One of the most predominant businesses to use the merchant cash advance is restaurants. Historically it has been next to impossible for a restaurant to get any type of unsecured financing from a bank or other financial institution. So it is no surprise that they were the early adopters of the MCA product.
If you've been any restaurant, especially high-end ones, you might have been the only patron. With virtually every American feeling the economic crunch the first discretionary spending to cut is eating out. As a MCA provider we have definitely seen our clients sales fall for high- and middle-end restaurants while sales at low-end restaurants increase significantly as the consumer spends much less (its a great time to own a little taco shop or pizza joint.)
There are a few bright spots for our gourmet restaurants and their clients. All of those that are surviving have adopted the fixed price menu. This recent article in Restaurant News shares the success stories from restaurants that are thriving with a prix-fixe menu and actually gaining market share.
If your in the business that offers MCA you probably know that most providers are very hesitant to offer new restaurant a contract when the clients need it most. MCA providers need really look at a potential clients operating history. Agents selling the MCA really need to get to know the client and find out the following:
Have sales remained steady over the past six months? If so, the owner is definitely doing something right and will most likely be around for a long time.
Has the owner changed his operations? For example cut costs or added a breakfast serving to increase sales.
What marketing changes has the owner successfully implemented? Offering the fixed price menu or free delivery in the local area are good examples.
Now the agent can submit the client for financing with not just an application and some statements, but submit a complete package that is much more compelling.
March 28, 2009
March 21, 2009
SBA Announces Rescue Plan, Will It Work?
On Monday, the Treasury Department announced the details of a rescue plan to expand the small-business loan market. The details, which you are found here, explain that the Treasury Department is going to spend $15 billion buying securities made up of packaged SBA loans from the 7(a) and 504 programs. The major points of the plan are:
1. Dedicate $15 billion to purchase SBA loans
2. Temporarily raise SBA guarantees to issuing banks to 90% (up from current guarantees of 75% and 85%)
3. Eliminate SBA fees to both the business getting the loan and the issuing bank to lower the overall cost of capital
These are all great steps to loosen credit for small business owners. This will also spur many business owners to seek capital through traditional bank loans. However it does nothing to address the lending guidelines that issuing banks have.
I've received numerous inquiries from agents asking, "How will this affect the financial product I sell?" Many are worried that the new guidelines will result in less businesses to utilize the MCA. What we have seen over the past week is just the opposite.
The announcement has lead to a surge in business searching for capital, whom the majority do not qualify for an SBA loan. This leads many of those to discover the merchant cash advance product for the first time. Even better for those selling our product is that these new customers are much more credit worthy than the previous businesses, resulting in higher approval rates from MCA providers.
Now is a great time to take advantage of this upswing in business. The most successful realize that these new prospects coming into the market are also different than previous clients. Being a new product to them, the clients need to be fully educated about what an merchant cash advance is. Also, these new clients tend to be more experienced and more educated. They do more research and take their time making financial decisions. An agent who takes a more consultative sales approach focusing on customer service will not only be more successful, but will also land a client for years to come and generate multiple referrals.
1. Dedicate $15 billion to purchase SBA loans
2. Temporarily raise SBA guarantees to issuing banks to 90% (up from current guarantees of 75% and 85%)
3. Eliminate SBA fees to both the business getting the loan and the issuing bank to lower the overall cost of capital
These are all great steps to loosen credit for small business owners. This will also spur many business owners to seek capital through traditional bank loans. However it does nothing to address the lending guidelines that issuing banks have.
I've received numerous inquiries from agents asking, "How will this affect the financial product I sell?" Many are worried that the new guidelines will result in less businesses to utilize the MCA. What we have seen over the past week is just the opposite.
The announcement has lead to a surge in business searching for capital, whom the majority do not qualify for an SBA loan. This leads many of those to discover the merchant cash advance product for the first time. Even better for those selling our product is that these new customers are much more credit worthy than the previous businesses, resulting in higher approval rates from MCA providers.
