Limitations Of The Merchant Cash Advance Product

The recent slight rebound in the United States macro-economic climate has resulted in a lot of entrepreneurs seeking working capital for their businesses. As a result of this, most smart entrepreneurs have already or are in the process of analyzing the different business cash options that are open to them other than the banks which are still on lock down for small business loans. When theses business owners do Google searches they find lots of information from the hundreds of sellers on the advantages and benefits but none on some of the limitations.

At American Finance Solutions, we like to give our clients the complete picture of all the pros and cons so that a business owner can make a intelligent decision on offers. I will try to summarize the cons and limitations which can be divided into three major areas:

1. Cost - The factor rate of a merchant cash advance is much higher than a traditional SBA or business bank loan. The primary reason for the higher rates is that the funding companies are taking much more risk with low documentation, unsecured financing and compared to conventional loans. This is also one of its advantages as the due diligence or underwriting criteria allows many more business owners access to capital. The basic market forces of supply and demand still apply to MCA financing, so it pays for business owners to shop around and find a good rate with minimal out of pocket fees.

2. Qualification - This area can be broken down into two sub-sections of qualifying for an MCA outright and how much a business qualifies for in funding. As a start up, for a businesses first location you will not be able to use a merchant cash advance because there is no sales history for the funding company to base its expected collection for credit card sales. You will need a minimum of four months credit card processing history to qualify. In addition, a business needs to have some minimum level of credit card processing volume, most funding companies require $3,000 to $5,000 per month to guarantee some form of payment.

How much a business owner qualifies for can be based on several different criteria that varies for each financing company. Most reputable companies base the amount financed on a combination of total sales, acceptable remittance rates for the businesses SIC classification and overall affordability on personal/business criteria. As always, your best bet is to negotiate the best contract that minimizes the impact of payback on the businesses cash flow. We've seen too many good business owners pushed into bad contracts that take too much from a business credit card receipts and forced to close.

3. Consistency - When applying for a business cash advance give the funding company the complete story of your business so that they can create a contract customized for the volume of your credit card receipts. After the contract is funded as a financing company we expect consistent volume for expected repayment. Due to fraud by less than honest merchants, the funding companies know that if your volume drops more than ten to 15 percent that the business owner is diverting sales and violating the terms. This results in getting black listed by the industry, unpleasant phone calls for the collection departments and usually penalties and automatic ACH payments being deducted from the business' bank accounts. Make sure you read all the find print of the contract and have all questions answered directly by the funding company! At AFS we actually prefer it when a potential client asks for clarification and understands all the responsibilities of us and them. It always results in a smooth contract and happy customers that almost always repeat.

If you business is seasonal let the funding company know ahead of time. American Finance Solutions is the specialist in providing merchant cash advances for seasonal business. We usually request 12 months of your previous credit card processing statements. This allows us to set the correct expected payback each month and then build a contract that works for both parties.

There are a few other limitations that we usually specialized to a specific industry or other factor. But the above covers 90 percent of the cons.

AFS Exhibiting At The Northeast Acquires Show

American Finance Solutions will be exhibiting this week at the Northeast Acquirers Association trade show. The event is being held January 25th through January 27th at the Grand Summit Resort in Mt. Snow Vermont.

If attending please stop by and visit our exhibit booth and learn about our new commission structures on Fast Cash contracts and upcoming participation by for co-funding your own merchants.

We look forward to seeing all of current sales agents and hopefully finding a few more.

Turning The Corner In 2011

Recently both Wells Fargo and Chase banks published their 2011 Economic Outlook reports. Both of these reports (and many others, from other respected firms) almost mirrored each other. The overall theme is that 2011 is the year that the US economy begins to turn the corner and slowly, oh so very slowly, start the path to recovery.

Below is a synopsis of both reports and the most important aspects that relate to our small- and medium-sized business owners:

• Consumer spending, representing the majority of aggregate demand in the US will benefit from a streak of positive reading by mid-2011 in the form of lower unemployment rates and rising real personal income
  
• Personal income is up 4.1 percent year-over-year compared to a decline of 2.1 percent last year at this time, so the increase in spending is not as strong as in past economic recoveries
  
• Extension of the Bush-era tax cuts and the two percent reduction in the payroll tax will spur businesses to add to their payrolls as the slow economic recovery continues
  
• Households are right-sizing their debt load and this behavior will remain persistent for many years, so much of the increase in consumer income will go to lowering debt rather than increased consumption as in past recoveries
  
• Big business is also moving forward with stalled projects, building out retail and distribution networks and supported by signs of bottoming of nonresidential construction

Most of our clients have been saying the above in their own words for the past quarter, "Hey, its starting to slowly get better." And I'm sure that most merchant cash advance funders are starting to hear the same as American Finance Solutions does from its clients' need for cash, "Hey, I've got this opportunity that I want to take advantage of...." For those of you agents selling the MCA, it may be time to change your sales approach from, "what problem do you need to fix with funding" to "what opportunities do you want to take advantage of"

AFS has started 2011 with record fundings in the first two weeks as well. Yes, its only been two weeks, but its already starting out to be great year.

