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Beyond Merchant Cash Advance: An Interview With Karlene Sinclair-Robinson
March 24, 2013Guest: Karlene Sinclair-Robinson
People come to me for advice on business lending quite often. I’ve spent years helping small business owners obtain financing, many of whom were turned down previously by a bank. And so the story has been told that if traditional lending doesn’t seem to be an option, there is an excellent Plan B, Merchant Cash Advance (MCA). The characteristics of an MCA have changed over the years though, by a wide margin.
At one point in the past, they were discernibly different from a loan, and most often structured as a purchase of future credit or debit card sales. Factoring costs amongst funding providers were relatively uniform, and advances were estimated to completely pay off in 8 months or less. It’s different now. MCA has since been semantically broadened to include non-bank financial service programs that are structured as a loan. Factoring or interest rates costs vary widely, and terms can go out as long as 18 months.
But maybe you knew all that, and so when the follow up question becomes, “Sean, how else can I raise capital besides MCA?” I resort to throwing out buzz words such as Venture Capital financing or Peer-to-Peer lending. Oh I can tell you how these things work but certainly not with the amount of details that I could about MCA. As some folks depend on me to help them out and list all of their options, I find myself promising to send them “something” through e-mail later.
As I started drafting one e-mail, I began to wish there was a comprehensive book, one that I could simply recommend as an easy read to newly minted entrepreneurs and wise old business owners alike. It turns out that such a book exists and it’s got tons of tips that I hadn’t even thought of; It’s called Spank the Bank, by Karlene Sinclair-Robinson. I was so glad to have found it, that I went off in search of Karlene, hoping that she would be able to answer some of my questions. Luckily, she was nice enough to respond!
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Sean: Karlene, I can tell you from my experience in the MCA field that a lot of people looking to start a business hope that MCA is the answer when the bank turns them down, when in fact it is not. You list many alternative funding options in your book, so if an individual were interested in starting a restaurant or brick and mortar retail business, what 4 options would you recommend they try? Which one do you think they should try first?
Karlene: Sean, thanks for reaching out to me and spreading the word about my book, Spank The Bank. In response to your question, it reminds me of a jigsaw puzzle. Why you might ask? This is due, in part, to the type of business, industry, how much financing they need and who the new entrepreneur will be. There are variables that must be considered in order to decide on the best financing solutions. So, in order to help a restaurant startup or retail business, they should consider the following, if appropriate:
- Equipment Lease or Vendor Financing
- Franchise Financing
- Microloan or Peer-to-Peer Lending
- Private Commercial Loan
The great part about alternative financing is the ability to use more than one option at the same time to gain the financing needed.
Sean: You list Peer-to-Peer lending in your book as an alternative. I am familiar with Prosper.com, but are there any others that you know of? Do you have any tips to make such a lending campaign successful?
Karlene: Great question. Yes, there are more Peer-to-Peer lending sites. Prosper.com is one of the two major sites I mention in the book. LendingClub.com is the other site borrowers should consider. They have funded over U.S. $1.5 billion as of this month. LendingClub.com hit the billion $$$ threshold on November 5, 2012, and so, in the space of just over 4 months have financed more than $500 million in loans. What is so unique about both sites is the maximum amount they can lend. Prosper lends up to $25,000 while Lending Club goes up to $35,000. Are they making a difference? Absolutely! By the way, this is not just a U.S. phenomenon, it is happening worldwide. Checkout Kiva.org
Sean: You mentioned that a website is important to alternative financing sources. I find this very interesting and agree with you completely. I have gone so far as to suggest to my peers in lending that in 2013 and beyond, it does not make sense to approve a business that does not have a website, even if the business looks decent on paper. There is even one specialized MCA firm that I know of that actually evaluates the amount of Likes and Followers you have on social media in the application process. For a very small business that just needs to get their web presence up and running, how much do you think it would cost to do this and would they need to hire a designer or programmer?
