Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.
Articles by Sean Murray
Banks Don’t Care About SBA Loans or Your Tax Dollars
August 23, 2011
Need proof the Small Business Administration (SBA) does more harm than good? The SBA has been protecting banks for decades against up to 90% of losses on eligible business loans. Funded by taxpayer money, it was designed to stimulate lending in the private sector. But banks have perverted the system and are using it as a literal blank check to commit fraud and reap profis.
With the Government footing the bill on defaults, banks have made it their business to make as many loans as possible to generate fees, regardless of whether or not the borrowers could repay. We have proof and it comes right from the source in a report prepared by the Office of the Inspector General.
MATERIAL DEFICIENCIES IDENTIFIED IN
EARLY DEFAULTED AND EARLY PROBLEM
RECOVERY ACT LOANS
Report Number: ROM 10-19
Date Issued: September 24, 2010
Prepared by the
Office of Inspector General
U. S. Small Business Administration
The Office of the Inspector General performed an audit on loans that had problems or defaulted especially early. On the sample they selected, it was determined that 82% of the loans should not have been made at all. From the report: “The audit identified material deficiencies in 32, or 82 percent, of the 39 early defaulted or early-problem Recovery Act loans reviewed, which resulted in the disbursement of approximately $5 million to borrowers who could not repay or were ineligible for the loans.“
82%?! And no, these loans were not flagged for technicalities, but rather for wildly incredible mistakes or intentional malice. This includes:
- Failure to request a business credit report on the borrower
- Using a borrower’s old credit report since a current credit report would make the applicant ineligible
- Using financial statements by the applicant that were more than 2 years old
- Not verifying business income
- Not verifying the age of the business
- Ignoring the borrower’s financial reports and creating their own figures that would make the applicant eligible
- Making loans to borrowers that did not even own businesses
- Failure to report fees both earned and paid for referrals to the SBA as required
An example: “One lender used 2007 personal income of $443,110 for a loan approved on April 13, 2009, even though the borrower noted annual income of only $750 on its April 1, 2009 loan application.”
As of June 30, 2010, there were a total of 484 early-defaulted or early-problem Recovery Act loans approved for $69,205,600. If the audit is any indication, it’s because 82% of the time, the banks just didn’t care. And why should they? The Government has only stepped up the effort to spur lending using this massively failed approach.
See more on that in our article, More Funding for Small Business Loan Programs – A Dysfunctional System
It may be interesting to note that while the traditional banking system is mired in corruption, an alternative financial product known as a Merchant Cash Advance (MCA) has been helping small businesses for years. With no taxpayer default guaranties, flexible terms, and an openness to borrowers of all credit types, it’s on track to become the most sustainable form of financing for businesses in the U.S.
SBA Loan vs. Merchant Cash Advance
Perhaps we’re a tad biased since we follow the MCA industry religiously, but one thing is for certain, don’t trust your banker for a second. They’re trying to pull a fast one almost 82% of the time.
– The Merchant Cash Advance Resource
What’s Going on in California?
August 23, 2011
The people have spoken! Many of our readers have sent e-mails wondering why we don’t have any coverage on the recent events in California. So here goes:
If you’re out of the loop, a nearly 3 year old lawsuit against one of the major Merchant Cash Advance (MCA) providers is coming to a close. Their name is not important, but it is a firm we revere still to this day. The story takes place in California, where a group of merchants in 2008 contested their Merchant Cash Advance was actually a loan, not a sale. In the other 49 states, MCA has been virtually undisputed for years but California law has shades of Gray.
There is one cardinal rule for making a loan in California and that’s to be licensed to do so. The case struck at the heart of what MCA is all about, a sale of future card payment receivables for a discounted price today. So why would a buyer of future cash flows need a lending license? The answer is not a short one and it was a heated debate that spanned 3 years.
It comes as no surprise that the end result was a stalemate. Both sides exhausted their time and energy until they called it quits with a settlement. Over $4 Million dollars will be paid to the legal team representing the plaintiffs. That’s big bucks for a group that was unable to prove over the course of 3 years the need for a lending license to conduct a sale.
While the affected merchants, attorneys, and the MCA provider are eager to move on, a particular California law firm seems to have grabbed the baton. As of early March 2011, at least 3 other MCA providers are now facing the same situation. We’ve seen the court filings and it’s essentially the same challenge and question of licensed lending.
