Why has bank lending dried up over the past few years?  The Asset Recovery Capital (ARC) loan disaster says it all. It thankfully expired last month after congress failed to extend the program. Originally intended as “stimulus”, the ARC loan highlighted some alarming flaws in America’s lending system.  What the ARC loan offered: http://money.cnn.com/smallbusiness/arc_emergency_small_business_loans_primer.smb/index.htm

1. Up to $35,000 in funds
2. Interest Free for 6 years
3. No payments for the first year
4. Must be in business for at least 2 years
5. Must be experiencing financial hardship but be financially viable long term
6. 100% default guarantee by the bank

What the result was: http://www.washingtonpost.com/wp-dyn/content/article/2009/11/05/AR2009110505178.html and http://money.cnn.com/2010/10/05/smallbusiness/ARC_loans_expire/index.htm

1. Predicted 56% default rate
2. Bank’s cost to underwrite the loans exceeded the profit they stood to make on them
3. Only $287 Million was funded over the course of approximately 15 months
4. Small businesses did not benefit

Common sense dictates that if you charge too much on a loan, you’ll have defaults. So how in the world does a loan program with no interest have a default rate of over 50%? Consider now that these businesses had to go through a rigorous underwriting and screening process to get approved. The end result is shocking and the sample size is large enough to be indicative of the real credit situation in America. Bankers have a guide about this kind of conundrum somewhere….. it’s called The Book of Revelation.

With a 100% default guarantee by the government, banks were not exposed to these massive losses. They did however get a front row view to what will happen if they lend their own money to small businesses. Don’t expect them to get excited about your expansion ideas any time soon.

The ARC loan has gotten plenty of publicity and praise over the last year. Many americans assume that a program where the taxpayers, banks, and businesses all lose in the same transaction is somehow the best option available to revive the economy.

Garnering far less media attention and yet rebuilding the foundation behind the scenes is an alternative financial product known as a Merchant Cash Advance. Differing from traditional loans, they are a purchase of a business’s future credit card sales. After a business receives a lump sum of capital, a small, fixed percentage of each credit card sale is automatically withheld until the amount of receivables purchased is paid back. There is no exact due date for the funds and repayment only happens at the rate sales are generated.

A Merchant Cash Advance offers:

1. Up to $500,000
2. Pay only at the pace that you generate revenue
3. Must be in business for only 6 months
4. Poor credit is acceptable

And what’s the result?
1. Historical default rate is less than 10%
2. Small businesses receive cash when needed with proven success over the years
3. Approximately $1 Billion funded each year
4. Small businesses benefit

The Merchant Cash Advance alternative has outlived its newness and is proven to be a long term, healthy, viable source of capital for businesses. Merchant Cash Advance providers out funded the ARC loan to small businesses by an astounding 4 to 1 ratio over the course of 12 months. With a history going back to the 1990s, this industry has been heavily expanding since 2005. Not many small business investment firms walked through the door of the Great Recession and came out the other side flicking the debris off their shoulders. This business model is tried and tested. Additionally these providers are privately owned and capitalized, putting no tax payer dollars at stake.

The program is not intended to save dying businesses, but rather grow and sustain healthy ones. The very few casualties of Merchant Cash Advances have stirred negative sentiment towards this often misunderstood financial product. Not surprisingly, the businesses defaulting on their interest free ARC loans have walked away with $150 Million of our tax payer money without so much as a peep.

Sure Payment Solutions in New York City, is one such Merchant Cash Advance firm that is working diligently to help small business owners obtain capital. Owned by two seasoned industry veterans, Sure Payment Solutions has first hand experience providing capital in good times and in bad. The concerns of business owners in 2007 is different than those in 2010. As they adjusted, they’re realizing that many business owners are still barking up the wrong tree.

The bank isn’t there to be your friend anymore. After watching small business feast on the government backed ARC loan, there is no reason to blame them. The long era of small business lending has come to its inevitable closing chapter. In these times, we must all adjust. A Merchant Cash Advance may be a good fit for your business.