Any independent sales organization contemplating a merchant cash-advance business should review the best-practice recommendations of the North American Merchant Advance Association, the group’s president advises.
Merchant cash advances, a value-added service some ISOs offer to retailers, represent lump-sum payments to a business in exchange for a percentage of its future credit or debit card sales.
The industry, which advances about $800 million annually, was in its early stages in 2006, when several funding companies formed the association, says David Goldin, president and CEO of AmeriMerchant, a New York-based advance provider, and the advance association’s president.
The merchant cash-advance business has come of age, taking on the same respectability as other value-added services ISOs sell to merchants, such as prepaid cards or direct deposit, says Adil Moussa, an analyst with Boston-based Aite Group LLC.
“Respectability is always a matter of degree,” says David Fish, senior analyst at Maynard, Mass.-based Mercator Advisory Group Inc. “There is a higher level of respectability currently in that space, but that’s not to say there’s not work to be done.”
Consolidation has helped burnish the merchant cash-advance market’s image because the better companies have survived while the lesser firms have folded or have been acquired, Fish says.
As the number of players has shrunk, the advance association’s membership has grown to 12 funding companies, Goldin says. That membership includes nearly every firm that advances $25 million or more annually, Goldin says.
Along the way, the group put together six guidelines, which Goldin says may benefit both funding companies and ISOs alike.
First, the association advises clear disclosure of fees. Merchant agreements should state the amount of future receivables purchased, the price paid for them and the amount held daily to pay back the advance, according to the guidelines.
Funders and ISOs also should provide clear disclosure of recourse. An advance is a purchase of future card receivables, not a loan, the association emphasizes. That means the merchant may not have to repay the amount specified if the business fails. However, funding companies could hold merchants responsible if they sell their businesses or stop accepting the specified cards.
Be sensitive to a merchant’s cash flow, the association advises in another best-practice guideline. Revenue should help determine the percentage of future sales used to repay, the group says.
Review marketing materials, which should note that an advance is not a loan, the association warns. And monitor sales agents, the group suggests, ensuring they accurately present the terms and conditions of the advance.
Finally, ISOs should ensure proper payoff of outstanding balances, the association maintains. If a funding company provides capital to a merchant already carrying a balance on an advance, the new funder should pay the original funder instead of relying on the merchant to do so, according to the association.
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