Now is a great time to take advantage of this upswing in business. The most successful realize that these new prospects coming into the market are also different than previous clients. Being a new product to them, the clients need to be fully educated about what an merchant cash advance is. Also, these new clients tend to be more experienced and more educated. They do more research and take their time making financial decisions. An agent who takes a more consultative sales approach focusing on customer service will not only be more successful, but will also land a client for years to come and generate multiple referrals.
March 14, 2009
Traditional Financing Gone For Small Businesses
If you own a small business and have been in the bank lately there are only two letters that you've heard. They are N and O! This recent article in Newsweek highlights the challenges that small- and medium-sized business are have in obtaining financing.
The example is a 46-year old plastic bagmanufacturing company that had solid relationship with his bank. With a company this established and marketing a core product one would think that they are a sure in for bank financing. Now imagine being a successful business that has been around for a couple of years.
Their are other options out there depending on your industry and product or service you sell. For companies that sell B-to-B a good route might be traditional factoring of their account receivables or spot factoring of just a few invoices. A manufacturer may be able to do an equipment lease back or certain piece of equipment or vehicles. Of course many service, wholesaler and retailers may be able to take advantage of the merchant cash advance.
For each of the above there are different fees and costs. All provide a low documentation, convenient alternative to bank financing. Of course the rate charged for each is higher than what you used to be able to get at your bank. Expect to pay two to four times the yield rate that the bank offers. So while access to capital is going to cost your business more than the past, its still out there for when you need it.
The example is a 46-year old plastic bagmanufacturing company that had solid relationship with his bank. With a company this established and marketing a core product one would think that they are a sure in for bank financing. Now imagine being a successful business that has been around for a couple of years.
Their are other options out there depending on your industry and product or service you sell. For companies that sell B-to-B a good route might be traditional factoring of their account receivables or spot factoring of just a few invoices. A manufacturer may be able to do an equipment lease back or certain piece of equipment or vehicles. Of course many service, wholesaler and retailers may be able to take advantage of the merchant cash advance.
For each of the above there are different fees and costs. All provide a low documentation, convenient alternative to bank financing. Of course the rate charged for each is higher than what you used to be able to get at your bank. Expect to pay two to four times the yield rate that the bank offers. So while access to capital is going to cost your business more than the past, its still out there for when you need it.
March 8, 2009
Responsible Use Of The Merchant Cash Advance
At our offices we get calls from business owners everyday asking about how a Merchant Cash Advance works. Nearly all are looking for traditional financing that their current bank or finance partner will not provide. Many of our clients recently had a traditional line of credit from their bank that has been pulled, despite never missing a payment and being a good client of the bank for years.
After explaining that an MCA is not a loan (but actually a sales contract) we get asked what is the rate? The MCA provider is purchasing future revenue at a discount (for example we might purchase $26,000 of future receivables for $20,000 today resulting in a $6,000 discount). Most MCA providers will set the credit card retrieval rate to collect the $26,000 over six or seven months. Doing the math you quickly see that paying $6,000 for access to $20,000 of capital is expensive and approximately triple the rate when compared to traditional bank financing.
The next question always out of the caller is "Why so high?" Answer: A MCA provides a quick, low-doc, uncollateraized business financing when most if not all other financing institutions will not. This high-risk financing carries much high default ratios than typical bank financing and for the MCA provider to stay in business they must make up for these losses in their pricing.
Most business owners love the thought of quickly accessing $10,000 to $150,000 of cash to grow their business. When entering into an MCA contract the client needs to answer two important questions:
1. By utilizing the MCA will I be able to make more profit in the long-run than the cost of the funds?
2. Can my cash flow afford the withholding percentage on my credit card receipts?
If the answer to either of these is no then the client needs to seriously consider the viability of an MCA for their financing needs. Reputable MCA providers are not in business to just hand out cash and make their premium. Rather they are here as an alternative financing partner to help business owners grow or deal with a situation or opportunity while not putting a financial hardship on the business.
After explaining that an MCA is not a loan (but actually a sales contract) we get asked what is the rate? The MCA provider is purchasing future revenue at a discount (for example we might purchase $26,000 of future receivables for $20,000 today resulting in a $6,000 discount). Most MCA providers will set the credit card retrieval rate to collect the $26,000 over six or seven months. Doing the math you quickly see that paying $6,000 for access to $20,000 of capital is expensive and approximately triple the rate when compared to traditional bank financing.
