Saturday, February 18, 2012

Banks

Firms turn to riskier financing

New York (CNNMoney) -- Banks denying small businesses loans keep demanding what they can't have - collateral - and the disconnect is forcing firms to look elsewhere.

Small businesses are caught up in the collateral crisis, as banks continue to focus on healthy credit scores and tangible assets like property, two of the hardest hit casualties of the recession.

"A lot of the traditional collateral that entrepreneurs used to have disappeared," said Ami Kassar, a financing consultant and CEO of MultiFunding.

It's a quandary long in the making. The landscape of U.S. small firms has changed from manufacturers to service companies, yet banks keep demanding collateral like equipment and land. The chasm has produced a breeding place for others, according to FOCUS investment banker John Slater.
Small biz loan demand up, Federal Reserve says

"Banks have backed away from making loans at a time when what many businesses have of value is cash flow and not physical assets," said Slater. "That's created a market opportunity for the cash advance industry."

Those in the trade, such as AmeriMerchant and RapidAdvance, offer quick money with a hefty fee. Typical clients are restaurants and small shops, which take out advances that range between $5,000 and $200,000. A business owner who takes out a $70,000 advance will have to pay back $100,000. Lenders ensure repayment by immediately taking a fixed portion, close to 15%, of a sale every time a customer swipes a credit card at the shop.

Advances commonly take six months to repay and carry annualized interest rates of 104% to 177% if paid evenly every month, according to a 2009 industry analysis by consulting firm First Annapolis. Marc Abbey, an expert and managing partner at the firm, said figures are similar today.

Despite complaints that such terms amount to predatory lending, the industry is supported by some small businesses that revel in how easily advances are made. Financing firms require little paperwork and no collateral or guarantees.

It's a merchant cash advance that kept open The Killarney, an Irish pub in Vermont that feeds those coming down from the snowy Okemo Mountain Resort. During the restaurant's first year in 2005, owner Mark Verespy exhausted a $285,000 Small Business Administration loan to buy the place and burned through a $50,000 line of credit. He needed more, but the bank denied him.

Verespy's kitchen equipment was not enough.

"They were looking for my parents to put their house up and all kinds of stuff that were just not an option," said Verespy.

Instead he turned to Merchant Cash & Capital, which analyzed the pub's cash flow and quickly handed over $30,000. Verespy has returned to the company a dozen times since.

"It's not inexpensive," he said. "But the good side is, if I need funding I can generally get it in less than a week. If I had to wait for the bank to get a loan, I'd probably be out of business."
Doctors: Why we can't stay afloat

Large financial institutions that have long sat on the sidelines are starting to listen.

In September, American Express (AXP, Fortune 500) began offering a similar option it calls "express merchant financing." Raja Sengupta, an executive who oversees the program, said it's different from merchant cash advance, because it's only offered to existing business clients who show a strong enough flow of customers using American Express credit cards.

Zalmi Duchman, CEO of TheFreshDiet.com, turned to American Express after three banks denied him loans and found the financing terms of his credit card processor unfavorable.

Duchman was looking for quick money to finance an ad campaign for his food operation in Miami Beach.
100 Best Companies to Work For

His credit card processor offered $1 million if he would pay back $1.15 million by giving up 8% of every customer's Visa and Mastercard payment.

"When I looked at it, I said, 'It's loan shark money,' " said Duchman.

American Express offered him $750,000 at a 6% annualized interest rate. He said 10% of every payment customers make with an American Express card goes to pay down the $795,000 bill. Unlike a bank loan, however, the full amount must be paid back by year's end or American Express will claim all of every future credit card receipt.

Still, he happily accepts the cost and risk.

"I have to give American Express props for entering this business," Duchman said. "They're doing what the banks and SBA aren't doing, and that's giving out money. It's hard to demonize them."

Are you a U.S. small business owner who has taken a merchant cash advance? Email Jose Pagliery and share your story. Click here for the CNNMoney.com comment policy. To top of page

No comments: