Merchant cash advances, essentially loans that businesses pay back from future card receipts, have survived market saturation, an image crisis and an economic meltdown.
ISOs can provide advances as a value-added service, yet the advances remain a low priority for some ISOs, and the companies that fund them acknowledge the cash-advance market is still waiting for its big moment.
Improved communication is bolstering the image of merchant cash-advances, but critics continue to point to the fees, potentially high interest rates and aggressive payback periods as reasons for merchants avoid them. Meanwhile, advance firms say their better business practices are helping them play a much-needed role, though not all ISOs are biting.
An alternative to bank loans–and sometimes a last resort after a loan rejection–a merchant cash advance enables a business to obtain working capital for expansion or expenses. Participating ISOs work with third-party funding suppliers who, for a fee, provide thousands of dollars to a business owner in a matter of a few days. The ISO gets a commission on the transaction.
Merchants repay advanced money through a portion of their monthly gross receivables, split out by their payment-processing providers. The payout averages between 10% and 20% of the merchant’s monthly revenue, and payback periods average between six months and nine months, says David Goldin, CEO of New York City-based advance firm AmeriMerchant and president of the North American Merchant Advance Association.
Both percentages and payback periods vary widely, however, with splits of more than 25% possible and collection periods as long as a year or as brief as four months. Advance amounts also can range from $5,000 to $250,000. Funding firms say the amount advanced depends on the merchants’ qualifications and the risk involved.
Last year, advance services delivered more than $760 million to merchants, Goldin says. ISOs say the sector is rebounding after a period of market saturation followed by a funding drought.
“With the failure of the mortgage sector, a lot of mortgage brokers got into this, and there were too many,” says Richard Ward, president of Meramak Bankcard, a Hamilton, N.J.-based ISO that offers cash advances. “It was too competitive, so we got out of it for a while. But more recently, a lot of those brokers left the market, and we came back in.”
Stephen Sheinbaum, president of Merchant Cash and Capital, an advance firm based in New York, agrees that mortgage companies, some backed by the likes of Lehman Brothers and Goldman Sachs, flooded the market with cash four to five years ago. “There was a lot of liquidity in the market then, but a lack of understanding. And companies were not as well educated as they should have been,” he says.
The industry also has fought comparisons to consumer payday loans. Questionable lending practices by some companies and a general lack of communication across the sector did little to help the cash-advance market shake those comparisons. Cash-advance companies often call their transactions “purchases” of merchant receivables and avoid loan terminology such as “payback,” saying they are merely collecting what they had already purchased.
But by any name, the practice is earning respectability and becoming an established offering for at least some ISOs.
A longer version of this article appears in the soon-to-arrive September-October issue of ISO&Agent magazine
