MCA Sales Agent Landscape - Four Funders Agree!

This past week I had the pleasure of sitting down with one of our competitors for lunch. This smaller company is one of the few that has been able to successfully raise capital and grow smart and slow with ultra-conservative underwriting. Since then I've called a two of the CEOs of our larger competitors to talk shop with them and confirm the current state of the industry and most importantly the sales agent landscape for Merchant Cash Advance.

The largest surprise in the industry is that while demand for Merchant Cash Advance is rapidly increasing, the "traditional" agent network is shrinking. On average most funding companies have seen anywhere from 20 to 25% of their ISO agents going out of business. The good news is that the majority of these agents are those that jumped on the MCA bandwagon after the mortgage collapse.

Gone are most of the large, boiler rooms pounding the phones with press "1" campaigns that were slamming and jamming MCAs down merchants throats and forcefully taking large broker fees. The costs associated with running such operations are just too costly. What's left are ISOs that focus on processing, providing good customer service and offering MCAs when it makes sense for the merchant.

At AFS we've worked hard to deliver outstanding customer service (and yes we still have a long way to go) to our agents and its paid off well. Those agents that have really partnered with us now have impressive portfolios of 40, 50 and even 100-plus merchants that continually renew their merchant cash advances and payback terrific. We consistently are cutting renewal and residual checks in the five-figures to some agents (and that doesn't even count the processing residuals!)

If your selling MCA or considering selling MCA, I can't think of a better time. Product demand is on the rise, sales competition is decreasing and most funding companies that have survived are consistently approving and funding deals. One just needs to decide if they are going to be the hare or the turtle in the game. Yes, the hare gets off to a fast start and makes some quick bucks but soon things catch up to him. Meanwhile the turtle focusing on building a strong client base with integrity and customer service. We all know who ends up winning the race.

Roller Coaster Ride: The Current State Of Funding In The World Of MCA

If your selling Merchant Cash Advances, you know that it may seem like a roller coaster ride for the funding companies! While American Finance Solutions continues to consistently fund deals month-in-and-month out at the same rate, we are hearing a completely different story about much of the competition.

One of the larger players in our space recently got a fresh round of funding (a reported $20M) from their private investors and turned the faucet at full blast! Most of in the market place will know who it is. While that is great in the short-term for Agents, what happens when the money stream gets shut off (as it appears to abruptly have)? The key is to find good funding companies that are well financed, operate and underwrite in a consistent manner and are transparent in their deal guidelines and underwriting qualifications.

Those of you representing AFS know that we follow the above guidelines. From what I understand there are two or three other companies that do as well, such as AdvanceMe and BFS. Its interesting to note that the three companies with the best reputation on the street for consistent funding, also have traditional, institutional financing behind them.

This provides two key advantages:

1. It provides us with a low cost of funds, which results in a lower cost for the merchant and/or higher commission rates for the agents.


2. Our financing partners require us to maintain a solid portfolio of clients to protect our and their interest. This results in good operating standards, pricing, underwriting and customer service. Without it, bad debt starts to spiral out of control as soon as you turn on the funding spigot.

If you haven't figured it out by now, these two key advantages lead to long-term stability. Something that is important to remember when calculating your renewal and residual income which quickly grows to the mid- to high-four figures each month for most agents for some reaching into the five-figures each and every month.

Each funding company has it specialties and works in unique ways (such as set pricing programs that are a no-brainier to sell, custom pricing for seasonal merchants, starter advance programs, etc.) If your selling MCAs, its best to work with two or three good funding companies to concentrate your deals and get to know how they operate, what they like and most importantly know what will get funded to get you paid.

As always, AFS, welcomes all reputable agent inquiries, from those whom close a deal every quarter to those closing a couple a week.

Commercial Bank Lending Contracting At Record Pace Still

Despite the decision by Bernake’s desire to “normalize” the financial system by raising the discount rate last week, it’s clear that the credit crunch is not over — not by a long shot. Remember, the discount rate is the interest charged to large banks for direct, short-term loans from the Fed. But since banks are not lending right now; the move in the discount rate is simply not that significant.

In fact, discount window borrowing by large banks has plunged nearly 80% over the past year alone, to just $14.1 billion in loans outstanding as of February 17, down from $65.1 billion a year ago! In other words, since bank lending continues to drop at an alarming rate, banks simply don’t need to borrow from the Fed at low rates. In the last two weeks alone, U.S. bank lending contracted by nearly $40 billion. That brings the year-to-date decline to $115 billion, a record -14% annualized rate.

Since the credit crunch began $740 billion of total bank credit has disappeared from the financial system from a combination of loan loss charge offs, write-downs, and decreased demand for credit. If anything, the credit contraction is actually accelerating and unfortunately for business-owners growing more widespread with:

1. Consumer loans down 12% year over year
2. Credit card balances decreasing at a 28% yearly rate
3. Commercial and industrial loans falling at a 19.3% rate

What does this mean for us in the merchant cash advance industry? Increasing demand for the product obviously (and increase in all other alternative financing such as equipment leasing, traditional factoring, etc.) It also means that a new a whole new class of clientele will be seeking out an MCA. We are rapidly seeing clients with high-credit scores and well established business inquiring for funding. In the past, these clients would have secured a credit line or signature loan in a matter of days from their bank. The key of MCA companies and those selling the MCA will be to service this new clientele. They expect a higher level of customer service and integrity. For those that are willing to expend the time and energy to deliver the service, the rewards will be great.

AFS Announces New FAST CASH Finance Program

American Finance Solutions (AFS) is excited to announce upgrades to its FAST CASH financing program for small- and medium-sized businesses.

Starting Monday, February 8th AFS will be offering business up to $20,000 in financing within 48 to 72 hours without credit checks. As long as the businesses meet a few qualifications such as:

• In business for six (6) or more months
• Process a minimum of $5,000 per month in Visa/Mastcard/Discover and Debit card transactions and batch a minimum of 15 times per month
  
• Not more than 30 days behind on the business' lease or mortgage
• Do not have a current merchant cash advance
• Do not have pending or open bankruptcy for the business or any business owner
  

and can get approved with an AFS-partner credit card processor they are approved!

Initially, each business will qualify for 20 percent of its credit card processing volume with a minimum amount of $2,500 and a maximum of $20,000. After successfully completing merchant cash advance contract each business will be eligible for additional financing amounts to a maximum of $60,000.

For more details you can visit us on the web at FAST CASH or to learn more about becoming a partner for AFS-partner to offer our financing service please visit our Partner Page.

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

Image by cosmic aether via Flickr

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!