Tuesday, April 14, 2009

Where is Payday in Advance America's Business Model?


After suffering recent legislative setbacks in Oregon and New Hampshire that imposed annual rate caps on payday loans, Advance America (AEA-$3.82) could come out ahead on a ‘Payday Reform Bill’ working its way through the House of Representatives in Washington D.C., according to its critics. Consumer lending advocacy groups decry that the federal legislation being penned by Illinois Representative Luis Gutierrez will ostensibly legitimize existing fee structures of the payday loan industry.

It remains the stated position of Advance America that “any legislative or regulatory action that severely restricts or prohibits cash advance and similar services, like the Gutierrez bill, if enacted, could have a material adverse impact on the company’s prospects and forward results of operations.” To that end, the company entered into a one-year consulting arrangement with Tony S. Colletti, a member of the Board of Directors, whereby Colletti will be paid monthly consulting fees in the amount of $5,000 and $10,000 for his lobbying efforts on Advance America’s behalf in Illinois and Washington, D.C., respectively, according to the
2009 proxy regulatory filing.

Unlike pawn companies, Advance America only give loans to people that are employed. Still, as a percentage of total revenues, provision for doubtful accounts eats up about twenty cents of each dollar in gross profit, on average, at each of its 2,797 centers. However, the bulk of operating costs remain rooted in payroll and occupancy costs. Management’s claim that the company cannot survive as a going concern with a legislated ARP ceiling cap of 36 percent on cash advances, in our opinion, speaks more to an internal inability to control operating costs at the center level than to payday advances costs, such as default risk.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

3 comments:

jte81954 said...

David,

It seems as if you have a very limited understanding of this business. Your conclusion that implies that better operating controls would allow them to be profitable when charging 36% apr is naive and uninformed, in my opinion, and hurts an industry whose customers are happy. Monthly loan losses alone are 25% of revenue. A 36% apr implies (approximately) 3% monthly revenue on assets. They need to charge about 8% per month (approx. 100% apr) just to pay off loan losses. (Do the math: 2 $100 loans for 2 weeks at $15 each produces $30 in monthly revenue and $7.50 in loan losses----that's a loan apr of 360% and a loan loss "apr" of 90%.) To alter their business model to minimze loan losses results in a product consumers don't want and financial companies won't offer because it is simply too costly and takes too long to complete such a small loan.
Other operating expenses for most of these companies are incredibly low: about 750 sq ft of cookie cutter buildout in strip centers and staffing that is matrixed with a mature store having 2 employees and operating systems that are streamlined and centralized. Please do your homework on this one or at least think about how silly your point is. A 36% apr would allow them to charge $1.50 on a 2 week $100 loan!!!! It costs me more than that to take my own money out of an ATM, let alone borrow it from someone else.

JTE

Anonymous said...

Dear Mr. Phillips:

For someone who reads 10-Q's so thoroughy, you show an extraordinary amount of ignorance regarding payday loans. Specifically you say:

"Management’s claim that the company cannot survive as a going concern with a legislated ARP ceiling cap of 36 percent on cash advances, in our opinion, speaks more to an internal inability to control operating costs at the center level than to payday advances costs, such as default risk."

Wrong wrong wrong. A thousand times, wrong.

The average national default rate for payday loans is 6%. The average store operating expense is about $7000. A payday lender cannot make money at anything less than $15 per hundred borrowed. And that assumes the store has the kind of volume needed to even survive.

You can educate yourself more on the industry at
paydayloanfacts.org

It incluces the economics of an average store.

Business Cash Advance said...

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