Karlene: Thanks for agreeing with me on the website factor. I believe it should be a part of the due diligence process. In order to help those who are in need of website development, I suggest you check with you local area SCORE offices, Small Business Development Centers, Women’s Business Centers or other business affiliated sources that can give you a good reference to a web designer or use networking sources to help you find a competent one. Depending on what must be on the site, the price can range from $500 to as high as $10,000. No startup business needs to pay that much. Use a budget that is in line with what you need first; then add on what you want at a later date. Be sure to carefully read the web designer’s contract that outlines what they are going to do and the cost to you. Pay for services based on work completed. Most will require a down payment.
Sean: A tough question now. Is it feasible for an entrepreneur that literally has no capital of their own to invest in their startup to go out and raise 100% of the funds to see it through? I ask because I have heard this story a lot. “I have a great business plan but I have no funds to make it reality.” Do they need to save up their own money first to get started? Even alternative lenders like MCA firms prefer for a business owner to be personally financially invested. It makes them more confident that the owner will never give up.
Karlene: This is a great question Sean. Let us add to the question – how much are they seeking? Again, the type of business will also determine the funding possibilities. However, let me make this very clear: startups need to come to the financing table with something to back them. Whether you are using savings, family and friends, or your IRA, having some money in the transaction or added collateral appropriate to the financing option to be used, makes it more likely that the financing request will be approved.
Sean: I’ve heard all the rumors about SBA loans; That they take 6 months to get an approval, 9 months to get the funds, that the bank can change their mind at the last minute, etc. But i’ve also heard it can happen in a matter of days. What is the real story here?
Karlene: Yes, I have to agree, there are a lot of rumors or myths about the SBA. Since I do not work for the SBA nor any banks providing SBA guaranteed loans, I cannot give the facts on this question. However, I can say this: since all financing requests (traditional and non-traditional) goes through due diligence phases from pre-qualification, initial approval, committee review (if appropriate) to final approval for transfer of funds, depending on all parties involved, it can be fast or it can be slow. When borrowers are unwilling to provide financial records or don’t have the required collateral to make a transaction work, this can delay or stop the deal. I often tell borrowers, lenders are in the business of lending, the more qualified transactions they can approve; they will do so. If the borrower is not on par with their financial records, this can also slow down the process.
Sean: Great answer. I agree that part of how long an application process takes is on the shoulders of the applicant. The more prepared they are, the faster it should be. Any final words?
Karlene: Sean, I appreciate the invite to shed more light on this topic of alternative business financing. You offer a product that many non-banking customers can use. Finally, I’d like your audience to take from this conversation, if nothing else, the fact that they do have options available to help them. So when banks say ‘no’, they’ll know where to go.
Sean: Thanks so much for taking the time to speak with me personally and for answering several questions that tons of small business owners and even peers in my field find themselves asking at some point. You are doing so many good things out there to help people and your book is excellent.
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After our interview, I also got to sit in on a twitter talk show in which Karlene was a special guest. The show was #SmallBizChat, a weekly event at 8pm EST. You can read the extended interview between the host and Karlene at http://succeedasyourownboss.com/03/2013/where-to-go-when-the-bank-says-no-finding-alternative-funding-for-your-small-business/. I intend to join as many future events as possible. So if you stop by, please say hello. I am @financeguy74.
Bio
Karlene Sinclair-Robinson, dubbed “The Queen of Business Financing” is the Bestselling Author of ‘SPANK THE BANK: The Guide to Alternative Business Financing’. She is considered a foremost expert on ‘Alternative Business Financing’ for startups, small businesses and struggling entrepreneurs. She is a speaker, instructor, business consultant and principal of KSR Solutions, LLC, based in Northern Virginia. She is also a top Twitter Business Financing source to follow via @KarleneSinRob. Website: http://www.SpankTheBankNow.com.
Letters from the Frontline
February 12, 2013
I’ve worked in the alternative business lending industry for quite a while and I’ve noticed something off about many of the marketing campaigns. Some lenders have gotten so caught up in the funding that they’re losing sight of what it’s like to run a small business. Admit it, we’re all a little rusty even if we were once small business owners ourselves.
I started working as a deli clerk when I was 15 years old and continued to do it part time until my senior year of college when I began waiting tables at a restaurant instead. I could definitely tell you a few things about the daily grind and the epic drama that happens in the back of the house on a Friday night, but it’s been a while since I lived it.