Fast Start To 2011 With AFS' Fast Cash Promotion

Last year was a record breaking year for American Finance Solutions. We funded well over a 1,000 contracts and are looking to double that amount for 2011! To get the year started off right, AFS has announced a new sales promotion.

For all new merchants funded now through February 28th, 2011 on our Fast Cash contracts will earn the following commissions.

• Increased commissions of 10% on the contract purchase price


• Earn an extra 2% Commission Bonus when agents self generate their contracts through the AFS Fast Cash Portal

That is a total commission of 12%, and its all up front! No need to wait until the merchant repays to get your cash. Don't forget that all Fast Cash contracts must be set up for split withholding through an AFS-approved processor (so no ACH or lockbox collection methods) and a merchant must process a minimum average of $5,000 per month with 15 batches per month or more.

If you are already an agent or reseller and need training on the Portal to generate contracts please attend one of our training sessions. Or you can always reach out to your Account Executive for a quick refresher. For new agents and resellers that want to get in on the action please give us a call or email to discuss becoming a partner. Please note that AFS does a background check on all new agents and demands that our MCA product be represented ethically and according to NAMAA Best Practices Guidelines.

30 Second Summary Of 2010

With 2010 almost in the books, its time to look back in retrospective so we can all see how far we have come. The year started out with turmoil continuing for many merchants, merchant cash advance funders and sales organizations on the MCA. Those with strong foundations built in operations, customer service and experienced management continued with the re-trenching.

Most found ways to either, lower operational expenses, re-purpose marketing dollars while increasing its effectiveness or raise pricing by adding on value to the end clients to minimize customer attrition. Those that were most successful were able to combine all three and actually make growth in 2010.

On the merchant side of the equation, we continue to see that customers of our merchants keep pushing and demanding value for their hard earned dollars. Capital Access Network just released their Black Friday 2010 reports and one highlight is the fact that restaurants with an average ticket showed a growth of 4% versus 1% for those with average tickets in excess of $25. American Finance Solutions has definitely seen the same trends among our client base.

Restaurants tend to be an early trend indicator for most merchants. Since they provide vital commodity (you got to eat) and across the industry offer products at all different price and service levels. At AFS we expect the trend of higher volume and lower average tickets (or transactions) to continue across every industry.

On the merchant cash advance funding side we saw the same trends. Many funding companies shrank their operations to cut the fat. We also saw a complete change in marketing with most abandoning expensive trade shows and opting for a narrow targeted approach through various mediums. Lastly, most funders saw a dramatically lower average funding amount per contract which is to be expected with our clients seeing lower sales volumes.

Lastly the sales agents had the most turmoil in our space. UCC hunters are now just banging the phones with much less efficiency given the increased competition. Many funders have stopped filing UCCs all together to protect their client base. Many sales organizations also re-trenched in their operations keeping only the most successful sales representatives and rewarding them very well.

After looking back, 2011 looks like a great year for those who are well grounded and ready to capitalize on opportunity.

2011 Predictions For The Merchant Cash Advance Industry

2011 is right around the corner and its time to look ahead so one will be prepared for a successful year. On the Chinese calendar, the upcoming 12 months are known as the year of the Rabbit. The symbol aligns with the state the predictions for Merchant Cash Advance industry perfectly!

There are a couple of things that rabbits do well: multiply, play well together and enjoy the company of others. These three characteristics are also the same three predictions for the MCA-industry for the New Year.

1. Multiply

Demand for alternative financing will continue to grow for 2011 and AFS believes that the merchant cash advance will lead the way. In fact this growth will increase dramatically from because of both supply and demand of business financing.

The largest driver of growth will be the limited supply of financing to small- and medium-sized businesses. Traditional bank credit lines will remain extreme tight as commercial mortgages default rates increase. Only the very best credit clients will qualify for traditional lending and when they do qualify they better have assets to back it up. Equipment financing companies are also significantly tightening up their lending qualifications as well. The merchant cash advance is well poised to pick up the slack and fill the supply-side void.

