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."

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!

Alternative Finance Companies Here To Stay

Image by Metafora AD Network via Flickr

Business week recent wrote an article on entrepreneurs accessing alternative finance companies. You can read the entire article here. It confirms what most of us already know, banks have virtually shut their doors to all types of financing for small business! Credit lines (both secured and unsecured), equipment financing and even personal credit cards to business owners are all being denied.

The articles highlights the fact that alternative lenders, such as traditional factors, reverse equipment leasing and merchant cash advance financing is becoming the mainstream for business owners out of necessity. All of the above and more expensive than traditional bank financing since they involve the financing company taking on more risk.

As for merchant cash advance, it seems that we have finally made it out of the infant-stage of our new product and are now entering the mainstream. For our agents selling the product, now is the time to expand into new business types that have not used the MCA before and target clients with very good credit who would not have considered the product before.

SBA's New Floor Plan Program

The Small Business Administration recently announced a new Dealer Floor Plan program to assist car, motorcycle, boat and motor home dealerships secure financing for inventory. This should help many of our clients in this business, but you have to act fast as funds may run out.

Details are as follows:

Dealer Floor Plan (DFP) Financing Pilot Program
Beginning July 1, 2009, the SBA will introduce the Dealer Floor Plan (DFP) Financing. This program offers government guaranteed loans to finance inventory for eligible auto, RV, boat (including boat trailer), motorcycle, manufactured home and other dealerships under a new pilot program that runs through September of 2010. When each piece of collateral is sold by the dealer, the loan advance against that piece of collateral is repaid and the dealer borrows against the line of credit to add new inventory. Here are some of the highlights:

* Size of the loan is $500,000 (minimum) up to $2,000,000 (maximum)
* Borrowers will receive a fee reduction as outlined in the recent changes to the standard 7(a) loan programs
* The maximum guarantee is 75% as opposed to the 90% in the standard program
* The maximum term for the DFP loan will be five years
* Loans will only be made for inventory that can be titled

For complete details visit http://www.sba.gov/floorplanfinancing/index.html

CIT Groups Pending Bankruptcy

CIT Group may be the largest financial player you never heard of. CIT has over one million customers, most of whom are small- and medium-sized businesses. Unfortunately with bankruptcy looming for the financial giant most of these companies will see their credit lines slashed or completely disappear.

If you're one of the above business owners, it's time to devise a backup plan. No matter what the end result for CIT, its current financial struggles signal that credit is going to get harder than ever to come by. When these business owners do come across credit it is going to be very expensive. It all comes down to the basic Economics 101 and the law of supply and demand. There's a very limited supply of credit and a swelling of demand. The swelling is continuing to grow at a very rapid pace.

This will affect the merchant cash advance industry as well. Agents and funding companies can expect a huge influx of demand and increased applications and conversions over the next few months. Many MCA companies may be increasing rates in an effort to limit their funding amounts as they may hit ceilings on their own access to capital.

The end result is definite opportunity in the industry of Merchant Cash Advance to gain a new client base and expand into other industries.

MCA Agents: Choose Your Partners Carefully!

Over the past two months American Finance Solutions has seen a large increase in quality agents signing up to be partners. We screen all of our potential agents to make sure that there is a good fit. Specifically with ethics, aptitude and ease of doing business with. After chatting with the owner of the agency signing up it seems that most have a horror story about a previous MCA provider or worse yet were a sub-agent to an agent that was signed up merchant cash advance company.

Generally the story always revolves around payment of commissions or processing residuals. If a MCA funder is going under the quickest way to conserve cash flow is too stop paying commissions, that’s a no brainer. The company can simply exercise its clause in the contract to adjust commissions at any time without notice. However, this is also the fastest way to decimate the very individuals and companies that bring the business through the front door. I just don’t get it, not a smart short- or long-term business decision.

Make sure that you are partnering up with a solid industry player that has a proven track record, hopefully three or more years. If so, the funding company has made it through the past 18 months of rough times and is here to stay. Residuals income builds quickly with most agents earning in the mid- to high- four figures monthly just on MCA residuals (that’s not even taking into consideration the merchant processing residuals).

The second, most popular gripe involves the MCA company renewing a contract with a client the day after the renewal clause in the agent’s contract expires. For example, most contracts say that the agent will earn renewal commissions if the business enters into a new contract within three months after previous contract expiring. Funny how some MCA companies start underwriting the renewal in the final hours of the third month and wire the funds for the contract on the day after the three months. Then low and behold the processing changes from the agent’s merchant processor to some other one.

The worst stories involve those where an sub-agent relationship has happened. The funding company pays the commissions to the registered agent, their fiduciary duty is done. Then the sub-agent has difficulty in collecting from the registered agent. Why not sign up directly with the funding company, you’ll make as much or nearly as much and have a direct relationship that you can count on.

To summarize, when evaluating a new funding source to place your deals make sure you do your due diligence. Sure high-upfront and high-residual commissions sound great, but anyone offering these will not be around in a few months, the economics just don’t make sense. Or they’ll do your deals, but all of them will be at a lower commission structure in order to get approval.

Specifically ask the following:

1. What is the track record of the merchant cash advance company? Hopefully 36 months or more

2. Is the merchant cash advance company a licensed lender? If so, they made financial and operation commitment to be held accountable and will easily survive potential industry regulation.

3. What is the merchant cash advance company’s funding source? Hopefully institutional (i.e. a traditional bank or factor bank; not a hedge fund!)

4. Who do you partner with for credit card processing? (Make sure its strong industry players that will pay your processing residuals and have an ethical track record.)

5. Ask for other agent referrals? (If they will not give you these, there’s a reason!)