But don’t you own a small business now? Yes, I do. I’ve been a part of two successful Merchant Cash Advance start-ups and I went off on my own full-time near the end of 2011. These days I have vendors, invoices, customers, contractors, accountants, and lawyers to deal with. I have monthly financials to reconcile, servers to monitor, and office rent to pay. But let’s be honest, my experience doesn’t really translate if I’m on the phone with a merchant that just had a waitress quit, a 12-top walk out on the bill, and an oven break, all while a health inspector is doing an unannounced review. Yeah, something about THAT is a little different than my day-to-day routine.
Sometimes we need to take a step back and stop trying to find the algorithm that best calculates FICO scores and monthly cash flow figures and start analyzing small businesses for what they really are. That led us to an interesting idea; Why not have actual merchants spell it out for us? What better way for us to connect with the retailers and service people of the U.S. than to have a two way dialogue right here on MPR?
Starting today, we’re announcing our experimental Small Business Corner, aka The Frontline. A small group of actual retail store owners or managers are going to contribute regularly with stories, tips, and advice about what it’s like for them. I think it will be insightful for us, as well as for the other small business owners that visit our site.
As the alternative business lending industry gets more saturated, shouting from the rooftops that you have “cash available with fast approvals!” isn’t a way to connect with the actual businesses that may benefit from a cash infusion. I’m guessing we’ll learn what does. These contributors are free to write what they want, so there’s no telling what’s in store. We hope you enjoy it.
Visit the Frontline
– Merchant Processing Resource
https://debanked.com
MPR.mobi on iPhone, iPad, and Android
What The Heck Happened to the Merchant Processing Resource?
August 26, 2011WHAT THE HECK HAPPENED TO THE MERCHANT PROCESSING RESOURCE?
We’ve had a lot of design changes implemented to our site in the last year. We hope this is the last one. Thank you for your patience!
Bottom line: Our previous web host sucked (Webs.com). Their dns servers were always down late at night and on weekends for “maintenance.” Their site building tools would crash 90% of the time and their technology is so old that it was impossible to do pretty much anything other than post a blog.
So we found new hosting and prepared ourselves to move the site in its original format but Webs.com disabled our access to FTP, making it impossible to retrieve our files. It appears they did this to discourage us from leaving them. That was the last straw.
So without FTP access, we were stuck with figuring out how to move thousands and thousands of pages. Not to mention, we figured out that Webs was hosting many files remotely, so we wouldn’t have been able to access most of our content anyway.
We got creative and reverted back to primitive programming on the OS X unix terminal, using curl –O commands against our sitemap to download our site through http into individual files.
So now we have the raw data, but the CSS stylesheets are gone. That means the pages are up but they’re styled like it’s 1994. Ugly, ugly, ugly.
In the next week (that’s what we say but it will probably take longer), we intend to repost that content into our wordpress theme. The old files will probably be given a 301 redirect to prevent ’404 File not found’ errors for indexed urls.
deBanked has big plans for the rest of 2011 and 2012, especially with the amount of traffic we were getting while using the old, useless format.
In the meantime, you can forward all questions to webmaster@merchantprocessingresource.com
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Update 8/24 All old articles have been republished to the site in a readable format. Their dates/timestamps are still wrong but the original urls are intact.
Electronic Payments Industry changing Forever – All Points Bulletin!
August 23, 2011Electronic Payments Industry Changing Forever – ALL POINTS BULLETIN
Posted on December 17, 2010 at 8:36 PM
Attention business owners and to all those employed in the merchant processing and Merchant Cash Advance industry. The world is changing and not at the ‘global warming will one day kill us all’ pace. It’s happening right now. Remember that little thing called the Wall Street Reform and Consumer Protection Act that passed in July? There was a little itty bitty part in there that we so happened to broadcast and critique in detail on our site, known as the Durbin Ammendment. Take a look the law’s summary, particularly #3. On the evening of December 16th, the Federal Reserve Board delivered an early Christmas present to all the debit card networks and big banks. The gift contained the government’s proposed debit card fee changes, or as some bank executives might tell you, “they mailed us 10 sticks of dynamite.” If you’re serious about this business, read through the 176 page document that every news agency is trying to sum up in 3 paragraphs.
