2011 Predictions For The Merchant Cash Advance Industry

2011 is right around the corner and its time to look ahead so one will be prepared for a successful year. On the Chinese calendar, the upcoming 12 months are known as the year of the Rabbit. The symbol aligns with the state the predictions for Merchant Cash Advance industry perfectly!

There are a couple of things that rabbits do well: multiply, play well together and enjoy the company of others. These three characteristics are also the same three predictions for the MCA-industry for the New Year.

1. Multiply

Demand for alternative financing will continue to grow for 2011 and AFS believes that the merchant cash advance will lead the way. In fact this growth will increase dramatically from because of both supply and demand of business financing.

The largest driver of growth will be the limited supply of financing to small- and medium-sized businesses. Traditional bank credit lines will remain extreme tight as commercial mortgages default rates increase. Only the very best credit clients will qualify for traditional lending and when they do qualify they better have assets to back it up. Equipment financing companies are also significantly tightening up their lending qualifications as well. The merchant cash advance is well poised to pick up the slack and fill the supply-side void.

On the demand-side, we will see a modest increase in demand for business financing. Those business who are surviving are now starting to take advantage of opportunity. The successful pizza franchisee is being asked by the franchisor to take over and turnaround other locations, landlords are asking their best tenants to open locations with huge concessions at other properties. Many of American Finance Solutions existing clients are buying competitors (or their assets) to grow by acquisition. All of these require working capital and the MCA is a great solutions for many.

A second part of multiplying is the MCA product mix. We will start to see more and more variations of the MCA based on term, cost and finally industry-specific products to fill very specific needs.

2. Plays Well With Others

On the marketing side of Merchant Cash Advance we are seeing the reseller/agent network morph. Traditional financial services sales organizations are quickly adding the MCA to their product line up out of necessity. As supply of business credit dries up, these sales organizations are scrambling to find new products to market and fill the needs of their clients. We will see the MCA being marketed together with other complimentary financing products, not just coupled with credit card processing.

This is resulting in a more consultative sale where a merchant can effectively evaluate the product and compare it to other financing options. Often when a clients first hears of the rates involved with merchant cash advances they are shocked. However, when you compare the rate to other products, the difference is considerably less and very competitive when they realize it is unsecured business financing. These resellers will be challenged to understand and effectively sell and deliver the credit card processing merchant services that has to be included as part of the sale.

3. Enjoys The Company Of Others

In 2011 you will see the merchant cash advance funding companies joining together in two ways. First, with large deals quickly on the rise and surpassing $500,000 the risk with one company is often unpalatable. Funding companies are smartly participating in these large deals to achieve risk mitigation. This cooperation is smart on the risk side for funding companies and for resellers and clients. As participation becomes more the norm in the industry and more comfortable for funding companies; larger deals will become more prevalent resulting in the MCA becoming a viable product for a new set of clients that have larger capital requirements. Resellers will benefit, however don't expect commissions to continue at the same straight percentages as these clients will push hard for lower rates.

Secondly, American Finance Solutions predicts some consolidation among funding companies. AFS and a few other companies have solid financing while others do not. The need for funding capital will create opportunities for growth through acquisition and mergers. In addition, the merchant cash advance industry has never experienced any consolidation, so the economies of scale that capitalize on operating efficiency have yet to be exploited.

As always, if you are interested in selling your funding company or its portfolio, American Finance Solutions is looking to buy. Overall expect the New Year to be more successful for all involved in the merchant cash advance industry!

$30 Billion For Small Business Lending, Think Not!

Recently Congress passed legislation to create a new fund for $30 billion to assit 8,000 community banks in creating business loans. Specfically the bill, known as the Recovery Act Queue" will waive SBA loan fees, allow the SBA to guarantee larger loans and offer tap breaks for those businesses.

While this is a good step in the direction of opening up credit markets for small- and medium-sized businesses, it is just a band aid. Unfortunately, these businesses will still have to go through the traditional banking system to access the funds. That means qualifying under very stringent guidelines, providing full documentation and if approved accessing the funds in 90 days or more. The more critical issue is fixing the credit markets!

