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This article appears in the June 6, 2009, issue of ISO&Agent Weekly.
More merchants are turning to cash-advance providers in the difficult economy because traditional bank lending is more difficult to acquire. But just as banks have set more stringent standards, so, too, have cash-advance companies as the economy has slowed and more merchants encounter financial difficulties.
More stringent underwriting criteria mean some merchants that previously may have qualified for a cash advance no longer are eligible, and ISOs may encounter increased difficulty in getting clients approved.
The more difficult it is to get a merchant approved for a cash advance, the more unlikely sales agents are to sell the advances actively, says Henry Helgeson, president and co-CEO of Merchant Warehouse, a Boston-based ISO.
Increased Standards
Some merchants that took cash advances before the recession and have since encountered financial issues are having trouble repaying their cash-advance providers, says Helgeson. "Lots of merchant-cash advance companies have taken hits and have not been able to get payback from merchants," he says.
In response, some cash-advance companies have undergone a "major tightening of underwriting policies," says Helgeson. "They generally are less willing to give advances," he says.
Merchant Cash & Capital has increased its merchant criteria and is more selective about the retailers to which it advances funds, says Stephen Sheinbaum, CEO of the New York-based cash-advance provider. "We raised the bar," he says.
Among its updated criteria, Merchant Cash now speaks with a larger number of merchants' vendors to ensure they are in good financial standing, and it requests the most recent processing data "to see if merchant-processing volume has fallen off in the past few weeks," says Sheinbaum.
Merchant Cash previously required processing volumes only from recent months.
Some merchants also may face tougher demands based on where they are located, says Xavier Ayala, vice president and director of national sales and marketing at Humboldt Merchant Services, a Eureka, Calif.-based merchant-service provider.
Merchants in some areas, such as Florida and southern California, have had more financial difficulties than their counterparts in other regions, he says.
"I'm not saying companies won't take accounts from these areas, but I'm saying they will take a harder look at these specific areas" because they have seen an increase in merchant default and delinquency rates, Ayala says.
Approval Difficult
The increased standards imposed by some cash-advance providers have made it more difficult for ISOs to sell cash advances successfully to their merchant clients.
Sales reps at Merchant Warehouse "pretty much have stopped selling it at this time because it's so hard to get someone approved," Helgeson says. Sales agents understand that their time with clients is valuable, "and they don't want to go in and get documentation and get declined," he says.
Many agents fear a merchant that is declined for a cash advance may become unhappy overall with its ISO, notes Dane A. James, executive vice president of corporate sales at Cynergy Data LLC, a Long Island City, N.Y.-based processor and ISO. "They don't want to risk the core business we have" to try and get a merchant approved for a cash advance. As a result, "the sales people are bringing the product up less and less," he says.
Many of the merchants applying for cash advances are of the same quality that requested funding before the recession. However, the increased standards have made it more difficult for the same caliber of merchant to be approved for a cash advance, says Helgeson. "We're seeing an increase in the volume of requests, but we're not seeing better merchants" with higher credit scores applying, he says.
The merchants requesting cash advances "are the ones with the worst possible type of credit, and they're getting declined by the cash-advance provider," says James.
Some cash-advance providers, however, are seeing an increase in merchant quality, notes Sheinbaum. "The quality of the merchant that we're giving money to today is substantially better than it was," he says. He cites the decreased availability of credit lines from financial institutions and corporate credit cards as the reason some larger merchants with better credit scores are considering cash advances.
A majority of merchant-service providers—56%—offer merchant cash-advance services, according to a survey by ISO&Agent magazine. Forty-two percent of 57 respondents stated between 1% and 10% of their merchant clients use cash advances, while 47% stated none of their clients use them.
Merchants Seek Funding
More merchants overall are seeking cash advances because of the recession, despite more stringent standards from some cash-advance providers.
During the recession, merchant cash-advance provider AdvanceMe Inc. has seen an "uptick" in merchants looking for funding, says Mark Lorimer, chief marketing officer for the Kennesaw, Ga.-based company. "Since the banks have tightened [lending] during the credit crunch, [some merchants] have looked hard to seek out more sources for financing," says Lorimer. "In the past, they may not have looked past their local bank."
Indeed, the slowed economy has increased the demand for products such as merchant cash advances, says Adil Moussa, an analyst with Boston-based consulting firm Aite Group LLC. "Some card networks and issuers have pulled the rug from small businesses by lowering their credit limits on cards or loans after the economy deteriorated," he says
As credit lines constricted, merchants "who never considered a cash advance before" began looking into it, agrees Sheinbaum. "We are undoubtedly seeing growth of the merchant cash advance in the recession," he says.
A recent National Small Business Association survey found small businesses also relied more heavily on credit cards for financing during the first four months of this year. Some 59% of respondents said they used credit cards during the previous 12 months to finance their businesses compared with 49% who said so in December 2008. Some 33% of respondents said card issuers had reduced their credit limits in recent months, up from 28% who said so in December.
The Washington, D.C.-based organization surveyed 288 of its members online between April 27 and May 5.
