January 17, 2010

The Credit Crunch Continues...

JP Morgan Chase was the first of the major banks to report its earnings last Friday, January 15th. While the overall picture was rosy with the company reporting profits of $3.3 billion, well above Wall Streets expectations.

Normally, this would signal a strong recovery for the banking industry and the economy as a whole. When banks are making money (by lending out capital to both consumers and businesses), generally the entire economy is making money. When you look deeper into the numbers, the picture is not a rosy.

We had been hoping that the banks credit costs/expenses would be leveling off and send a strong signal of recovery. The investment banking division posted virtually all of the companies profits versus any of the companies traditional lending.

* Chase reported steep loses on its credit card loans

* Losses on prime mortgages almost tripled to $568 million compared to a year earlier.

* Total credit losses ticked downward to $7.8 billion from a high of $8.1 billion in the third quarter.

* Most importantly for our industry, wholesale (business) loan portfolios declined 22 percent compared to the fourth quarter last year.

Ralph Cole, portfolio manager at Ferguson Wellman Capital Management, was quoted by Reuters as saying "Consumer credit may be close to a bottom here, but it's not getting better, and people wanted JPMorgan to say it's getting better." JP Morgan's projections for 2010 were not even optimistic with Chief Executive Jamie Dimon saying on the conference call, "We don't know when the recovery is."

The credit crunch is still getting worse, not better. This will continue to drive growth for the Merchant Cash Advance industry out of sheer necessity. Other alternative financial products such as traditional factoring, equipment leaseback, etc. will also benefit from all the demand.

Citibank and Bank of American are due to report this week, and I expect similar results.

January 7, 2010

Goodbye 2009, Hello 2010!

Many are happy to say good bye to 2009, including many of our competitors in the merchant cash advance space which did not live to see 2010! It was definitely a year that started off slow and then really finished with a bang.

We started with the hang over of 2008, that saw many business owners struggling to generate revenue and fighting to stay alive. For many financing companies (including those in the merchant cash advance space) this drastically increased their bad debt. Reports on the street are that some saw bad debt levels exceed 20%! Obviously with those kinds of defaults one cannot survive.

Often during 2008 and into early 2009, we at American Finance Solutions would hear from our sales partners, "Company X was offering a client $50,000, can't you match the deal?" Luckily AFS had tightened up its guidelines in early-08, and our response was, "We can match it, if you don't want us to be around to pay you residuals!"

Slowly things started to stabilize and the shakeout continued in the MCA-business on both the funding side and the agent side. As funding companies tightened up across the board, making better decisions for themselves and the industry, the sales process became more challenging. Agents actually had to build re pore with clients, thoroughly explain the product and the corresponding method of repayment. This caused an even greater shakeout for the sales channel.

We saw a mass departure of the previous mortgage brokers who were looking for more easy money. Call center boiler rooms found that they couldn't generate enough revenue to keep their dialer going. Then end result has left us with a higher caliber and ethical sales channel across the board.

Around July, business owners realized that the worst was over and now its time to investing in their businesses. We saw gradual increase in demand for working capital. However the source for capital is nearly non-existent except for those with perfect credit and have been in business for five-plus years operating in an acceptable industry. This left a huge void that the remaining funding companies are trying to fill.

The last quarter of 2009 saw all time funding levels for AFS with December 2009 setting a funding record. With no end in sight of the credit crunch, we expect the demand and usage of the merchant cash advance product to proliferate. The best news is that in our industries relatively short-time period there has never been a more qualified/experienced sales force.

For 2010, AFS expects to see consumer confidence slowly increase, most likely increase at a painfully slow rate. Business owners recognize that they've made it through the worst and have made the necessary adjustments to decrease expenses and increase revenue. They in turn will slowly continue grow and seek capital to achieve this growth. Keep in mind this will not be a smooth road, but a rather bumpy one. As for the funding companies, expect a little more shakeout with some that are still struggling with portfolios of contract that show the errors in guidelines and underwriting past. I expect that we will see some consolidation in the industry to take advantage of scale of operation. However, its a still a relatively young industry with opportunity for both the large and small funding companies out there.

To all our blog readers, we wish you a prosperous 2010!



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