SBA Writes Off $2.1 Billion In Small Business Loans

Earlier this week the Associated Press reported that our Federal government bought over two billion (that's billion with a big B) in small business loans that have gone bad (that's bad with a big B). This is quite a big jump from from the previous year where the Small Business Administration bought back $1.3 billion in bad loans from banks. For the full article please visit AP.

An analysis conducted by the Associated Press found that the time between loan approvals and loan defaults is narrowing. According to the analysis:

More than $235 million in restaurant loans have been charged off since 2007. The 2,586 restaurant charge-offs make up the largest number of defaulted loans, according to the SBA. More than 150 loans made to Quizno's franchises — worth nearly $15.5 million — have been written off since 2007.

Restaurants have been part of the core market for Merchant Cash Advances since inception and will continue to be so. With default rates like those above, even the SBA will be very wary about guaranteeing loans to restaurateurs. Obviously for our agents selling MCAs you may want to continue targeting this client base.

For those restaurants seeking funding for expansion, improvements, etc. a merchant cash advance will continue to be a feasible alternative for financing. Yes, the rates are much higher than a traditional SBA loan, but given the added risk highlighted above hopefully it is a little more understandable.

SBA's New Floor Plan Program

The Small Business Administration recently announced a new Dealer Floor Plan program to assist car, motorcycle, boat and motor home dealerships secure financing for inventory. This should help many of our clients in this business, but you have to act fast as funds may run out.

Details are as follows:

Dealer Floor Plan (DFP) Financing Pilot Program
Beginning July 1, 2009, the SBA will introduce the Dealer Floor Plan (DFP) Financing. This program offers government guaranteed loans to finance inventory for eligible auto, RV, boat (including boat trailer), motorcycle, manufactured home and other dealerships under a new pilot program that runs through September of 2010. When each piece of collateral is sold by the dealer, the loan advance against that piece of collateral is repaid and the dealer borrows against the line of credit to add new inventory. Here are some of the highlights:

* Size of the loan is $500,000 (minimum) up to $2,000,000 (maximum)
* Borrowers will receive a fee reduction as outlined in the recent changes to the standard 7(a) loan programs
* The maximum guarantee is 75% as opposed to the 90% in the standard program
* The maximum term for the DFP loan will be five years
* Loans will only be made for inventory that can be titled

For complete details visit http://www.sba.gov/floorplanfinancing/index.html

CIT Groups Pending Bankruptcy

CIT Group may be the largest financial player you never heard of. CIT has over one million customers, most of whom are small- and medium-sized businesses. Unfortunately with bankruptcy looming for the financial giant most of these companies will see their credit lines slashed or completely disappear.

If you're one of the above business owners, it's time to devise a backup plan. No matter what the end result for CIT, its current financial struggles signal that credit is going to get harder than ever to come by. When these business owners do come across credit it is going to be very expensive. It all comes down to the basic Economics 101 and the law of supply and demand. There's a very limited supply of credit and a swelling of demand. The swelling is continuing to grow at a very rapid pace.

This will affect the merchant cash advance industry as well. Agents and funding companies can expect a huge influx of demand and increased applications and conversions over the next few months. Many MCA companies may be increasing rates in an effort to limit their funding amounts as they may hit ceilings on their own access to capital.

The end result is definite opportunity in the industry of Merchant Cash Advance to gain a new client base and expand into other industries.

MCA Agents: Choose Your Partners Carefully!

Over the past two months American Finance Solutions has seen a large increase in quality agents signing up to be partners. We screen all of our potential agents to make sure that there is a good fit. Specifically with ethics, aptitude and ease of doing business with. After chatting with the owner of the agency signing up it seems that most have a horror story about a previous MCA provider or worse yet were a sub-agent to an agent that was signed up merchant cash advance company.

Generally the story always revolves around payment of commissions or processing residuals. If a MCA funder is going under the quickest way to conserve cash flow is too stop paying commissions, that’s a no brainer. The company can simply exercise its clause in the contract to adjust commissions at any time without notice. However, this is also the fastest way to decimate the very individuals and companies that bring the business through the front door. I just don’t get it, not a smart short- or long-term business decision.

Make sure that you are partnering up with a solid industry player that has a proven track record, hopefully three or more years. If so, the funding company has made it through the past 18 months of rough times and is here to stay. Residuals income builds quickly with most agents earning in the mid- to high- four figures monthly just on MCA residuals (that’s not even taking into consideration the merchant processing residuals).

The second, most popular gripe involves the MCA company renewing a contract with a client the day after the renewal clause in the agent’s contract expires. For example, most contracts say that the agent will earn renewal commissions if the business enters into a new contract within three months after previous contract expiring. Funny how some MCA companies start underwriting the renewal in the final hours of the third month and wire the funds for the contract on the day after the three months. Then low and behold the processing changes from the agent’s merchant processor to some other one.

The worst stories involve those where an sub-agent relationship has happened. The funding company pays the commissions to the registered agent, their fiduciary duty is done. Then the sub-agent has difficulty in collecting from the registered agent. Why not sign up directly with the funding company, you’ll make as much or nearly as much and have a direct relationship that you can count on.

To summarize, when evaluating a new funding source to place your deals make sure you do your due diligence. Sure high-upfront and high-residual commissions sound great, but anyone offering these will not be around in a few months, the economics just don’t make sense. Or they’ll do your deals, but all of them will be at a lower commission structure in order to get approval.