On the demand-side, we will see a modest increase in demand for business financing. Those business who are surviving are now starting to take advantage of opportunity. The successful pizza franchisee is being asked by the franchisor to take over and turnaround other locations, landlords are asking their best tenants to open locations with huge concessions at other properties. Many of American Finance Solutions existing clients are buying competitors (or their assets) to grow by acquisition. All of these require working capital and the MCA is a great solutions for many.

A second part of multiplying is the MCA product mix. We will start to see more and more variations of the MCA based on term, cost and finally industry-specific products to fill very specific needs.

2. Plays Well With Others

On the marketing side of Merchant Cash Advance we are seeing the reseller/agent network morph. Traditional financial services sales organizations are quickly adding the MCA to their product line up out of necessity. As supply of business credit dries up, these sales organizations are scrambling to find new products to market and fill the needs of their clients. We will see the MCA being marketed together with other complimentary financing products, not just coupled with credit card processing.

This is resulting in a more consultative sale where a merchant can effectively evaluate the product and compare it to other financing options. Often when a clients first hears of the rates involved with merchant cash advances they are shocked. However, when you compare the rate to other products, the difference is considerably less and very competitive when they realize it is unsecured business financing. These resellers will be challenged to understand and effectively sell and deliver the credit card processing merchant services that has to be included as part of the sale.

3. Enjoys The Company Of Others

In 2011 you will see the merchant cash advance funding companies joining together in two ways. First, with large deals quickly on the rise and surpassing $500,000 the risk with one company is often unpalatable. Funding companies are smartly participating in these large deals to achieve risk mitigation. This cooperation is smart on the risk side for funding companies and for resellers and clients. As participation becomes more the norm in the industry and more comfortable for funding companies; larger deals will become more prevalent resulting in the MCA becoming a viable product for a new set of clients that have larger capital requirements. Resellers will benefit, however don't expect commissions to continue at the same straight percentages as these clients will push hard for lower rates.

Secondly, American Finance Solutions predicts some consolidation among funding companies. AFS and a few other companies have solid financing while others do not. The need for funding capital will create opportunities for growth through acquisition and mergers. In addition, the merchant cash advance industry has never experienced any consolidation, so the economies of scale that capitalize on operating efficiency have yet to be exploited.

As always, if you are interested in selling your funding company or its portfolio, American Finance Solutions is looking to buy. Overall expect the New Year to be more successful for all involved in the merchant cash advance industry!

Credit Card Usage Down, MCA Funders Worrying?

It was just reported by a major credit report agency that Americans had an 11% drop in credit card usage. Of the 70 million users the previous year, 8 million have dropped off the radar. At first glance Merchant Cash Advance funder might think they are in trouble with their expected payment stream quickly dwindling but these statistics require further investigation. For example, there were headlines over the past year about how much debt the U.S. consumer was "paying off" but when you dug into the numbers the reality was, the cause of this drawdown in debt at the aggregate level was almost entirely due to a huge swathe of people defaulting on debt.

More than 8 million consumers stopped using credit cards over the past year. About 62 million people now have an active card, compared with 70 million a year ago. The decline stems from a combination of consumer choices and bank actions. An analysis by credit reporting agency TransUnion found that use of general purpose credit cards bearing MasterCard or Visa logos, or issued by Discover or American Express, fell more than 11 percent in the third quarter, compared with the July to September period last year. The Chicago-based company found that consumers in the subprime category, or those with low credit ratings, were believed to be without cards mostly because they were shut down by banks after payments fell behind or balances were written off. "One can quite reasonably infer that's not voluntary," said Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit. Banks have written off record amounts of credit card balances in recent years.

But a significant portion of the decrease in card usage reflects decisions by cardholders to stop using credit, Becker said. "They're simply either not purchasing as much or paying down balances." Many of these individuals may have shifted to using debit cards. In the past several years the use of debit cards has grown steadily and now surpasses credit card use in both the number of transactions and dollar volume. Interest rate increases by credit card companies and reduced credit lines have contributed to that trend.

The good news for funders like American Finance Solutions is that almost all credit and debit card transactions are used in capturing the expected payment stream from our clients. So in reality the economics of the merchant cash advance appear to be virtually unchanged. This is good news for the funding companies, agents representing the products and the merchants accessing the financing since there are no significant changes to the expected payback one should expect approvals, underwriting and access to capital to remain consistent.