Forecast For Small Business Default Rates Dropping

The Stanford University Business School was announced their forecast of default rates on small business loans. Based on analysis of PayNet data the default ratio is expected to decline from 4.6% in 2010 to 3.9% in 2011.

Since 2006 the average rate of small business has averaged 6.9%. This means that small businesses in general are defaulting on their obligations less. Merchant Cash Advance funding companies are also see their default rates drop at approximately the same ratios. As compared ot 2008, the default ratio has dropped by 1/3 and looks likes the trend is continuing.

This drop has allowed MCA companies to do a couple of things:

1. Agressively price quality contracts, with a lower bad debt; funders can offer lower factor rates

2. Write deeper in their portfolio, again with the lower factor rate we can afford to take risks on some contracts

3. Offer contracts with longer expected repayment terms, as the we push out the timeframe risk increases

2011 is shaping up to be a record year for the entire industry. With falling bad debt, banks still siezed up and total lack of liquidity in most other alternative financing products, the MCA is becoming a viable alternative for almost all merchants.

If your marketing MCA their has never been a better time to build your book of business!

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.

Comparing MCA Quotes

Many clients call AFS all the time when shopping for the best rates for a merchant cash advance. Most of the time the first question is, "What is your best factor rate?" While this is one important part of the quote, you cannot compare it without the second part of the equation which is the withholding rate.

At AFS we've written contracts from a factor rate of 1.1 (providing $10,000 in funding for $11,000 of future credit card receivables) all the way up to a 1.5 (providing $10,000 in funding for $15,000 of future credit card receivables). They key element is how fast do you expect the MCA provider to be collect the amount of the contract.

For example, a merchant that does $20,000 per month on credit cards consistently. Might get a quote for $20,000 in funding with factor rates of 1.3 and 1.4 from two different companies. If they both have the same withholding rate of 30% of credit cards then its easy to identify which is the best deal.

If the 1.3 factor rate has a withholding of 25%, we would expect the MCA provider to collect the $26,000 over 5.2 months. Now if the 1.4 factor rate quote has a withholding of 20%, the MCA provider will collect over 7.0 months. As a business owner the merchant will need to ask him or herself two important questions:

1. Is the higher factor rate worth the longer payback period?

2. Can my cash flow afford the withholding percentage?

Often we have clients that want a factor rate of less than 1.2 and generally MCA providers have no problems with providing a low factor rate. In fact, MCA providers generally prefer lower factor rates, because they collect on those contracts over a shorter time frame, thus lowering their risk on funding the contract. However, most reputable MCA providers also recognize that they can quickly put a merchant out of business if they withhold too much of business' credit card sales. Most MCA providers limit the amount that they expect to collect from a merchant to 11 to nine percent of the business total gross sales.

When comparing quotes remember the old time/value of money rule. The longer you have the funds, the more it is going to cost due to greater risk of default. Don't forget to deal with only reputable companies that have a proven track record and will around for the long haul to support your business for years to come. Most MCA providers offer discounts on subsequent contracts since the merchant has demonstrated a proven track record in paying back a contract.