Specifically ask the following:

1. What is the track record of the merchant cash advance company? Hopefully 36 months or more

2. Is the merchant cash advance company a licensed lender? If so, they made financial and operation commitment to be held accountable and will easily survive potential industry regulation.

3. What is the merchant cash advance company’s funding source? Hopefully institutional (i.e. a traditional bank or factor bank; not a hedge fund!)

4. Who do you partner with for credit card processing? (Make sure its strong industry players that will pay your processing residuals and have an ethical track record.)

5. Ask for other agent referrals? (If they will not give you these, there’s a reason!)

Merchant Cash Advance Shakeout

The last 6 months in all areas of finance have caused a great shakeout of those that were not built on solid ground. Firms that gambled and rolled the dice by leveraging paid the price. Across the every finance-related industry (from mortgage brokers, investment banks, hedge funds, retail banks to merchant cash providers) the number of players has shrunk and only the strong have survived.

In our space many of the merchant cash providers have shut their doors or are on life support only servicing existing clients with a skeleton workforce to just service their portfolio. Those that thought MCA was the next “get rich quick” scheme and funded every deal that came across their desk are now gone. Also, those that competed on price without regard for bad debt are now fighting to survive.

The same is also true for the thousands of sales agents of MCA that sought to stick it to business owners and provide financing without regard to capacity of the business to handle the repayment. Unfortunately the same “get rich quick” mentality attracted many unsavory characters from the mortgage industry. As times got tough and MCA funders started tightening up, these agents quickly fell to the way side.

While shakeout in any industry is always painful to go through, those that last emerge stronger. Those that remain like, American Finance Solutions, have built strong systems, sales agent relationships and evaluate risk properly. Currently there are about ten legitimate competitors in the industry, each providing a comparable product and specializing in their niches. Those of us remaining are uniquely poised to take advantage of growth with the reduced competition and hopefully future growth of the US economy sometime in 2010.

As for sales agents, the shakeout also helped clean up the industry. Most of the fly-by-night operations have shut their doors. The most successful sales agents/teams are those that truly understand their clients’ needs in both financing and credit card processing and provide solutions that best match those needs. While they may not be getting rich over night, they are building success relationships with both merchants and MCA providers that will provide for them for many years to come.

As small business’ across America continue to weather our current financial storm with traditional credit markets in shambles, many, many more will turn to MCA to finance their businesses.

American Finance Solutions estimates that industry wide approximately $150 million of merchant cash advances are funded in the 1st Quarter of 2009 and expect this to grow at a measured pace through the end of the year and then quickly accelerate as soon as the US and global economy recovers. We look forward to growing with our clients, agents and partner credit card processing companies.

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.

How To Shop For A Merchant Cash Advance

Merchant cash advances are a great option for financing when a business cannot get a traditional business loan or does not have the time to wait for a loan to close. Unfortunately there are a few providers that charge additional fees, dramatically increasing the cost of the financing or have restrictions that do not fit a particular business.

When seeking a merchant cash advance make sure you find the right financing institution to fit your business' needs.

- Make it a priority to seek a merchant cash advance that requires no closing costs.

- Avoid initial, up-front fees including application fees, credit report fees and any other fees. Negotiate or seek a merchant cash advance provider that can wave initial fees.

- You may be asked to provide collateral to obtain a merchant cash advance. If your merchant cash provider requires it then the rate should be dramatically lower because it is now secured financing.

- Some merchant cash advance providers require that the business provide financial statements. Most require them for larger funding amount ($50,000 or more)

- Avoid any minimum payment requirements in the MCA contract. Some contracts require that a minimum amount be collected. The beauty of the MCA is that payback is tied directly to the business' cash flow. So, when the business is doing well, it pays back faster and just the opposite when its slower.

- Find the right collection method for your business. Most MCA providers have the business change their processing over to a credit card processing company that splits the credit card batches. If you can't change credit card processors, some may offer a trust account (also known as a lock box) collection method, where all credit card proceeds are deposited into a separate checking account then the business receives its proceeds via ACH. Some MCA providers may also offer a fixed payment collection where they collect a set amount based on the average credit card sales a business does. For example a business does $100,000 a month in credit card processing and enters into a contract where 10% of the credit card sales are collected, the MCA provider may collect $2,500 per week via ACH to equal 10% of the $100,000 it would have collected by splitting the credit card batches.

- Some MCA providers require that you've been in business for at least 24 months. If that's not the case, you'll have seek a company that have a lower requirement. Generally the minimum amount is 12 months, unless you're operating a well known franchise, then the minimum is around six months.

- Know your credit score before you start shopping around. If your business has a lower score, look for providers that fund contracts in your score range. Generally the minimum acceptable score is 550, but some have minimums of 650 or even higher.

- Most important is to find a MCA provider that has been around for at least two years and is financially sound. Many small MCA providers come and go due to lack of capitalization. You want to make sure you find one that will be a true partner in your business. Most business owner renew there cash advances even before the first contract is paid in full. It should be a relatively painless process to get additional funding in 48 to 72 hours the second time around when your balance is paid down (generally the business has to have paid 70% of the balance before being eligible for more funding.)

- Last thing is to research the financing company by checking their Better Business Bureau rating, see if they have a finance lenders license (this is not required, but its nice to know if they are being regulated) and check out discussion boards to see other clients reviews.

American Finance Solutions does not charge any type of fees in association with its contracts, does not require security in any collateral, offers all three collection methods, requires business be operating for 12 months usually (six months for a franchise), minimum FICO score requirement of 550 and has been in operation for three years and is a licensed California lender.