When merchants fail to qualify for a cash advance because of bankruptcies, liens, foreclosures, credit scores below 550 or undesirable Standard Industrial Classification codes, independent sales organizations can turn to a handful of companies that specialize in the “decline” market.
Strategic Funding Partners Inc., one such company that advances cash to merchants others might shun, does business from a Gainesville, Fla., headquarters under the name Merchant Cash Group.
Merchant cash advances usually come in the form of a lump sum payment to a merchant in exchange for a specified percentage of future credit card receipts. “Decline” refers to merchants that have been turned down for funding.
Merchant Cash Group protects itself from the downside of providing cash to riskier-than-usual merchants, says Heather Francis, the firm’s director of business development and client acquisitions.
For protection, Merchant Cash Group carefully screens merchants and offers risky clients smaller initial advances at larger discount rates than less-risky merchants would receive, according to Angela Hanssen, the company’s underwriting manager.
The company pays ISOs a 10% commission for signing up merchants and 5% for renewals, says Francis.
ISOs have the option to pursue renewals, which can help them maintain relationships with merchants, Hanssen says. However, ISOs still collect renewal fees if they delegate the follow up to Merchant Cash Group, she says.
The renewal fees come more frequently with the Merchant Cash Group than with most advances, Francis says. That happens because most advance companies renew after eight or nine months, while Merchant Cash Advance renews after two or three months, she says.
ISOs that secure an advance through a “decline” company build loyalty among merchants that have been turned down by other funding sources, says Francis.
“It can be a retention tool,” she says.
Merchant Cash Group began researching the market in January 2009 and began making advances in July of that year, Francis and Hanssen say. They considered the company’s activity a test until January of this year.
“Now it’s full-speed ahead, and we’re here to stay,” says Francis.
The company specializes in “decline” business because advance companies already were established in the mainstream trade, she says.
The company has made advances to merchants with risky Standard Industrial Classification, or SIC, codes, says Hanssen. Those merchants have included furniture stores, thought risky because of long delivery times, big tickets and likelihood of charge-backs; membership club stores; legal medical marijuana sellers in California and Colorado; rent-to-own businesses; and Web-based retailers that ship all of their merchandise directly from factories to consumers and thus own no inventory.
Merchant Cash Group performs much of the same due diligence as mainstream advance companies, including use of LexisNexis Group computer-assisted legal research, interviews with the merchants and their landlords, and the use of third-party companies that photograph businesses and conduct interviews.
“It can be a red flag if we catch them saying something that just doesn’t add up,” Hanssen says of the interview process.
Advances make sense for merchants that want to add another location or buy a point-of-sale system to help manage the business more effectively, says Hanssen. Renovation can prove trickier because a store or restaurant might close temporarily, thus reducing card receipts, she says.
Taking an advance to cover the rent or meet the payroll tends to indicate long-term problems but sometimes results from just a slow month or a rainy tourist season, Hanssen says.
The company provides risky merchants with initial advances of 30% to 50% of monthly credit card receipts–less than the typical 100% to 125% less-risky merchants receive from mainstream advance companies, says Francis.
If a company averages $30,000 monthly in card receipts, for example, Merchant Cash Group might offer a $10,000 advance, she says, while less-risky merchants might receive $30,000 to $45,000.
The company provides ISOs and agents with cash bonuses and free merchandise in promotions that vary throughout the year, says Hanssen.
“We like to pay for performance,” says Francis. “You push your team and set a goal, and everyone works harder.”