Visa’s stock plunged on the news
Debit cards accounted for 35% of all non-cash transactions in 2009. The proposed changes seek to cap the fee charged for accepting a debit card to a maximum of 12 cents. According to the report issued by the Board, here’s what businesses are paying now:
“Networks reported that debit and prepaid interchange fees totaled $16.2 billion in 2009. The average interchange fee for all debit transactions was 44 cents per transaction, or 1.14 percent of the transaction amount. The average interchange fee for a signature debit transaction was 56 cents, or 1.53 percent of the transaction amount. The average interchange fee for a PIN debit transaction was significantly lower than that of a signature debit transaction, at 23 cents per transaction, or 0.56 percent of the transaction amount. Prepaid card interchange fees were similar to those of signature debit, averaging 50 cents per transaction, or 1.53 percent of the transaction amount.”
Debit interchange fees have always been assessed as a percentage of the sales amount. The larger the transaction size, the higher the fee. Debit cards are most frequently used for smaller purchases but a flat cap on transaction fees regardless of transaction size is a game changer. Now twist this with the fact that interchange fees are almost disappearing altogether and one needn’t think too hard about the unintended consequences.
MasterCard issued a statement immediately. “Experience demonstrates that consumers, not banks or payments networks are the biggest losers as a result of this regulation,” said Noah Hanft, MasterCard’s general counsel. “This type of price control is misguided and anti-competitive, and in the end is harmful to consumers.” Visa hasn’t provided any useful feedback at this time but has openly condemned the report.
The Board acknowledges that some card issuers can’t even cover their own costs with the 12 cent transaction fee in effect. This Board’s direct response to this dilemma is that they simply don’t care. “An issuer with costs above the cap would not receive interchange fees to cover those higher costs. As a result, a high-cost issuer would have an incentive to reduce its costs in order to avoid a penalty.”
Thank you Federal Reserve for the feeble minded, anti-capitalistic solution. “Just lower your costs or we’ll fine you.” The outrage is warranted because the proposal isn’t really a proposal at all. This is the new order granted to the government after the passage of the Wall Street Act back in July. The payment networks and banks may comment on this proposal but effective July 21, 2011, this simply becomes law.
This is the equivalent to forcing all the businesses in America to lower their retail prices under penalty of law as the solution to dealing with consumers whining about the recession.
Additionally, the Board constantly refers to the life cycle of a debit sale to being a 4 party transaction. There is:
* The bank that issued the card to the customer
* The customer
* The business that the customer shops at and uses the debit card
* The acquiring bank that the business uses to accept debit cards
The payment networks are what allow the acquiring banks to communciate with the banks that issued the debit cards. The networks have costs associated with their service, infrastructure, and overhead. The 12 cents per transaction is the combined total that can be charged between both the acquiring bank, payment network, and issuing bank. There’s not a whole lot to go around.
While the Federal Reserve and congress are patting themselves on the back and high fiving eachother for saving the economy (by sticking it to the big banks), the end result will be the loss of millions of jobs, the elimination of debit cards, an increase in other bank fees, the end of all debit rewards programs, the end of electronic payments quality, the end of electronic payments assurance, and the collapse of the free market economy. Give me a high five. Not!
Here’s what will happen and why:
* The Board ignores or does not understand the electronic payments industry business model. The debit card business is not a 4 party transaction. The acquiring bank party encompasses multiple layers and parties in itself. Acquiring bank —> Payment Processor —> Indepedent Sales Office —> Sales Agents. Debit transaction costs are marked up at each level to create a competitive marketplace. The electronic payments industry employs millions of people. With a 12 cent cap and no markup abiliity, those millions of workers will lose their jobs overnight.The majority of this business is commission based, with processors and sales agents directly taking home solely what’s generated on the markup of debit/credit fees of their clients.This is probaby the most blatent and incredibly obvious oversight. There can be no competitive market because costs are fixed and there can be no sales because there is no money for anyone to earn on markups. National unemployment will rise several percent over the course of a few months.
* Rewards debit cards can no longer exist. Card issuing banks currently pay their customers rewards by charging businesses more for accepting a rewards card transaction. Since a bank no longer has that ability, rewards cards can no longer exist.
