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03-19-2014, 03:52 PM #1
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I don't think you are completely wrong with the argument you are making about cash advance companies funding behind a traditional loan, but there are a few things you need to realize are different. First, a traditional loan is typically secured against a piece of collateral that protects the lender. If I were to take a loan against my home or a piece of equipment equal to the value, I cannot go out and get another loan against that same thing that I no longer have any equity in. The terms of the loan may state that I cannot receive additional debt which is where you are partly correct in comparing the two.
A cash advance in the traditional sense is a purchase of revenue. When someone secures a right to receive a percentage of that revenue, and in contract is not allowed to sell their revenue to anyone else, you fall into a different situation than when you look at more traditional types of financing.
I think the main difference though, is that when the first position funders are financing these businesses, they are taking into consideration the existing debt on the business and calculating what that business can reasonably afford to pay back without putting them in a compromising position with their other lenders, payroll, taxes, etc. Does work every time? No. But the model is built to work across the spectrum for the most part. Not to generalize all of the "stackers" but it appears to me that for the most part, they are financing businesses with no regard for what they can and cannot reasonably afford to pay back to them, the other funding companies and other forms of debt while maintaining the ability to operate their business for the long run.
Just my two cents.
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