Towne Services Inc. said its initial public offering cleared the way for it to develop a new market for financing merchant receivables.

The Norcross, Ga.-based company sells software and processing services for moving in-store credit balances on to banks' books. Merchants can improve their cash flows, while the banks can earn 15% to 30% returns, Towne says.

"It's in an early-stage situation, but they have a great product that is being accepted by banks," said Charles Wittmann, analyst at Wheat First Union, the lead underwriter for Towne Services.

Three million small businesses nationwide grant in-store credit, mostly to retail customers, building up outstanding balances estimated at $200 billion, Mr. Wittmann said. Towne Services is poised to capture a significant share of that, he said.

In little more than a year, Towne Services has signed 200 community banks, which are offering the service to 300 small businesses in 25 states.

Mr. Wittmann said he expects the company to become profitable by next year's the third quarter and produce $77 million in revenues by 2000. He rates the company a "buy" and expects its stock to reach $13 a share within the next 12 months. It closed Friday at $5.125.

Towne Services went public July 30 at $8 a share on the Nasdaq market. That day the index was off 5% from its July 21 high of 2,028 and 12 other scheduled IPOs were shelved, Mr. Wittman said.

The company raised $28 million. "We needed to go public and have excess capital on our balance sheets to convince bankers of our staying power," said Drew W. Edwards, chairman, chief executive officer, and founder of the company.

The company generated $1.4 million of revenues in the first half, up from $185,000 in the comparable 1997 period. Losses rose to $15.4 million, from $721,000.

The abnormally high loss represents a $12.1 million one-time charge required to grant stock options to employees, said Mr. Wittmann. Excluding that charge, the first-half loss would have been $3.3 million.

Mr. Edwards, formerly with the Federal Reserve Bank of Atlanta and with Bankers Bank there, founded Towne Services in 1995 with $9 million from venture capitalists. He modeled the financing process after the credit card industry's discount fee system.

Small businesses tally the total of purchases made with in-store credit and transmit it to Towne Service's data center in Georgia. A bank grants the merchant a line of credit, funding the merchant's account at a 2% to 5% discount the next day. Towne Services bills the customer at full value, with interest if the credit is revolving, and splits the difference with the bank.

Cary Epes, executive vice president at Old Point National Bank, Hampton, Va., said he spent $15,000 for the software a year ago. He has resold the service to 12 merchants, adding $1 million in receivables to the bank's books for an average 16% return, he said.

Mr. Epes had hoped for larger adoption among his merchant customers, but is nonetheless enthusiastic. "It gives mom-and-pop businesses the ability to offer in-store credit but not have to carry all of the paper," he said.

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