However, when considering the absolute unlikelihood that these independent lawsuits would have come together at the same time without extreme goading by their class representation attorneys, we are highly suspicious of the motives behind them. The timing implies that merchants funded by MCA provider A, MCA provider B, and MCA provider C all approached the same law firm at the same time with the same problem. This may have been possible if each provider structured a deal in the exact same manner. Rather, each provider used different contract language and there is no commonality between them outside of the tendency to all describe their product as a “Merchant Cash Advance”.
We are therefore inclined to believe this law firm is taking the “throw shit at the wall and hope something sticks” approach. Keen to the $4 Million windfall to be reaped in the case described above, it is reasonable to believe these attorneys went searching for customers of all MCA providers and invited them to be plaintiffs in their frivolous suits. There’s no precedence that they’ll win, but there is for a settlement, and a settlement could mean millions of dollars in representation fees.
Some of The Merchant Cash Advance Resource’s top connections can attest that this particular law firm spent a substantial amount of time surfing the net for all MCA providers in California. Using their web traffic analytics and tracing the activity to their domain name, it certainly appears they’re going shopping for “victims.” If we are right, expect more lawsuits from them in the next few months.
To add insult to injury, these events coincide with tough economic times. MCAs are widely celebrated as the easiest, most flexible financial option available to small businesses today. Over half a billion dollars was funded in 2010 alone. With the Federal Government struggling to do the same, it is troubling that a few slick lawyers are seeking to take the lifeline away.
Treasury offers funds to spur business lending
The SBA is in shambles, the unemployment rate is extraordinary, and banks are unwilling to lend. That’s not a great combination for America’s small business owner. Fortunately MCA providers have filled the gap. If steps are taken to discourage them from operating in California, millions of dollars will disappear from the state’s economy. That means less jobs, less sales, and less growth. And if that day should come, don’t point the finger at the Governor, The Federal Reserve, Obama, or the banks. You’ll be able to thank a few lawyers that robbed Californians for their own personal gain. The truth hurts.
– The Merchant Cash Advance Resource
What Recovery? Small Businesses are Still Suffering
August 23, 2011
Experts claim the economy is getting better, but average Americans have yet to claim the same. According to the March Discover Small Business Watch Survey, 54% of small business owners said the U.S. economy is getting worse. The sentiment seems to fly in the face of the stock market’s surge forward, as well as a declining unemployment rate. As of the latest March jobs report, unemployment ticked an inch downward to 8.8%. Sadly, the official unemployment rate does not count individuals that have been unemployed for an extended period of time or have given up looking for work altogether, traits that characterize many of the ACTUAL unemployed in this country. (Find out who the labor force consists of)
The unemployment rating system loses accuracy in prolonged recessions and therefore 8.8% is not valid, nor worth comparing to previous months. In an Interview with Reuters, Bill Cheney, the Chief Economist at John Hancock Financial Services stated, “It is always possible that as the job market
improves, people will start looking again and the unemployment rate could go up.” That being said, the one true measure of the economy is the voice of the people.
As a member of the U.S. Chamber of Commerce, the Merchant Cash Advance Resource is constantly tuned in to the issues of small business owners. And guess what? We’re not hearing much positive feedback there either. The lending and capital markets continue to be a pressing factor, but federal, state, and local government regulations are stymieing innovation and expansion as well. From the Chamber, “With increasing uncertainty and government barriers threatening America’s economic recovery–Congressional leaders are reaching out to business owners to hear what is hindering their growth and what can be done to remove barriers.” (Watch the videos and interviews here)
In the face of discouraging news, access to capital is slowly making a comeback but not from the banks. Alternative financial firms providing a product known as a Merchant Cash Advance will buy your future credit card sale receivables in exchange for a big chunk of cash today. Different from a loan and becoming widely accepted, businesses all over the country are taking advantage of the most innovative form of financing available. In a true level playing field, ‘mom and pop’ shops are just as eligible as the major franchises to receive up to $250,000.
Next month, the experts could claim an unemployment rate of 0%. So long as the statistics fail to reflect reality, it becomes more frustrating for Americans who continue to live through a recession that never actually ended. High unemployment, scarce capital, and job killing regulations still plague commerce. We’re not experts ourselves, but if 54% of business owners testify that things are getting worse, they probably are. With the Dow at a 52 week high, now is a great time to sell…
– The Merchant Cash Advance Resource
1st Quarter 2011 Merchant Cash Advance Industry Preview
August 23, 2011Posted on April 3, 2011 at 7:52 PM
As a continuation of the massive popularity of our 2010 full year Merchant Cash Advance funding statistics, we are putting together data for the 1st quarter of 2011. It has not yet been finished but we figured we’d share some of our
early findings.
