Merchant Cash Advances Finally Becoming Mainstream

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The merchant cash advance product is finally becoming a mainstream product after 10 years. When American Finance Solutions started over four years ago this was definitely no the case! We spent most of our time explaining the product and educating business owners.

Over the past two years the MCA product has continued to gain popularity out of necessity. American Express recently published an article on its website highlighting several "alternative" financing products including: equipment lease back, traditional factoring and micro loans.

Most clients use the MCA as an alternative to a credit line that they used to get at their bank. Many people have questioned if the merchant cash advance is really an extended version of a credit line. Technically it is a factoring sales contract, the business owner is selling a portion of his credit card receivables at a discount. So the cost is strictly the discount that the business owner agrees to up front. An interest rate cannot even be calculated since the time period for collecting on the contract is open ended.

Yes, many clients use the product in lieu of a traditional credit line. Even when liquidity returns to the banking system, many clients will still opt for the MCA for its ease of accessing funds and payback method that is directly tied to the clients cash flow.

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."

The Next Mortgage Crisis: Commercial!

A new mortgage crisis like the one that has devastated homeowners is hitting the nation's office and retail buildings. This new round of financial pain, which some had anticipated but hoped to avoid, now seems all but certain.

The last mortgage crisis in the residential sector of housing, really effected the larger banking institution who were highly exposed. Unfortunately in this next wave of foreclosures it is likely to swamp many smaller community banks across the country. Elizabeth Warren, Chairman of the Congressional Oversight Panel, the watchdog created by Congress to monitor the financial bailout, was recently quoted in saying, "There's been an enormous bubble in commercial real estate, and it has to come down. There will be significant bankruptcies among developers and significant failures among community banks." In all of 2009 there were 89 bank closures by the FDIC, through April 30 there have been 63 in 2010!

Unlike the largest banks that got into so much trouble early on, the community banks in general fared better in the residential mortgage crisis. Not only do community banks issue a higher proportion of commercial loans, but they also hold on to them rather than sell them to other investors. Nationwide, at least $1.4 trillion in commercial real estate debt is expected to roll over during the next three years. CoStar Group, a Bethesda real estate research company, estimates that half of commercial real estate mortgages will be underwater by the beginning of 2011.

Every dollar they lose in commercial real estate is a dollar they can't use for small businesses. That means if you thought capital is constricted for small business owners now, just wait six more months! It will be virtually gone from the traditional banking system. Alternative lending sources will see a huge uptick in demand and will become more the norm for business financing. I recently spoke to the top lending officer of one of the largest banks to find out the current criteria for qualifying for a small business loan. Here's what it is:

• In business for two-plus years
• FICO score for all business owners of 720 or higher
• No declining gross sales in the previous eight quarters
  

The last one is the killer, I personally do not know of many businesses that have experienced constant growth over the past two years! I guarantee that only a very small percentage of small- and medium-sized business owners qualify.

What does this all mean for the Merchant Cash Advance industry? Obviously growth and demand will continue and I expect the rate of demand to increase at a rapid pace. As more credit worthy clients choose the MCA as their financing tool, default rates will continue to drop. As the default rates drop, we can expect some new pricing/product models to develop to capture this new market. Bottom line, in the MCA's short history there has never been a better time to be involved in the business!

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).

Review Of ETA Show

This past week the Electronic Transaction Association (ETA) trade show was held for three days. This is the largest trade show in the US for the electronic payments industry. It offers a chance for the credit card processing industry to come together to learn about new products, services and technologies.

Of course the Merchant Cash Advance industry was well represented with four major funders sporting exhibit booths. It was great to see the MCA industry was alive and growing based on the displays.

Overall the show was well attended as compared to last year. The largest difference was the attitude and upbeat tone in 2010. Both exhibitors and attendees alike were talking about and planning on how to grow their businesses and invest in new technologies, products, etc to prepare for future growth. Gone was the talk of re-trenching, evaluating risk and pairing down to core products/services as in 2009. Many, including AFS, were inking new deals and or partnerships right on the trade show floor.

All were in agreement that the worst seems to behind us, but its still going to be a bumpy road for the immediate future and those of us that have survived are well poised for the long-term future.

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.