It made sense when Square started its own lending arm to support the small businesses using its card readers. And when Stripe decided to build upon its payment processing tech to launch financing through Stripe Capital, no one blinked an eye. But what about the company delivering burritos, pizzas and ramen to your house?
San Francisco delivery company DoorDash recently launched DoorDash Capital, which enables its merchant partners to get cash advances for business operations and pay for them via their earnings on the platform. The move is part of a larger trend of Bay Area companies expanding their offerings to financial services in order to keep customers within their ecosystem and take business from traditional providers like banks.
“It’s all about customer acquisition and retention,” said Joanna Karger, a 20-year veteran of lending startups and co-founder of Sunfish, a San Francisco-based fertility treatment financing firm. “We’ve become so obsessed with efficiency and having things very quickly that it has become appealing to offer up a frictionless experience around lending with a trusted brand.”
DoorDash is the country’s largest online food delivery company, with more than 50% of the market in the U.S. Adding financing options could help the company build on existing customers relationships, analysts said, particularly by serving businesses without easy access to financing.
Through DoorDash Capital, businesses can be pre-approved for an advance based on their sales history and are able to modify and customize terms through the platform. Once accepted, the merchant can receive the cash in a day or two.
Instead of interest like a typical loan, the cash advance comes with a fee averaging around 11% of the funding amount, which is paid back automatically through a percentage of the businesses’ daily DoorDash sales. The company estimates that most businesses will be able to pay back the cash advance within one year.
“As a restaurant, you don’t really want to go a bank, it's often a complete nightmare and they might not want to talk to you because the industry is so risky,” said Laurie Thomas, the executive director of the Golden Gate Restaurant Association and the owner of Rose’s Café and Terzo. She said her cash advance offer through DoorDash was equal to around two months of her sales on the platform.
There’s some irony in DoorDash providing a financing lifeline for restaurants, some of which have accused the company of predatory fees that make it hard for them to operate profitably. The SF Board of Supervisors last year imposed a permanent 15% cap on delivery service commissions, but DoorDash teamed up with its competitor, Grubhub, in a lawsuit to block the measure. That case is still in litigation.
DoorDash’s service is being enabled by a partnership with San Francisco startup Parafin, which was founded in 2020 by a group of ex-Robinhood employees. Parafin has raised $34 million in venture funding and $150 million in financing from Atalaya Capital Management and Jefferies Funding for its lending products.
“The speed and affordability is a huge advantage for these small businesses, and that comes from the existing relationships between Doordash and these merchants,” said Parafin co-founder Vineet Goel, adding that the company aimed to expand eventually into other services like credit cards.
A potential downside, however, is the risk of lowering barriers to lending, which can lead to questionable practices. A number of local digital financing companies, like LendUp and Oportun, have been dinged by regulators for misrepresentation or abusive lending practices.
Cash advances are often put in the same category as payday loans, an industry that is rife with abuses. But Goel said Parafin’s fees are much less than competitors’ rates. The startup underwrites its loans based on sales and revenue rather than credit scores, which it touts as a way to directly tie the health of a business to its access to capital.
“Providing easy access to capital we think is key to the answer of how these businesses will continue to thrive in the post-Covid era,” Goel said.
According to a report on small business lending from the Federal Reserve, around 8% of small businesses applied for a merchant cash advance, compared to 89% of businesses seeking a loan or line of credit. The success rate for a cash advance, however, was among the highest recorded, with 84% of small businesses approved for the financing option.
Restaurants across the country have struggled under the weight of nearly two years of pandemic restrictions, sky-high inflation and a general decline in foot traffic.
While the $28.6 billion Restaurant Revitalization Fund unveiled last year aimed to help these businesses, the enormous demand depleted the funds within three weeks. Calls for a new round of federal funding have not materialized into concrete aid.
In the meantime, restaurants continue to struggle.
An Independent Restaurant Coalition survey found that 86% of independent restaurants and bars that didn’t receive grants during the first run of relief are at permanent risk of closure. In San Francisco, Covid restrictions continue to take their toll, with restaurant reservations down around 63% from pre-pandemic levels, according to OpenTable.
“I think companies like DoorDash realize they need restaurants to stay in business to buy their services,” Thomas said. “As long as nobody is misled or pressured into something they don’t understand, then it's not a problem. They’re providing a service that I’m sure they’ve heard is a needed one.”