Unfortunately the $30 billion does not place restrictions on business size that can utilize the funds. Most bankers are much more favorable to lending to large, established businesses rather than mom-and-pop operations. I have to believe that the $30B will quickly be gobbled up by established businesses retiring pervious expensive debt and leave little for Main Street. The banks will continue to lend to only their best clients and forget it if you have a credit score below 750!

The fundemental issues are still present and continuing to grow. In the MCA space we continue to see record submissions and funding amounts month-after-month. If you are an agent offering Merchant Cash Advance or any other type of alternative business financing, there has never been a better time. The demand is there, the funding companies left are all solid proven players and the range of MCA products continues to expand making it easier to get clients funding.

Franchise Failure Rates - Best and Worst

CNN Money just announced its top ten franchisees based on popularity as measured through the number of SBA loans over the past ten years. They also added another metric in the study by also calculating the default rate on these SBA loans to measure a failure rate. For the complete article you can click here.

Highlights of the top ten are:

1. Subway - Failure Rate 7%
2. Quiznos - Failure Rate 25%
3. UPS Store - Failure Rate 12%
4. Cold Stone Creamery - Failure Rate 31%
5. Dairy Queen - Failure Rate 8%
6. Dunkin Doughnuts - Failure Rate 8%
7. Super 8 Motels - Failure Rate 4%
8. Days Inn - Failure Rate 6%
9. Curves For Women - Failure Rate 16%
10. Matco Tools - Failure Rate 36%

Franchises are a great way for new business owners to start their own business and control their destiny. With a franchise you are given the playbook on operations, product/services offering, customer service, accounting; plus you have all the marketing support (usually the most difficult in starting a new business). Its like having an expert partner without giving up any equity.

When researching make sure you understand all the upfront and ongoing royalty costs. Yes they can be very expensive. As for Merchant Cash Advances, we are much more comfortable in extending credit to a franchisee due to all the benefits above. Also, a franchisee generally has much more invested in his business as compared to an independent business in the same space. This makes their commitment to the business and business model much stronger.

As a sales agent of MCA, don't forget to target these franchisees (especially those with low failure rates)! They are a great lead source and often yield repeat/referral business as once successful with one location a franchisee will open up several more locations (all require working capital to fuel their expansion).

AFS Launches New Agent Portal

American Finance Solutions launched a new Agent Portal in early April. Previously our Agents and Partners could only track their commissions through our website in real time.

We have taken the effort to roll out a complete support tool for our agents that allows them access to sales training, almost all of AFS' forms needed to submit and complete contracts, and all of our partner processing companies applications and supporting forms. The most significant piece is our FAST CASH contract generation.

The FAST CASH contract piece allows agents to create, save, print and email a complete PDF package to their clients in just minutes and auto attaches all the necessary partner processing forms as well. Agents simply log in to the portal, enter in their clients pertinent data (including the previous four months credit card processing volumes), select the partner processor who will doing collecting of the split withholding and hit submit. The system will auto-calculate how much the client qualifies for and create a complete submission package.

The entire process of generating contracts should take less than ten minutes after one becomes familiar with it. Hopefully this new tool will lead the industry again, in customer service by empowering our sales agents and giving them the ability to close more deals in less amount of time! AFS is really trying to deliver on the promise of "simplifying cash advance"

To learn more about partnering with American Finance Solutions please visit our website americanfinancesolutions.com or call 800-760-5516.

MCA Agents Getting More Diversified

The response to the last blog post on the current state of the merchant cash advance (MCA) agent landscape was overwhelming. Ninety-five percent positive and a few negative criticisms. Many of you emailed asking for more insight about the agent network. So here it goes.

American Finance Solutions as a funding company is seeing a more diverse agent network in the past 12 months. Yes, our core agents are traditional ISOs that sell credit card processing along side merchant cash advances. However, we are seeing the majority of new inquiries coming from those that have never represented the product and quite often they just learned about the MCA product through a client, friend of colleague.

