Source: CNN Money.com, February 21 2012, by Jose Paglieri 

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.

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“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.”

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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.

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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 with a fee equivalent to 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.”

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As a professional turnaround company, we can provide an intermediate option. By slashing the corporate debt and burn rate, we can ultimately improve the financial health of the business. We reduce the risk of the investor making an additional round of funding to a project on the cusp of profitability and at the same time increase the value of the venture backed company.

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Source: cfo.com by Sarah Johnson

More small businesses applied for loans last year, but the number receiving credit stayed the same.

Despite moderate growth in the U.S. economy toward the end of last year, small businesses were more likely to face rejection by lenders in 2011, according to a study released today by the National Federation of Independent Business (NFIB).

For each of the past three years, close to the same number of small companies — between 1.6 million and 1.7 million businesses — were able to obtain credit from a financial institution. But small businesses made more tries at getting a loan or line of credit in 2011, meaning more got turned away. “Demand rose relatively substantially . . . but we didn’t see any net new people getting credit,” says William Dennis, NFIB senior research fellow.

Part of the reason, of course, is that some small businesses are still hurting financially. Last year lenders received more requests from small-business owners with shakier credit profiles than from those likely to pay back their loan on time.

But much of the blame for small businesses’ unmet credit needs falls on the real estate market. Nearly all of the 850 small businesses surveyed in the NFIB’s annual credit report own some sort of property, and those assets’ declining values have affected potential borrowers’ clout with creditors. Many small businesses have put up their company’s or even their own personal property as a way to fund their business. Nineteen percent have used mortgages or the proceeds from mortgages and 15% have posted property or other collateral to get a business loan. “With depressed balance sheets and the loss of collateral [value], businesses that would otherwise be capable of borrowing can’t,” says Dennis.

But that hasn’t stopped small businesses from trying. The NFIB reports 57% of small-business employers sought a loan from a financial institution last year, a 9% increase over 2010. In 2011 companies were more interested in obtaining new lines of credit and credit cards than other kinds of loans, and requests for loans and line renewals were flat. In fact, only 29% of small businesses were carrying a loan as of the end of 2011, a decline from 44% three years ago.

02/16/2012

Dow Jones Newswires

The first thing I should mention about Larry Doyle are his life’s priorities: faith, family, capitalism. He grew up in a big Catholic family in Boston. His father was a lawyer. His mother was a real estate agent. He was one of eight siblings, five of whom landed work on Wall Street.

After graduating from the College of the Holy Cross in 1983, Doyle began his career at First Boston. There he met a guy named Laurence Fink, who helped pioneer the mortgage-backed security. Today, Fink is CEO of BlackRock Inc. (BLK), the giant multinational investment firm.

“Larry hired me,” Doyle said. “He goes, ‘You are really not going to know anything for the first year, so mind your Ps and Qs, and go get me a cup of coffee.’”  Doyle did whatever he was asked to do. Before long, he got a position on the trading desk. He worked at First Boston for nearly seven years. Then he moved to Bear Stearns. Then UBS. Then Bank of America. Then J.P. Morgan Chase.

Doyle, now 51 years old, left the mortgage-backed-securities business in 2006, well before it imploded and practically toppled the entire U.S. economy. But he attributes this move to circumstance, not foresight. “You could start to see significant cracks,” he said, “primarily in the subprime space. But I couldn’t forecast what was going to happen.” The mortgage-backed securities he trafficked were higher-quality. In its infancy, the mortgage-backed-securities industry wasn’t taking crazy risks with subprime paper, and toward the end, J.P. Morgan Chase & Co. (JPM) made a decision to stay out of the subprime end of it, Doyle said. “I never sold something where I thought, ‘Oh man, this is truly a piece of garbage,’” he said.

But Doyle said he went to work on Wall Street knowing it sometimes took advantage of the people who work and invest there. “I wanted to take advantage of Wall Street without Wall Street taking advantage of me,” he said. “That was always my mantra. I kept it to myself, and it worked.”

Since leaving J.P. Morgan Chase, Doyle has been investing the money he made over his career. Married 24 years and a father of four, he lives in Connecticut and now spends his time mentoring students, staying involved with his church and writing a blog, www.senseoncents.com, where he said some of the darndest things about Wall Street.

Regarding the missing $1.6 billion at the imploded firm run by former U.S. Sen. Jon Corzine, Doyle wrote: “We need an MF Global grand jury….Money does not vaporize. Money is misappropriated. Money is stolen.” On last week’s big settlement among 49 states, federal regulators and five major Wall Street firms, including J.P. Morgan Chase, Doyle wrote: ”In a nation now all too familiar with a ‘too big to fail’ banking system, a heavily manipulated and high frequency dominated equity market, and an incestuous financial regulatory system, we should not be surprised with a mortgage settlement that does little more than ‘piss into the wind.’”

He has fiercely championed investors of “auction-rate securities,” whom he said have been jilted in settlements between regulators and the big firms that misled investors about the safety of these instruments. Though marketed as an alternative to money market funds, the entire auction-rate securities market collapsed in 2008. ”The auction-rate securities market was nothing more than a Ponzi-style financing,” Doyle said. “Four years later, there are people who still can’t get their money.”  It was another fine Wall Street product shoved through the pipes. ”When you tell a salesman there’s a quarter-point commission in something, they’re going to figure out a way to sell it,” Doyle said. “And they did.”

Among the central themes on Doyle’s blog: Wall Street has co-opted regulators who are more interested in their next job than protecting investors. Washington, from the Oval Office and Congress on down, has simply been acquired. And America’s investors are often too financially illiterate to know what hit them. “People are basically ignorant. They are sheep. Part of the reason I launched my blog was to say, ‘wake up.’”

Doyle said his former colleagues on Wall Street have yet to give him any blowback. “My friends are like, ‘keep writing,’” he said. “My blog is really an indictment of the Wall Street management. There are plenty of scumbags on Wall Street. But the people I know, they’re good people trying to make an honest living.” Pointing out malfeasance should not be left to Occupy Wall Street protesters, some of whom would rather destroy capitalism than correct its flaws. “I’m the furthest thing from a liberal,” Doyle said. “But let’s not forget what happened here. Capitalism got abused.

“The country needs Wall Street. It needs a flow of capital and credit, but when politicians get paid off, you end up with a regulatory system that protects the industry rather than investors.” “I’m just trying to help people understand what’s going on here,” he said. “If that’s critical of the industry, well, let’s put it this way, there’s been a lot to write about.”

(Al’s Emporium, written by Dow Jones Newswires columnist Al Lewis, offers commentary and analysis on a wide range of business subjects through an unconventional perspective. The column is published each Tuesday and Thursday at 9 a.m. ET. He can be reached at 212-416-2617 or by email at al.lewis@dowjones.com, or on his blog at tellittoal.com.)

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