Housing Recovery Opens Up The Door For Home Improvement

Traditionally the home improvement industry has been on many Merchant Cash Advance funding companies prohibited list.  Especially the "old timers" that have been around since pre-2008 when the economic downturn started.  This industry got absolutely hammered resulting in very high default ratios.

Across the country the housing recovery is starting to happen.  The first homes that are being purchased are the foreclosures, auctions and short sales and these homes need the most "home improvement" to get them back in livable or rent able condition.  Typically this requires the services of the following:

• Plumbers
• Flooring
• Painters
• Kitchen re modelers
• Stone and masonry
• Pool and spa
• Heating and air conditioning (HVAC)
• Window and garage door replacement

Business that survived in home improvement and construction are now experiencing strong demand and are in search of financing to fund raw materials for their jobs.  For those business owners that survived and have decent operations now is the time to take advantage of the market and make up for the previous lean years.

Here at American Finance Solutions we have been ahead of the curve and been financing these business types over the past 24 months.  In fact these industries are turning out to now have some of the lowest default rates as well.  Clients in this segment will need to be somewhat established with a 24 month track record, but only a 500 minimum FICO is required, and the provide 12 months of bank or credit card statements since in many areas of the country their business is seasonal.

As always, AFS looks forward to assisting both our clients, partners and agents will financing solutions that are merchant-centric and building long term value.

Not Just Surviving, But Thriving In Recession

Unfortunately what is bad for the overall economy ends up being good for the Merchant Cash Advance industry. When the economy starts shrinking, traditional lending sources start drying up quickly, and when available the cost goes up. That forces those that need capital to turn to alternative sources.

The political events over the past week coupled with the stock market realizing the reality of the American economy has us in store for our second dip in the waters of economic recession, in my opinion. With unemployment (true unemployment is definitely above 15% and if you want estimate under/unemployment some experts are quoting 20%+) showing no signs of recovery, government stimulus spending coming to end and definitely more foreclosures in residential real estate (and the shoe hasn't even begun to drop in commercial!); its hard to refute that the next 18 months will be tough.

The end result will be significant growth for alternative lenders with Merchant Cash Advance and its ancillary products thriving. The number one reason will be pure demand and lack of suppliers. Obviously the demand will be there just as it was in 2008 when the last recession started. However, I believe the suppliers will not come rushing in as they did previously. You need dump trucks full of cash to become a serious player in this market and if you think its tough raising money for your traditional business or hot Internet start up. Imagine going out to the capital markets and saying, "I need cash to finance working capital in the sub-prime, small-business market and oh yeah, most of my clients are sub-700 FICO with no assets."

Another reason is that MCA will thrive is that funding companies will be able to easily pass along their increased cost of capital to their clients. With a typical factor rate now being 1.32, its not that difficult for a client to swallow 1.35 at the same terms. Even if real interest rates double or triple, I expect the effects to be negligible.

The key will be the qualification and underwriting criteria that the funding companies follow. In 2008, the MCA landscape was like the Wild West with anyone who had a business getting funding. The ten major funders left, American Finance Solutions included, learned their lessons the hard way. Expect most to focus on SIC codes and business models that "make sense" in a recession. More on that in my next post.

In 2011 Banks Are Getting Tighter, Not Loser As Expected

The most recent report by the Wall Street Journal, reports that for the 1st Quarter of 2011 small business lending from banks and other institutions decreased by 8.6% for 2011 versus 2010! All the hoopla of and marketing pushes by big banks appear to be just smoke and mirrors yet again.

In fact when you drill down into the data the numbers for banks (small business' historic solution for working capital), the numbers are even worse. For business loans less than $1 million, banks reported a drop of 14% and other small lenders fell 3%.

Now if you're an established business with significant revenue (in excess of $25 million) big bank lending has actually increased. Sounds like the same old story, that banks do not want to lend the lifeblood of the American economy, Small Business, when they need capital to grow and expand their business. But as soon as a business established and cranking out cash flow they open up the coffers, but of course it has to be collateralized and with personal guarantees!!!

Its no surprise that American Finance Solutions, had a historic record June in terms of funding amount. We continue to see a steady increase in applications and funding amounts. Some of our recent fundings include a well-established retailer with an 800 FICO but no real estate and a three location auto repair facility that has been established for 12 years.

For those that sell and market the Merchant Cash Advance product, there has never been a better time to build a strong portfolio!

Banks Finally Starting To Reach Out To Small Business

Banks across the county are slowly starting to open their coffers to small business. This is a good sign for the US economy and the merchant cash advance space. The big financial institutions always seem to lag six months behind the more nimble niche players.

While lending by the big boys continue to fall as illustrated by the graphs, it does appear that a comeback is in the works.

We've been blogging now since 3Q 2010 that demand is increasing from our merchants and believe the pace of demand will continue to grow as well. Expect the banks to have minimal impact on MCAs as they will only loan money to well established business that have assets to back up the financing. The core MCA-client base of younger, non-asset based merchants will still get the doors of the banks slammed shut, unless they have significant personal assets and near-perfect credit scores.

Below is a synopsis from a recent Wall Street Journal article of recent banks focus on lending to small- and medium-sized businesses:

• Federal Reserve said 10% of large U.S. banks reported easing loan terms for small businesses in the past three months, compared with nearly 20% for medium-size or large companies.
• The number of small-business loans and lines of credit made in the third quarter are down more than 70% from their pre-crisis peaks, according to Equifax Inc. and Small Business Financial Exchange.
• Bank of America has promised to add 1,000 small-business bankers during the next 18 months.
• U.S. Bancorp began training employees at nearly all of its 773 branches in supermarkets on how to make small-business loans and added 100 private bankers to sell loans to doctors, lawyers and other small-business owners.
• Small-business loan-approval rates at Wells Fargo “are well up” compared with early 2010 as more firms try to seize on new business opportunities rather than keep themselves afloat, said Marc Bernstein, an executive vice president at the San Francisco bank. In the fourth quarter, Wells Fargo made $4.6 billion in loans to businesses with revenues of $20 million or less, up 18% from a year earlier.
• At Huntington, bankers dedicated four straight days in January to making calls to prospective small-business borrowers. They usually zero in on them for one day a month.

We firmly believe that this activity will aid our agents and resellers in selling the MCA product as well. With banks marketing, many merchants will be more receptive to taking on debt and financing hopefully opening up the door to make a proposal. The key will be positioning and selling on value, service and speed versus price.

For the funders of MCA, we are starting to see new class of clientele that has not been anxious to get funding due to desperation. The result seems to be a more established, lower risk merchant base that has thoroughly planned for use of the funds. Which will hopefully lead to lower default rates which is good for everyone (funders, agent and the clients)!