June 25, 2024

Searching for Capital: What You Need to Know About Merchant Cash Advances

Joe Maguire: Ami Kassar. Joe Maguire: “I haven’t lost my shirt yet.”

Searching for Capital

A broker assesses the small-business lending market.

Every morning, before I start my day, I stop for a cup of coffee and a bagel near my office. I have to choose between the local Dunkin’ Donuts franchise and Maguire’s, a boutique sandwich shop. Invariably, I pick the sandwich shop. I know the owner, Joe Maguire, and I like to support him. Also, his coffee is great.

Mr. Maguire has owned the shop for almost a year. He knows his customers by name. I often see him at the back of the store loading products onto the shelves after a trip to Costco or helping with a breakfast run.

“How are you doing, Joe?” I ask.

“Hanging tough, Ami,” he replies with a smile. “I’ve almost survived Year 1, and I haven’t lost my shirt yet!”

As I walk to work, I feel good about my choice as a consumer, but I don’t feel great about how our banking system is treating Mr. Maguire and millions of other small-business owners like him. The life of a small retailer is tough these days, and there are few signs that it’s getting easier.

What, for example, are Mr. Maguire’s options if he wants to get a loan to increase or expand his business? What happens if the radiator goes out and needs to be replaced, or if the oven blows up in the back of the kitchen? What happens if there is a bad winter and sales slow unexpectedly?

Mr. Maguire probably cannot turn to a bank. He has two strikes against him: he hasn’t been in business for at least two years, and, unless he is one of the lucky few with equity in their houses, he has no collateral for a loan. The bankers aren’t interested in the coffee urns or the coolers holding Snapple.

If Mr. Maguire is lucky and gets good advice, he may find one of the few banks that still offer unsecured Small Business Administration Express loans up to $50,000. The good news is that if you can get one of these loans, the rates are reasonable. The flip side is that Express can still take a few weeks and lots of paperwork, and Mr. Maguire may not have time to wait.

In this situation, he may well turn to one of the merchant cash advance lenders that are having a field day in today’s economy and that will promise Mr. Maguire unsecured money in just a few days. The lender will review Mr. Maguire’s recent merchant processing statements, bank statements or both, and then make what is often a tempting offer. In Mr. Maguire’s case, the offer might be an immediate $20,000 in exchange for $25,000 of future receipts.

It sounds tempting because the owners figure they can get $20,000 immediately, and it costs only $5,000. Think about it, though. The $5,000 is 25 percent of the amount they’re borrowing, and it’s actually even worse than that. Considering that most of these loans have to be paid back within six months, the actual interest rate may be more than 50 percent. That is a lot for any small-business owner to swallow. The lenders can get away with the high rates because they are careful not to call these transactions loans. They say they are buying a piece of a company’s future revenue.

If you are in the market, here are some things to consider:

Insist on seeing all of the fees upfront, and make sure you understand every one of them.

Make sure you understand the terms. Some of these loans involve a daily fixed amount taken from your account; others take a percentage of your credit card sales every day. A lender, for example, might demand 10 percent of your daily credit card receipts until you have paid back the agreed-upon amount. Don’t focus on the 10 percent figure — that is not the rate you are paying. I had to explain to one client that his effective interest rate was more than 90 percent.

Insist that the cash-advance company provide at least a projected annual percentage rate, or A.P.R., for your loan. This makes it much easier to compare the advance with other options. In addition to an S.B.A. Express loan, there may be business credit cards or equipment leases available to you at better rates.

Shop around. The cash-advance business is competitive. Make sure you’re getting the best possible rate.

The sad reality of today’s credit markets is that many small businesses have no choice but to consider these types of loans. In our work at MultiFunding, we often find that there is no better option. Still, whenever I am forced to put a client into one of these high-rate loans, I think about Mr. Maguire and the struggle he is facing to build his business, as well as his crew of four employees who count on him. Yes, the merchant cash advance lenders and the hedge funds that back many of them are filling a need in today’s market. But there has to be a better way.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2012/10/30/what-you-need-to-know-about-merchant-cash-advances/?partner=rss&emc=rss

You’re the Boss Blog: The Biggest Banks Tell Us a Little More About Their Small-Business Lending

Searching for Capital

A broker assesses the small-business lending market.

