Restaurant delivery platform DoorDash announced the launch of DoorDash Capital, designed to provide financing and business working capital to restaurants participating in the DoorDash platform. Often referred to as a merchant cash advance, DoorDash has partnered with fintech B2B lender Parafin to pre-qualify DoorDash restaurants for a loan amount based on the restaurant’s daily sales with DoorDash. The loan is repaid as a percent of daily sales, typically 10%, deducted right from the merchant’s bank account and with a repayment term of one year or less. Parafin is a new fintech lender that specializes in providing working capital to platform participants in marketplaces, vertical SaaS applications, and service platforms like DoorDash.
Beginning with the financial crisis of 2008, banks have abandoned traditional small business lending and have pushed business clients to card-based revolving products that are underwritten primarily based on the credit score of the business owner. The lending void that banks created in the market was filled quickly by merchant cash advance lenders that operate similar to receivables factors in commercial markets. Using credit card processing statements to document daily sales, lenders would provide working capital that would be repaid on a daily basis from the merchant’s credit card deposits. While a personal guarantee from the owner is usually required, the owner’s credit score is typically not a factor in underwriting the advance. Once considered “hard money,” the merchant cash advance industry is now a mainstream source for businesses in all vertical markets that need capital to invest in the growth of their business with an installment-based repayment schedule that is tailored to the peaks and valleys of their sales.
Overview by Don Apgar, Director, Merchant Services Advisory Practice at Mercator Advisory Group
