Merchant Cash Advances Finally Becoming Mainstream

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The merchant cash advance product is finally becoming a mainstream product after 10 years. When American Finance Solutions started over four years ago this was definitely no the case! We spent most of our time explaining the product and educating business owners.

Over the past two years the MCA product has continued to gain popularity out of necessity. American Express recently published an article on its website highlighting several "alternative" financing products including: equipment lease back, traditional factoring and micro loans.

Most clients use the MCA as an alternative to a credit line that they used to get at their bank. Many people have questioned if the merchant cash advance is really an extended version of a credit line. Technically it is a factoring sales contract, the business owner is selling a portion of his credit card receivables at a discount. So the cost is strictly the discount that the business owner agrees to up front. An interest rate cannot even be calculated since the time period for collecting on the contract is open ended.

Yes, many clients use the product in lieu of a traditional credit line. Even when liquidity returns to the banking system, many clients will still opt for the MCA for its ease of accessing funds and payback method that is directly tied to the clients cash flow.

When Banks Say No To Small Business, American Finance Solutions and TransFirst Say Yes!

Even if you've been reading this blog for a month you know that small business owners are having crisis in accessing capital that has not been seen since the 1930s. I rarely use this blog in self promotion, but this week announced a very significant partnership that continues to fuel our growth.

American Finance Solutions, a leading provider of Merchant Cash Advances (MCA), and TransFirst, one of the nation’s top transaction processing solutions, are teaming up to provide small- and medium-sized business access to the
working capital they need. Through a joint referral relationship, TransFirst expands its product portfolio to include American Finance Solutions' Merchant Cash Advance product, helping clients' access capital quickly, despite tightening credit markets.

"TransFirst works with partners that demonstrate a track record of success," said Steve Rizzuto, President of Independent Sales Services for TransFirst. "We are happy to add American Finance Solutions to our suite of innovative, customer-based solutions. They have a unique funding product that provides our small business clients with capital in less than 48 hours. TransFirst will enable split funding for AFS’ product line of merchant cash advances and welcome their clients to our outstanding processing services”.

American Finance Solutions is proud to be partnered with a leader in the payment processing industry such as TransFirst. This was a win-win-win for TransFirst, their customers and AFS. We are happy to serve them, providing value-added benefits, and look forward to continued success in 2010 and beyond."

The Next Mortgage Crisis: Commercial!

A new mortgage crisis like the one that has devastated homeowners is hitting the nation's office and retail buildings. This new round of financial pain, which some had anticipated but hoped to avoid, now seems all but certain.

The last mortgage crisis in the residential sector of housing, really effected the larger banking institution who were highly exposed. Unfortunately in this next wave of foreclosures it is likely to swamp many smaller community banks across the country. Elizabeth Warren, Chairman of the Congressional Oversight Panel, the watchdog created by Congress to monitor the financial bailout, was recently quoted in saying, "There's been an enormous bubble in commercial real estate, and it has to come down. There will be significant bankruptcies among developers and significant failures among community banks." In all of 2009 there were 89 bank closures by the FDIC, through April 30 there have been 63 in 2010!

Unlike the largest banks that got into so much trouble early on, the community banks in general fared better in the residential mortgage crisis. Not only do community banks issue a higher proportion of commercial loans, but they also hold on to them rather than sell them to other investors. Nationwide, at least $1.4 trillion in commercial real estate debt is expected to roll over during the next three years. CoStar Group, a Bethesda real estate research company, estimates that half of commercial real estate mortgages will be underwater by the beginning of 2011.

Every dollar they lose in commercial real estate is a dollar they can't use for small businesses. That means if you thought capital is constricted for small business owners now, just wait six more months! It will be virtually gone from the traditional banking system. Alternative lending sources will see a huge uptick in demand and will become more the norm for business financing. I recently spoke to the top lending officer of one of the largest banks to find out the current criteria for qualifying for a small business loan. Here's what it is:

• In business for two-plus years
• FICO score for all business owners of 720 or higher
• No declining gross sales in the previous eight quarters
  

The last one is the killer, I personally do not know of many businesses that have experienced constant growth over the past two years! I guarantee that only a very small percentage of small- and medium-sized business owners qualify.

What does this all mean for the Merchant Cash Advance industry? Obviously growth and demand will continue and I expect the rate of demand to increase at a rapid pace. As more credit worthy clients choose the MCA as their financing tool, default rates will continue to drop. As the default rates drop, we can expect some new pricing/product models to develop to capture this new market. Bottom line, in the MCA's short history there has never been a better time to be involved in the business!