So who are these new agents? Most often they are current financial advisers or offer ancillary financial services; such as accountants, CPA firms, business brokers and attorneys. As the popularity and acceptance of merchant cash advances grows, I think we'll see more and more of these types of agents offering MCA in their product mix.

These new agents do however offer new challenges to funding companies in the way of training. First off they've usually lack complete product knowledge and often confuse the MCA with a traditional credit line. I cannot count the number of times I've been on the phone with a CPA and say for the tenth time, "There is no interest rate!" It is important to have simple, step-by-step, training materials for this type of new agent. AFS recently rolled out a new Agent Portal which we've been told has the most comprehensive training materials in the industry.

The larger challenge is that these agents have never sold credit card processing. It is very difficult to successfully sell a MCA without selling processing (which in my opinion takes ten times the product knowledge with equipment, POS systems, rates, etc). To effectively sell you need to effective sell both products with the basics feature/benefits.

At American Finance Solutions we never take a cut of the processing and thus do not benefit financially from the processing. While we attempt to educate these new agents to the best of our ability, it is really in their best benefit to partner up or hire someone/processor with the experience in merchant services that will take the time and patience to show them the ropes. AFS has developed relationships with processors that have great training and customer support teams that take the time to walk new agents through the application, pricing and conversion process to signing up (known as "boarding" in the industry) new merchants.

While these agents do not provide the volume of applications and funded deals, they do tend to submit high quality deals that usually have an approval rate well above 75% which makes sense. Their current clientele is generally a more established, sophisticated client that cannot access capital as in previous years. Also, the clients are usually not seeking maximum cash from the MCA which allows for shorter expected payback times and thus lower factor rates (and much less risk for the funding company).

Funding companies may not see the sheer volume out of this agent network, but if we take the time to educate and train them, the quality of clientele and overall portfolio will improve.

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!

Credit Lines For Small Business Cut 25% Since Last Year!

Everywhere in the news we have been hearing that the signs are there for the end of the recession. Unfortunately the recession will not be ending anytime soon until the credit markets return to normalcy. At American Finance Solutions we supply credit to small- and medium-sized business and we follow the credit market closely and sadly report that credit is being denied at an accelerating pace. Large, well-capitalized companies have no problem finding credit. Small businesses, on the other hand, have never had a harder time getting a loan.

Since the onset of the credit crisis two years ago, available credit to small businesses has contracted by trillions of dollars. The same is true for consumers (who support most small businesses with their spending) and that phenomenon is reflected in dismal consumer spending trends. Equally worrisome are the trends in small-business credit, which has contracted at one of the fastest paces of any lending category. Small business loans are hard to find, and personal credit-card lines for small business owners (a critical funding source to small businesses) have been cut by 25% since last year.

Unfortunately for small businesses, credit-line cuts are only about half way through. Home equity loans, also historically a key funding source for start-up small businesses, are not a source of liquidity anymore because more than 32% of U.S. homes are worth less than their mortgages.

Why do small businesses matter so much? In the U.S., small businesses employ 50% of the country's workforce and contribute 38% of GDP. Without access to credit, small businesses can't grow, can't hire, and too often end up going out of business. What's more, small businesses are often the primary source of this country's innovation. Apple, Dell, McDonald's, Starbucks were all started as small businesses.

What's especially disturbing is how taxpayer dollars have supported "too big to fail" businesses yet left small businesses unassisted and at a significant disadvantage. Small businesses do not have the same access to government guarantees on their debt. After all, most of these small businesses don't issue public debt.

In reality, our government should be supporting the life blood of our economy by offering incentives to community banks to step up small-business loans on a greater scale. These smaller banks could not only bridge gaps created by the shut down in the securitization market but also gaps being created by a massive contraction in credit-card lines. Arguably credit would perform better with these types of loans as they would reintroduce and reinforce the most important rule in banking: "Know Your Customer."

Alternative lending sources such as merchant cash advances offered by AFS will continue to thrive as the trend continues. We get to "Know Our Customers" and offer solutions to access capital and grow your business.