Funding appears to be on the rise in almost every state
This is mainly due to increased output by AdvanceMe. They are literally pushing the industry’s figures forward and making up for some firms that have cooled off. First Funds’ (Principis Capital) figures have declined by a large degree and is not operating close to 2010 levels.
Surge in “Starter Advances”
1st Merchant Funding, the most well known provider of starter advances is making significant gains. This may be an indication of tighter underwriting for normal size advances, there being more applicants with terrible credit, or the result of business owners embracing the opportunity to start off small.
California
Funding volume in this state has fallen off a cliff. Our initial estimates show declines of somewhere between 20-50%. This most likely has to do with What’s Going on in California. Normally the most active State for Merchant Cash Advance (was 13% of the entire nation in 2010), a continuation or worsening of this trend will actually shrink the industry as a whole in 2011. Of course the evidence of growth in the remaining 49 states tells the real story of the financial product’s success.
Stay tuned for the statistics…
– The Merchant Cash Advance Resource
Credit Card for Business Owners? Forget it!
August 23, 2011Posted on April 4, 2011 at 9:59 PM
“Anyone that owns a small business is automatically declined,” revealed an inside source at a major credit card issuing bank. A friend of ours that we’ll call Dave (name changed), is an underwriter in charge of approving credit card applications. We were discussing tighter credit standards for consumers, an issue we felt to be of little relevance to business credit, until it got interesting.
According to Dave, and the bank doesn’t make this information public, small business owners and the self-employed are issued automatic declines for cards. “Just to get a simple credit card?”, we asked. Dave explained that their data indicates consumers are less risky than the self-employed. We dug deeper and were told his:
- Employed consumers are more likely to have a fixed budget and steady income.
- Business owners experience continuous ups and downs. During a down, they are more likely to supply their employees with their steady paychecks and skip out on the credit card payment until cash flow improves. If they did it the other way around, they would lose their employees and the business wouldn’t last.
- Employed consumers are better equipped to prove their income since they have verifiable documents such as W-2s or paystubs.
- Business owners are less able to verify their income, more likely to show losses on their tax returns, and less willing disclose their true financial status. Though this may serve them well come tax time, it works against them on credit applications.
But that shouldn’t discourage small business owners from applying. Dave concedes they’ll consider extending credit to businesses open longer than 20 years so long as the applicant has above 720 credit. Ouch!
The Ugly Face of Business Credit Cards
So if you don’t make the cut, or even if you do, credit cards aren’t so attractive these days anyway. The Credit Card Act of
2009 made major changes for consumers but NONE for businesses. In an article by creditcards.com, titled “10 ways business credit cards are different“, is a list of many dangers to look out for. If you’re a business owner, these are the pitfalls:
- A teaser rate can be as short as 6 months, 3 months, or even 1 day. That attractive 2% rate can be increased on a whim as soon as you sign up or start using the card.
- There is no minimum amount of time to notify you of a payment due. Consumers are required to receive their bill at least 21 days in advance of the payment due date. For business owners, you might not get the bill until the day before!
- Your due date can change every month. Don’t get too comfortable paying on the 30th every month, your card company can switch it up to throw you off and entrap you with late fees.
- There are no late fee penalty limits.
- Payments are applied to the balance with the lowest interest rate first, instead of to the highest interest rate like consumer cards.
- The business owners are usually personally liable for the business card’s debt.
What’s the Alternative?
It’s bad news galore but there’s light at the end of the tunnel. A unique financial product known as a Merchant Cash Advance (MCA) offers all the positive features of a credit card and spits out the negative. Any business that accepts credit/debit card payments from their customers is eligible. Different than a loan, a MCA provider purchases the future card revenues of the business in exchange for a lump sum of cash today. The benefits and differences are truly astounding.
- Good credit is not necessary.
- Funds can be received in under a week. (You can barely get a credit card that quick)
- A business can qualify with as little as 3 months in business.
- The “rate” or the cost of the funds can’t change. Once the cost of funds has been established and executed, it remains the same. The balance does not increase with time nor is there any element of interest.
- Because the balance is only reduced by withholding a percentage of card sales, less funds are withheld in slow periods, and more in strong periods. This tackles the issue of business ups and downs.
- There are usually no personal guarantees.
- Additional funds can be made available before the balance has been reduced to zero.
- Personal income does not need to be verified, just the monthly credit/debit card sales volume.
- Your credit can’t be negatively affected since it is not a loan.
