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.

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!

Bootstrapping 101

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Now that you have slaved away night and day to get your business off the ground. The hardest part is finding financing, especially in these times.

Our Merchant Cash Advance product is in greater demand than ever. Often our clients need more funding than we can qualify them for. They use our funding for the most mission critical needs then boot strap for the rest, because failure is not an option

Their are five successful keys to bootstrapping:

1. Focus on cash flow! Most small business owners focus on profitability and that's a good theory. Unfortunately theories don't pay the bills, but cash does. Focus on clients/products that pay promptly or even prepay, stretch your suppliers terms to the limit and conserve every cash expenditure.

2. Forecast from the grass roots, not from the top-down. Example, we add an additional shift we can install 15 more units a week versus we need to gain 3% points of market share in our market. The first in much more tangible and easy to focus on and become attainable.

3. Forget the "big league" players to staff your team. Hire starving, talented young kids that will not only bust their butt, but also foster creativity and new solutions. The key is directing all that energy towards the goal of generating cash!

4. It doesn't need to perfect! Your product or service will never be perfect and once you think you have it perfect, clients will most likely not. Its a constant revision to deliver a great product or service that provides value. Just get it out there and refine from there.

5. Understaff and add staff only when the breaking point is near. You get to sleep when you're six feet under, plus the growth your forecast may not happen for another six months so why pay for extra staff until you need them.

Sure there are other ways to save your cash and build your business. The above are the biggest items that will suck up all your cash. Don't focus on the pennies of profits and let the dollars of cash slip through your fingers!

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.

Approval Rates For MCA At An All Time High

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In the past 60 days approval rates for Merchant Cash Advances are at an all-time high. American Finance Solutions is currently running a 70-plus percent approvals for new clients. There are a couple of reasons for this.

First reason is the state of the economy and almost total lack of traditional funding. Everyone knows the last 18 months have been some of the toughest on record of business owners. Banks have tightened up their lending activities in response, but to make matters worse the banks are now left with devastated portfolios of commercial loans.

Merchant Cash Advances are filling a huge void in the market place by supplying desperately needed capital to marketplace. If you are in the business of offering MCAs, there has never been a better time to build a portfolio of clients.

A second reason has been the maturation of the MCA-industry. Now the MCA product is evolving to offer various products that fit certain business-types or situations. A good example of this has been the fixed-repayment schedule. At AFS you can choose between paying a contract as a split percentage of credit card sales or a fixed weekly or daily payment. Another product is the "starter advance" where clients are offered smaller funding amounts with quick repayment times to limit risk to the funding company. This allows clients to build lender history and graduate up to more financing and improved terms. AFS launched its FAST CASH product in this niche in August of 2009.

I firmly believe that the combination above will last for at least three more years and continue to give merchants access to capital and provide agents with strong customer service skills a chance to develop a great clientele list.

Bad Credit = No Small Business Loans

As business confidence begin to return the world of small- and medium-sized businesses, many entrepeneurs are lacking the capital to take their successful operations to the next level. A recent CNN video highlights just how severe the access to capital is.

A restaurateur who has proven he can thrive even in this challenging economy cannot find the funds he needs. Yes, he has less than perfect credit, as most successful business owners do. They boot-strap, borrow on personal credit cards, take loans from family members then work 80-hour weeks and make it happen.

This theme is occurring again and again across the country from large cities to rural areas in almost every business type. For many of these business owners a Merchant Cash Advance is one alternative financing method to take their business to the next level.

Alternative Finance Companies Here To Stay

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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.