The next question always out of the caller is "Why so high?" Answer: A MCA provides a quick, low-doc, uncollateraized business financing when most if not all other financing institutions will not. This high-risk financing carries much high default ratios than typical bank financing and for the MCA provider to stay in business they must make up for these losses in their pricing.
Most business owners love the thought of quickly accessing $10,000 to $150,000 of cash to grow their business. When entering into an MCA contract the client needs to answer two important questions:
1. By utilizing the MCA will I be able to make more profit in the long-run than the cost of the funds?
2. Can my cash flow afford the withholding percentage on my credit card receipts?
If the answer to either of these is no then the client needs to seriously consider the viability of an MCA for their financing needs. Reputable MCA providers are not in business to just hand out cash and make their premium. Rather they are here as an alternative financing partner to help business owners grow or deal with a situation or opportunity while not putting a financial hardship on the business.
March 7, 2009
Welcome To Merchant Cash Advances Blog
Hello all and welcome to the Merchant Cash Advances blog. This blog is dedicated to providing information and ongoing updates to the Merchant Cash Advance industry for both clients and sales agents (resellers) of the industry. We welcome all input and encourage communication from all to promote the industry and fairly represent the financial service that we offer.
The Merchant Cash Advance (aka MCA) has become increasingly popular over the past four years as a viable finance option for many small- and medium-sized businesses. While the industry as been around for over a decade the economic downturn and credit crisis that started in 2007 has resulted in tremendous growth. This tremendous growth brought numerous new MCA providers and thousands of resellers into the marketplace.
As the United States economy continued its collapse throughout 2008, the MCA providers who made poor decisions on which clients to finance paid the price with dramatically increase defaults. The resulting shakeout in the industry has left a core group of MCA providers, including American Finance Solutions.
To give an overview, a merchant cash advance is NOT a loan, but a factoring product where a business sells a portion of its future credit card receivables for cash today. The MCA provider offers an alternative financing option to provide working capital to small- and medium-sized businesses that do not qualify for under traditional financing. To summarize, a Merchant Cash Advance provides fast, low-documentation funding that is uncollateralized for businesses. The premium of this service is more expensive than traditional financing given the risk associated with financing.
Our industry has seen various website and blogs that come and go on the industry over the years. As the CEO of a mid-tier MCA provider who has been around for the past three years as a hand-on manager my goal is to provide unbiased information about industry. As this blog evolves it should will become the prominent resource for the industry for all to comment, educate and gain information on product and those who benefit from it.
Please email me with any questions, comments, etc. about this blog and the merchant cash advance industry. I look forward to developing this resource with your input sent to me at scott@americanfinancesolutions.com.
The Merchant Cash Advance (aka MCA) has become increasingly popular over the past four years as a viable finance option for many small- and medium-sized businesses. While the industry as been around for over a decade the economic downturn and credit crisis that started in 2007 has resulted in tremendous growth. This tremendous growth brought numerous new MCA providers and thousands of resellers into the marketplace.
As the United States economy continued its collapse throughout 2008, the MCA providers who made poor decisions on which clients to finance paid the price with dramatically increase defaults. The resulting shakeout in the industry has left a core group of MCA providers, including American Finance Solutions.
To give an overview, a merchant cash advance is NOT a loan, but a factoring product where a business sells a portion of its future credit card receivables for cash today. The MCA provider offers an alternative financing option to provide working capital to small- and medium-sized businesses that do not qualify for under traditional financing. To summarize, a Merchant Cash Advance provides fast, low-documentation funding that is uncollateralized for businesses. The premium of this service is more expensive than traditional financing given the risk associated with financing.
Our industry has seen various website and blogs that come and go on the industry over the years. As the CEO of a mid-tier MCA provider who has been around for the past three years as a hand-on manager my goal is to provide unbiased information about industry. As this blog evolves it should will become the prominent resource for the industry for all to comment, educate and gain information on product and those who benefit from it.
Please email me with any questions, comments, etc. about this blog and the merchant cash advance industry. I look forward to developing this resource with your input sent to me at scott@americanfinancesolutions.com.
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