I hope to one day open some businesses and be cursed with high performance and pay a penalty to stripe.

I wonder if the correlation might be age, since it seems to me that younger people try to avoid bullshit and seek out authenticity (giving or receiving) moreso than older generations, which were embedded in more traditional business models across all industries. (I could be completely wrong about this being related to age or generation, though; totally guessing. Authenticity does seem to be a universally growing trend.)

I thought the comment was apt.

E.g. You charge a 10% upfront fee for the loan, and repay at a 10% rate, from the perspective of the company they’re actually paying 12.9% to Stripe during repayment.

If you could pay just the 10% or even if you just got a .5% reduction to 12.4% overall going to Stripe during the repayment period, it becomes more of a win-win and a nice customer loyalty type bonus.

(I find myself guilty of fanboying over certain musicians and founders sometimes, too, but keep in mind people on the receiving end of it sometimes feel automatically uncomfortable, even if you're saying things they like to hear.)

Stripe reduce their margin slightly on payments - but it makes for a much more compelling sell to potential borrowers.

Let me go back 12 months, pretend I took a loan of $X amount at Y date and simulate the repayment based on a customers actual historical data.

Interesting. From this perspective, Stripe is actually getting into the factoring business: https://en.wikipedia.org/wiki/Factoring_(finance)

As the borrower this loan is significantly de-risked since there aren't any dreaded monthly payments you must make.

Here's my attempt at a quick interest calculator for Stripe Capitals loans: https://docs.google.com/spreadsheets/d/1RH9PpJ9kdB7X4xcZvqb7...

https://connect.calcapp.net/?app=atzggn

Also, you don't have to duplicate the spreadsheet to make it editable, you can just use it straight away.

(Disclaimer: I created it with Calcapp, which is a SaaS product I built.)

I don't agree with how you say that 10% is the Quoted Interest Rate, because Stripe isn't doing that. They are saying they have a fixed fee. "Interest rate" means it compounds.

Ahh you caught the mistake with the interest periods! Thanks!

How does that make any sense?

But you're probably right in this case - Stripe likely include their fee in the monthly payments - updated the sheet.

Appreciate the feedback!

In short, you’re charging the highest interest rate to those whose businesses do better than you expected and the lowest rate to business who underperform your projections.

As such, you’ve created a financial incentive to underperform, and are entering this business of lending money by literally penalizing the least risky borrowers and rewarding the riskiest borrowers.

When you incentivize something you get more of it.

Your borrowers know their business better than you, and you’ve provided them with a mechanism to exploit that asymmetry in information.

You sort of have to assume that your incentives will be effective: the customers who have the most reason to believe they are growing faster than baseline will avoid your product and those who are pessimistic will embrace it, greatly increasing your default rate.

if you have reasons to believe that you can grow faster than "the baseline", it makes sense to use that evidence to borrow from a traditional bank. If you are undertaking a risky business move, the bank will not want to lend you the loan, and this model stripe has is going to be the next best thing.

Having a stripe loan would make me, as a successful business owner, make that move much sooner.

All that gives pretty good dataset for building predictive models that tell how the business will do. These models could be actually better at predicting the future than individual business owner (on large population). Stripe has information about the past performance of many similar businesses while the owner just knows about his.

Also need to remember that business owner is not just optimizing for low APR. He should be still making money through the sales. So hopefully in total there’s still the financial incentive to have as good sales as possible.

What is crazy, is how eerily similar Patrick's response is with the Payday Industry's response about why Payday Loans are good for consumers.

>the downside risk of credit obligations they can't meet ... substantially outweighs the theoretical "risk" of a higher effective APR.

"The $15 cost of a $100 payday loan also pales in comparison with the lost income when a car is out of commission and a job lost. Good payday lenders clearly disclose their loan terms and conditions, including the dollar amount of any fees and the APR."[1] Payday loans are clearly bad for the consumer, even as much as the industry tries to defend it.

[1]https://www.americanbanker.com/opinion/why-payday-loans-are-...

The better analogy would be a fixed-cost loan with variable installments based on your income- a much, much friendlier loan structure for consumers.

What makes payday loans unaffordable is their structure, more than their cost. In California, a typical payday loan goes like this:

1- You write me a $300 check and date it for two weeks from now (when you get paid)

2- I give you $250 in cash

3- Two weeks later, I cash the check

If you had to borrow $250, what are the chances that you have $300 left over on your next paycheck? Zero. So really, it's:

3^- You come back to the store and say "don't cash that check, I'll get hit with a $25 overdraft fee."

4- I say "ok, give me $50 and I'll move your due date back 2 weeks."

5- You say "phew, thank goodness!"

6- Two weeks later, goto 3*

So the one-time payment is what makes it horrible. Even if they charged 0% APR and all you had due was $250, you'd still be hosed. An installment loan, though, where you pay $50 every two weeks for N months is clearly better, as proven by step 4 here.

I don’t think this is the case. Payday loans compound interest, don’t they? You end up owing more money the longer you take to pay them off. With this, you only ever have to pay back the advance and fixed fee no matter how long it takes.

SBA loans have better rates, but require more work. I particularly like the American Express model, where they extend credit to pay a merchant invoice directly. You repay the credit in 30/60/90 days and you pay 12% (which used to be 9%).

California has light regulation in the form of disclosures similar to those for consumer credit. CA is also the only state that requires any licensing but the license is for the company, not for any of the brokers, and is super easy to obtain.

But I worry that it's vulnerable to bad people.

Got a hefty personal bill coming up, and you're pretty confident your SaaS business will be dead within 6 months but Stripe has no way of knowing based on current numbers?

Thinking of getting a divorce (startup or marital)... maybe time to grab the largest advance possible before your soon-to-be ex(-co-founder) realises?

The problem is that even if only 1% of Stripe's customers might match these kinds of profiles, that same 1% might be taking 20% of the Stripe Capital advances.

You worry too much for them, that's why they charge a hefty interest fee. A certain % of non-payments or partial payments are built in.

> Decent fraud model

Yeah, I would think so.

In a regular loan, the bank makes you bend over backwards to prove you’re risk free, and then charges you interest to give you the loan anyway, and you’re on the hook to pay back a constant amount whether you’re under or over performing, at risk of going bankrupt.

* What does the entry level look like? This appears to be a decent way to launch a hobby into a business, but what is the income you're looking for? Does my app need to gross 1k/mo before it's an option?

* What are the term limits? Or what if the app is shutdown, or underperforms?

This appears to be a good way for people to launch hobby projects into full businesses, I was just wondering if that was indeed the case.

You could charge a flat interest rate but require the customer to pay you back a minimum of x% of their stripe volume per month.

Allow the customer to pay a higher percent of volume if they choose, and reward them for paying you back by lowering the effective rate.

I somewhat agree with the point the GP made, the fee structure is very much an early repayment penalty in disguise.

I mean, if you have several payment methods on your website, one resource to improve your APR could be to make more promiment other payment methods for the duration of the loan.

For businesses that expect a slow payback, the APR isn’t nearly that much.

I’d use it to reserve EC2 instances, for example. I get a 40% cost reduction on AWS over 3 years, and I’d expect to take that long to pay back the capital. The APR would be fine in that case, and I make 20% more than I would otherwise.

That's a great idea!

Just be honest, you don't want to deal with the regulatory issues that surround offering a fair compounded interest rate.