Becoming a First Choice Option
A Merchant Cash Advance is not a last resort method of financing and is quickly becoming a first choice pick in the business world. Certainly better than business credit cards, they also rank better than SBA Loans. [SBA Loan vs. Merchant Cash Advance]
Before you fill out that credit card application, just remember what our friend Dave said. “You’re automatically declined.” Say goodbye to the card issuing naysayers and SBA Loan ploys. The lending system is too far broken to be aggravated about it anymore. If your business needs capital, you can simply sell your future card sales in exchange for cash today. Check out the true direct funding sources in our directory and walk away with flexible financing your business can depend on.
– The Merchant Cash Advance Resource
Merchant Cash Advance Statistics for First Quarter of 2011
August 23, 2011
The results are in! The Merchant Cash Advance Resource has researched and released funding statistics for the 1st quarter of 2011. Here’s what we found:
- Funding in California is on pace to drop by a whopping 45% in 2011.
- Funding is on pace to increase in the remaining states by about 2.5%.
- The quantity of transactions is on pace to match 2010’s levels.
- There are more small independent funding providers but the bulk of transactions are done by a few major veteran firms
- An average deal funding size of $25,000 may not be appropriate. Most of the largest providers have ramped up “starter advance” operations, which normally involve transactions that range from $1,000 to $10,000. Therefore the average deal size is being averaged down and this will probably cause overal funding output in 2011 to be lower than 2010.
Take a look:
Merchant Cash Advance Statistics for First Quarter of 2011
– The Merchant Cash Advance Resource
MasterCard interchange rates rise. What does that mean?
August 23, 2011
MasterCard recently released announced their Interchange costs effective as of April 2011. The subject of Interchange has been a hot topic ever since Debit Card fees were brought into the crosshairs of the 
Wall Street Reform Act. Interchange, for those that don’t know, is not paid to MasterCard, nor to the acquiring bank that grants a business the ability to accept payment. It is paid to the banks that issue the cards. For instance if a customer makes a purchase with their Wells Fargo MasterCard, the Interchange fees are directed to Wells Fargo. Pretty snazzy huh?
The new Interchange structure will not necessarily affect all businesses since there are hundreds of cost levels and only some have changed. The system is not easily interpreted, nor easy to break down. The new pricing chart alone is 144 pages. (Download April 2011 MasterCard Interchange Chart). We fell asleep on page 4, so fortunately our friends at the Green Sheet clued us in. The increases worth mentioning are on the World Merit III category and apparently “World Merit III can be 20 to 30 percent of a retail merchant’s MasterCard transactions.” It will rise from 1.73% + $0.10 to 1.77% + $0.10.
Other changes include:
- World Full UCAF (the rate for a world card e-commerce credit transaction conducted with merchant security and cardholder verification) will increase from 1.83% + $0.10 to 1.87% + $0.10.
- World Merchant UCAF (the rate for a world card e-commerce credit transaction conducted with merchant security only) increased from 1.73% + $0.10 to 1.77% + $0.10.
- The Supermarket Base and Enhanced Supermarket Base rates will increase from 1.48% + $0.05 to 1.48% + $0.10.
Is this payback for the Wall Street Reform Act or a direct result of it? Hardly, in fact this is a normally scheduled increase. Visa and MasterCard typically make updates on a semi-annual basis. According to MasterCard, Interchange pricing is determined in the following way:
“MasterCard interchange rates are established by MasterCard, and are generally paid by acquirers to card issuers on purchase transactions conducted on MasterCard cards. Interchange rates are only one of many cost components included in a MDR, and are a necessary and efficient method by which MasterCard maintains a strong and vibrant payments network. Setting interchange rates is a challenging proposition that involves an extremely delicate balance. If interchange rates are set too high, such that they lead to disproportionately high MDRs, merchants’ desire and demand for MasterCard acceptance will drop. If interchange rates are set too low, card issuers’ willingness to issue and promote MasterCard cards will drop, as will consumer demand for such cards. In response to these competitive forces, we strive to maximize the value of the MasterCard system (including the dollars spent on MasterCard cards, the number and types of cards in circulation, and the number and types of merchants accepting MasterCard cards) by setting default interchange rates at levels that balance the benefits and costs to both cardholders and merchants.”
Accepting card payments may seem expensive but how much less would customers spend if they only had the cash in their pocket? Probably a lot less. The Interchange fees pay for themselves and it’s up to the business owner to find the most reliable, cost effective acquirer. Good luck!
– deBanked
