Tuesday, September 2, 2014
The merchant cash advance alternative funding option for small to midsize businesses (SMBs) has been well documented. But ATM ISOs are SMBs, too, and yet not as much attention has been given to the alternative funding avenues available to them. Super G Funding LLC, which specializes in funding ISOs, devoted a white paper to the challenges and opportunities for ATM ISOs, also termed independent ATM deployers (IADs), in finding capital to grow their businesses.
Like most merchants, IADs are having trouble obtaining traditional bank loans in the present economy, said Super G Funding in Lending Challenges and Solutions for Growing Your IAD in Today's Economy. Fortunately, a number of financing options are available to IADs, including equity investment strategies. IADs can turn to venture capitalists, angel investors, public investors and corporate investment firms to gain capital, said Super G Funding.
However, the downside to going the equity investment route is that investors carry more risk than traditional lenders. "As equity investors rarely have the same rights as debtors, companies are not required to repay the original investments should the business collapse," the paper noted. "Since there is the risk of losing their investment should a business fail, equity investors require higher returns than lenders and usually demand a seat on the board and require approval for any major changes or expenditures – often taking control out of the hands of the IAD's management team."
Another funding option for IADs is selling off merchant portfolios, with multiples ranging between 12 to 35 times monthly residuals and larger portfolios commanding the highest multiples. But Super G Funding recommended that IADs sell portfolios only when they leave the business completely.
However, an alternative to the alternatives exists: borrowing against residuals through residual loans, which allows IADs to remain in business and maintain control of the business. "A residual loan resembles a cash advance product but doesn't take a cut of each day's transaction fees," Super G Funding said. "Instead, it takes monthly draw-downs for interest and principal before the borrowing IAD receives the residuals.
The alternative lender explained that, under the terms of a residual loan, the IAD has its processor temporarily assign distribution of residuals to the lender; the lender takes its monthly cut and forwards the remainder to the IAD. In addition, IADs can be easier to get than bank loans, can be funded in five to seven business days and can qualify for loans that are often five times their monthly residual streams.
"Because a residual loan's criteria is based on an IAD's residuals, credit history is not a factor," said Super G Funding Chief Executive Officer Darrin Ginsberg. "Instead, the lender looks at the past 12 months of residuals, what makes up the residual stream, how those residuals are performing and then bases the risk factor on those criteria."
Super G Funding reiterated the analysis of Meredith Whitney, CEO of New York-based Meredith Whitney Advisory Group LLC, who said small business credit has "contracted at one of the fastest paces of any lending category."
Todd McCracken, National Small Business Association President and CEO, chimed in, saying, "Not only have small-business owners been unable to find new credit over the last four years, nearly a third have had their existing credit slashed, and one in 10 had their loans called in early."
But the biggest factor in IADs unable to secure traditional funding is that banks simply do not understand the IAD business model based on residuals. "[B]anks have strict credit criteria based on eligible collateral, and residual streams are not a traditional asset to borrow against," Super G Funding said. "Banks also have to know how ISO and IAD residual streams evolve in order to properly manage that risk – something institutions are unlikely to look into unless they are focused on lending to payment processing-based businesses."
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