No Business Left Behind!

In today’s credit crunch most business owners across America are feeling left behind. Most of them are telling us that with the recession in full swing they have not been able secure a loan and a new line of credit. Businesses of all sizes have really taken a beating the last 18 months with the meltdown of the global economy, the credit crunch and lack of normal revenue from their customer base. Like the US homeowner that has been unable to continue to pay their mortgages and getting behind with payments the same thing has happen with business owners. They have trouble paying rent or leases, paying their employees, purchasing needed equipment to stay open and with cash flow issues. They are having the feeling of being left behind.

American Finance Solutions (AFS) FAST CASH program was rolled out to assure that “No Business is Left Behind”. With 175 business types 100% pre-approved and another 65 business types 95% pre-approved for AFS’ Fast Cash program. The underwriting process is streamlined and inclusive for this new financing product. Now business owners can have a recent Bankruptcy, liens and a low credit score (in fact credit isn't even considered) and still get approved for FAST CASH.

The FAST CASH product is really more inclusive to those that have been really affected by the present recession. A lot of these clients are good owner-operators that have had some bad luck with not being able to pay bills on time or have had to file for bankruptcy. The FAST CASH product allows these merchants to navigate through some really tough financial times and get caught up on a few bills and get above water.

AFS will fund a business with the FAST CASH product in 24-48 hours and them qualify for between $2,500 to $9,500.

The requirements for FAST CASH financing are as follows:

1. Must process at least $4500 per month in credit cards
2. Have no current cash advance accounts open
3. AFS must obtain a landlord verification and must not be behind in rent more than one month
4. Minimum of 15 credit card batches per month

The business owners who receive the FAST CASH product are not the only ones who benefit. AFS allows the ISO partner agents to keep 100% of all the processing residuals and they also get a great upfront and back end commission on the deal. Merchants who complete three FAST CASH programs are then approved for a traditional cash advance.

Merchant Cash Advance Shakeout

The last 6 months in all areas of finance have caused a great shakeout of those that were not built on solid ground. Firms that gambled and rolled the dice by leveraging paid the price. Across the every finance-related industry (from mortgage brokers, investment banks, hedge funds, retail banks to merchant cash providers) the number of players has shrunk and only the strong have survived.

In our space many of the merchant cash providers have shut their doors or are on life support only servicing existing clients with a skeleton workforce to just service their portfolio. Those that thought MCA was the next “get rich quick” scheme and funded every deal that came across their desk are now gone. Also, those that competed on price without regard for bad debt are now fighting to survive.

The same is also true for the thousands of sales agents of MCA that sought to stick it to business owners and provide financing without regard to capacity of the business to handle the repayment. Unfortunately the same “get rich quick” mentality attracted many unsavory characters from the mortgage industry. As times got tough and MCA funders started tightening up, these agents quickly fell to the way side.

While shakeout in any industry is always painful to go through, those that last emerge stronger. Those that remain like, American Finance Solutions, have built strong systems, sales agent relationships and evaluate risk properly. Currently there are about ten legitimate competitors in the industry, each providing a comparable product and specializing in their niches. Those of us remaining are uniquely poised to take advantage of growth with the reduced competition and hopefully future growth of the US economy sometime in 2010.

As for sales agents, the shakeout also helped clean up the industry. Most of the fly-by-night operations have shut their doors. The most successful sales agents/teams are those that truly understand their clients’ needs in both financing and credit card processing and provide solutions that best match those needs. While they may not be getting rich over night, they are building success relationships with both merchants and MCA providers that will provide for them for many years to come.

As small business’ across America continue to weather our current financial storm with traditional credit markets in shambles, many, many more will turn to MCA to finance their businesses.

American Finance Solutions estimates that industry wide approximately $150 million of merchant cash advances are funded in the 1st Quarter of 2009 and expect this to grow at a measured pace through the end of the year and then quickly accelerate as soon as the US and global economy recovers. We look forward to growing with our clients, agents and partner credit card processing companies.

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.