Merchant lenders carve financing niche between banks, online firms

Breaking up is hard to do — especially when you have to finance it.

Dan Linnen and Joe Vicari had been partners for years, building up a restaurant empire. Linnen owned the Novi outpost of Andiamo Restaurant, the flagship brand in Vicari’s Andiamo Restaurant Group (now Joe Vicari Restaurant Group), and the pair launched a midrange Mexican concept, Rojo Mexican Bistro, in 2008.

But last year, the pair realized they were ready to part ways. Vicari wanted to focus on the future of Andiamo, while Linnen was passionate about growing Rojo.

The solution, in the end, came in the form of alternative financing. Despite an improving economy, individual business circumstances have led certain types of businesses to seek an alternate path to cashing out or giving up equity.

“I wanted to do for Mexican food what P.F. Chang’s did for Asian food,” said Linnen, 49. “I want to deliver Mexican food in a more contemporary environment. Blankets on the walls and sombreros, that’s really what people think of Mexican; they think down and dirty. We wanted to make it family friendly as well as hip and cool for the date-night crowd.”

To do that, Linnen needed to buy the concept — and breakup cash isn’t something that banks are usually keen to lend. Linnen spoke with several lenders, but without collateral, they weren’t interested in the risk. After all, no matter how cushy his chairs or extravagant his kitchens, they’re worth peanuts on the resale market if he defaults.

And even if Linnen had the collateral, small-business lending is still paltry. Less than 20 percent of all loans were approved by big banks in May, according to the Biz2Credit Small Business Lending Index. Small banks had better results, with slightly more than half of applications approved.

So Linnen turned to New York City-based Strategic Funding Source Inc., which makes the kind of loans that banks seem to be allergic to. It specializes in “alternative” financing, also known as merchant cash advance lending.

The company got its start seven years ago, lending against credit card receipts for restaurants and nail salons. Since then, the company, which operates nationally, financed nearly 250 businesses in metro Detroit, with an average loan amount of $29,000 repayable over nine months.

“Banks are all about managing risk,” said Strategic Chairman and CEO Andrew Reiser. “So are we, but banks understand risk in a much different way than we do. Collateral is not what we look for; we look at the cash flow of the business and the personality of the owner and how we can help them grow.”

When Reiser got into the business, few of these lenders existed. But in the wake of the recession, they’ve popped up everywhere, especially online, touting the ability to get small-business owners cash quickly, often within a week of application.