* Debit cards become a moot point for banks. With no profit incentive to put them in the hands of customers and no ability to compete on price, there is no incentive for debit networks or cards to continue.
* Quality, fraud protection, and assurance will suffer. Banks whose own costs are higher than the imposed cap face fines by the Federal Reserve unless they cut costs. Therefore the government is not only incentivizing poor quality, but in fact making it mandatory.
* Ever hear of too big to fail? This industry is too big to be messing with. These are the actual national and international money networks through which trillions of dollars move through every day. Mandating poor quality, eliminating all competition, and removing profit incentives will de-evolutionize the flow of money altogether.
The Board will review and allow comments through March 31st, at which point this industry will meet its maker. Yes, it’s that’s serious.
-deBanked
https://debanked.com
Did Somebody Say the End of the Credit Card Industry?
August 23, 2011
We check our site’s inbox once a day and usually receive some compliments, feedback, or industry secrets. But over the last two days, more than 15 people e-mailed us this link: The End of Credit Cards is Coming. This was followed by a barrage of comments such as “Does this mean the end of the Merchant Cash Advance industry as well?” or “It looks like your site topics are going to be obsolete.”
If any industry is poised to take a hit as a result of this “payment evolution”, it’s likely to be the manufacturers of plastic and magnetic strips. (The companies that make the cool shiny holograms on the back may also suffer.) If you actually READ through the article, it discusses an industry progression towards contactless payments. A contactless payment is still an electronic payment and it involves the same networks and banks. Saying the declined use of physical rectangular plastic cards will result in the end of the electronic payments industry as whole is like saying that the less frequent use of flutes and banjos will result in the end of music.
All sarcasm aside, this progression towards contactless payments indicates the merchant processing industry is on the verge of an explosive rebirth. Here’s why:
Equipment Sales and Leases
New technology to accept contactless payments will be required. If plastic cards are slowly phased out, retailers will have absolutely no choice but to purchase or lease equipment to accept contactless payments. (Sales and Leasing boom)
Increased Interchange profits for banks
The growth of contactless payments will likely cause Visa and MasterCard to increase certain interchange categories. They will rationalize this by providing proof that contactless security costs more.
New Payment Networks
Every merchant needs to accept both Visa and MasterCard branded cards in order to survive. In some regions of the country, it’s also important to accept American Express. Though American Express charges merchants more, they can’t afford not to have it. That being said, the above referenced article mentions the formation of a new super power payment network called ISIS to rival the current players. ISIS was formed by AT&T, T-Mobile, Verizon, Discover and Barclays Bank. Since ISIS is indepedent from the other payment networks, they will be able to create their own “interchange” and cost structure. I am inclined to believe that costs will not be lower than what’s commonplace in the current marketplace.
Increased Electronic Payments Usage
For the past 4 years, we’ve been lectured repeatedly by the government, teachers, and financial experts that credit cards are bad. During that same time period, we’ve also celebrated the importance and efficiency that phones/smart phones have brought into our lives. Blackberries, iPhones, Droids, texting, apps, skype, and wireless internet are the bread and butter of our daily lives. So what is the public inclined to infer with phones capable of making electronic payments?
- Credit Cards Payments Bad
- Smart Phone Payments Good
As long as Smart Phone is Good, consumers don’t need to feel guilty over their usage of credit. I’m sure we’ve all seen the debt counseling talk shows where they take an out of control spending housewife and force her to cut up her credit cards. She cries a little, acknowledges her problem, and then in a symbolic gesture of triumph, cuts up her cards. The entire charade portrays the plastic card as the perpetrator of the woman’s debt problems. One thing I don’t expect to see any time soon is a woman being lectured by a debt counselor to smash her iPhone with a hammer to stop her out of control spending. “In order to conquer your debt, I want you to go home and burn all 5 of the Droids on your family plan.”
BECOME DEBT FREE
Join the thousands of people who are breaking their scissors on their phones, buying new scissors, and then smashing their phones with a hammer. Say “Forget it to Credit” because there’s no app for your spending problems!
Those rectangular plastic cards may be on their way out but contactless payments are going to bring billions to the merchant processing industry. Happy processing!
-deBanked