Last week, I wrote a post about a joint announcement from the Small Business Administration and 13 of the largest banks in the country that they had increased their small-business lending by more than $11 billion over the past year. As I noted, this number stands in stark contrast to the number these banks self-report to the Federal Deposit Insurance Corporation, which shows that their lending has fallen by more than $2 billion.

Getting capital into the hands of small-business owners and entrepreneurs at affordable prices is a critical issue for our economic recovery. And that’s why it is important, when the largest banks in our country and the S.B.A. administrator make an announcement, that we understand what it means. I am happy to report that the Financial Services Roundtable, an organization that represents those 13 big banks, provided a statement in response to my post. We’ve decided to share the full statement, because we feel it provides some important clarification (while also raising some additional questions). Here it is, followed by a few of my thoughts:

After reading Ami Kassar’s Tuesday column (“The Big Banks Say They Are Meeting Their Lending Commitment”), we want to make sure you have information on F.D.I.C. call report data, what it shows and how it differs from the lending commitment reported by Karen Mills, U.S. S.B.A. Administrator, so this data is reported accurately.

In the conclusion of his article, Mr. Kassar wrote: “According to Ms. Mills, the banks are up by $11 billion; according to the F.D.I.C. call reports, the banks have fallen behind by more than $2 billion. We are still hoping the banks will explain what exactly they have committed to do.”

There is a straight-forward explanation behind the seeming contradiction Mr. Kassar cites. The lending commitment measures the increase in credit the 13 participating banks have made available. So, for example, if a bank provides a small business with a line of credit totaling $50,000, that bank is making $50,000 of credit available to the customer. If in the following year, the bank raises the customer’s line of credit to $75,000, that would be an increase of $25,000 which would be reported as part of measuring success against the lending commitment referred to by Ms. Mills.

The F.D.I.C. call report numbers measure the amount of credit small-business owners are actually using. If the customer in the example above has an outstanding balance of $20,000 against their $50,000 line of credit, the F.D.I.C. calculation would reflect only $20,000. If that same customer decides in the second year to pay their balance down to $15,000, this would result in a $5,000 decrease in the F.D.I.C. reported borrowing – even though the amount of credit made available to that customer by the bank has increased $25,000. Paying down the balance is the customer’s decision.

The banks participating in the lending commitment are working to make more credit available to small businesses and have made great progress in increasing new lending, as Ms. Mills reports. How much actual borrowing businesses do against their available credit is a decision made by business owners based on a number of factors, including how confident they are about the economic environment and the prospects of their business.

Just as consumers recently have been paying down their credit card balances, F.D.I.C. data shows us that small businesses are paying down their bank debt too (and not just cards and lines of credit). This is not something banks control nor should they try to influence what small-business owners do with their credit. It would be like saying to a consumer: we’ve increased your credit card limit so you need to increase your outstanding balance owed. Banks only determine the amount of credit they make available to small businesses, which has been increasing as reported in the lending commitment numbers. It’s business owners who decide how much they actually borrow at any given time.

The F.D.I.C. call report data gives us some insight into the use of credit by small businesses. Yet it does not show new lending commitments and should be not be used as a measure of a bank’s new lending to small businesses.

The Financial Services Roundtable is correct in that the F.D.I.C. numbers reflect actual monies borrowed by small businesses. These numbers tell the precise amount of loans to small businesses with a balance of $1 million or less.

Judging by the banks’ statement, I believe it remains very difficult to determine whether these banks have really done anything to make credit more available to the small businesses that need it. First of all, the banks’ numbers still include loans to companies with revenue of as much as $20 million. With a few strokes on an excel spreadsheet, they could tell us the corresponding numbers for companies with revenue of $1 million or less.

Second, this statement confirms that the loan dollars noted in their commitment include credit card debt. That means a significant portion of the $11 billion they are bragging about comes from the millions of small businesses who use credit cards for convenience or to earn cash-back and frequent flier points — not as capital to build their businesses. The statement also makes clear that when it comes to lines of credit, small businesses have only borrowed a fraction of the money that the banks are taking credit for lending.

Given these issues, as I have previously discussed, I still believe that the F.D.I.C. call numbers are a better barometer of small-business lending. The Obama administration has talked a lot about transparency. Wouldn’t it be appropriate for the S.B.A. administrator to demand clarity from the banks and share it with the small-business community? As a starting point, they could at least pull the credit card loans out of their numbers.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2012/10/01/the-biggest-banks-tell-us-a-little-more-about-their-small-business-lending/?partner=rss&emc=rss

Conversations: Small-Business Credit Markets, Assessed by a Loan Broker

He formed MultiFunding, a broker that helps arrange loans for small businesses. It was hardly an auspicious time to open any business, but Mr. Kassar’s challenge was particularly daunting: the freeze in small commercial loans was only beginning to thaw. Plus, business loan brokering has been a fairly obscure and even somewhat shadowy field — but one that Mr. Kassar says he believes serves a growing need.

Running both a start-up and a loan broker, Mr. Kassar has had an unusual perspective on the small-business credit crisis. Based near Philadelphia, MultiFunding, which observed its first anniversary last week, now employs four people full time and has completed 12 transactions. It is presently helping 120 clients in 23 states secure financing.

Mr. Kassar, who works with companies that seek at least $250,000, said that he was able to help from one-third to one-half of his prospective clients. When MultiFunding procures financing, it takes as a fee either a percentage of the financed loan — from 1 to 2.5 percent — or, in the case of a refinancing, two months’ worth of saving over the original debt service.

Mr. Kassar recently spoke about his business and the market for small-business lending. This is a condensed version of that conversation.

Q. What accounts for MultiFunding’s growth — marketing, or a worsening economic environment for businesses?

A. I think there’s a yearning and crying out for transparency and knowledge and understanding. Most small-business owners are more tradesmen than they are businessmen, and they don’t really understand the finances.

Q. What don’t they understand?

A. I think people have a hard time with the whole collateral concept. Also, when you get into a loan, it’s extremely important to know what it’s going to take to get out of it if you choose to get out of it early. A few weeks ago, we were refinancing a loan and the prepayment penalty the bank was trying to charge the client was 19.5 percent of the face value of the loan. The guy didn’t even realize he had a prepayment penalty.

Q. I would guess that 15 years ago not many small businesses went to intermediaries to help them find loans. Why do businesses come to you?

A. Banks push the products or services that they have to offer. In today’s world, a bank’s portfolio of options represent maybe five or 10 of the options available to the customer. And in all the confusion out there with all these different structures and options, I think it’s very difficult for the average small-business owner to figure out what is going on. We have lending products in our portfolio that are as low as 4 percent annual interest to as high as 60 percent annual interest. The goal is to get them the cheapest possible loan that we think we can get them.

Q. Is a 60 percent loan ever good for a business?

A. I am not a fan of 60 percent loans, but if you need money to fulfill a purchase order or buy some inventory, and you have no other collateral to work with. … Sixty percent a year is 5 percent a month, and if you borrow that money for two months at 10 percent and you make 30 percent on it, you’re still better off than you were without it. I would rather that they be aware of the choice and then they can make the decision for themselves. I don’t always agree with the decisions my clients make.

But we try to bring some innovative and creative thinking. There’s a client who is currently backed up on payroll taxes with the I.R.S. and their business has dropped by about a half this year, but they have plenty of collateral. We are putting them into a factoring arrangement so he can pay off the I.R.S. quickly, and then flip him into an S.B.A. loan where he can pay off the other debts.

Q. Are there people who should get loans that you can’t get bank loans for at this point?

A. I think the people who aren’t getting loans today are appropriately not getting loans.

Q. What disqualifies people right now?

A. Collateral. The value of their houses has collapsed, or the value of their equipment or commercial properties has collapsed. This most likely disqualifies people from S.B.A. loans or traditional commercial mortgages and drags them into factoring or asset-based lending or private money. That’s about half of our fundable clients. No one is addressing that.

Q. What could be done?

Article source: http://feeds.nytimes.com/click.phdo?i=7d7bf17c677f1d1ef203ddab399ab8d4