Jump-starting the flow of capital in a sluggish economy can seem like an intractable problem. Many businesses struggling to grow and expand have an increased need for upfront capital, but under current economic conditions banks and financial institutions are often reluctant to provide loans.
Capital Access Network Inc. - parent company to two subsidiaries, the merchant cash advance provider AdvanceMe Inc. and alternative loan services provider NewLogic Business Loans Inc. - champions innovative methods for vetting applicants and retrieving (paying back) advances and loans to lift businesses in need of working capital. The company focuses primarily on helping small- to midsize businesses (SMBs), providing most of its services through ISOs and other third-party sales channels.
With CAN, the type of capital infusion and the particulars around retrieval are determined by leading-edge risk scoring models that take into account specifics about an individual business, as well as huge troves of data related to broader merchant sales trends collected and analyzed since the company was founded in 1998. Through this process, each advance and retrieval arrangement can be tailored to suit individual merchants, according to Chief Executive Officer Glenn Goldman.
To date, CAN has advanced business capital to tens of thousands of U.S. merchants, having completed about 80,000 merchant contracts with an estimated 40,000 merchants, according to Goldman, who anticipates delivering $500 million in working capital to businesses this year. All told, the company has surpassed $2 billion in funding, Goldman noted.
He added that the company has 390 employees dispersed in four locations in New York, Massachusetts, Georgia and Costa Rica, and said CAN's international division is currently working to expand the Daily Remittance Platform developed by CAN's Financial Technology Group to financial institutions in 22 nations, so that financial institutions in those countries can provide working capital to local businesses.
According to Goldman, the process behind the company's merchant cash advance platform is somewhat counterintuitive to traditional lending. Traditional loan providers vetting loan applicants tend to focus on their financial histories, while AdvanceMe's scoring model primarily assesses the potential for future opportunities. The company uses a sophisticated, automated computer algorithm to determine both merchant eligibility and the right parameters for retrieval.
Broadly speaking, businesses are more likely to qualify for a merchant cash advance than a traditional bank loan, Goldman said. However, he added that it sometimes works in both directions: merchants with high credit scores may qualify for a traditional loan, but not a cash advance. In such cases, CAN's screening system may determine that, despite a merchant's reliable credit history, the potential for future business growth simply isn't there.
"Standard personal credit scores are a rearview mirror approach, whereas we see ourselves as looking through the windshield at the road ahead," Goldman said. "What we've found is that standard credit is not predictive of performance. We've found that the level of cash flow, the number of years [a proprietor] has been in business, how effectively he's managed his business ... all are better predictors [of the company's financial future] than whether he has five credit lines, or two, and how quickly he's paid the bills."
While the use of merchant cash advance has grown in popularity among ISOs, processors and other payments industry players, AdvanceMe pioneered the practice over 12 years ago, Goldman reported. And merchant cash advance offers a variety of advantages over traditional loans. For one, he explained that merchants who might not qualify for traditional loans often do qualify for merchant cash advance. Second, the process of receiving a cash advance is much simpler and requires far less paperwork than would a traditional loan.
"I've been working with [CAN] for four or five years, and they are the easiest in terms of getting a deal funded and the simplicity of underwriting around paperwork, time and communication," said Matthew Gibb, Director of Sales for the Philadelphia-based Victory Capital Group. "They are willing to lend to more customer-friendly programs and to a broader spectrum [of merchants]."
Another advantage is that cash advances are repaid as a small percentage of a merchant's daily credit and debit card receivables, rather than through a fixed payment, meaning payments ebb and flow in line with a merchant's card sale fluctuations. But for merchants that prefer the structure of a loan, CAN offers capital loans through its NewLogic subsidiary, where maturity dates are predetermined and repayment occurs as a percentage or fixed amount of daily receivables.
"When you receive a small payment each day, from a risk management perspective, it's better than to rely on your customer to write you a single check," Goldman said. He said the percentage-based reimbursement can be particularly important for seasonal merchants who may need capital during slower business cycles and are looking to pay back the bulk of their advances during peak periods.
The cash advance process is predicated on what is known as a "split" of merchant receivables. This means merchants who receive upfront capital from a cash advance provider agree to redirect a percentage of their credit and debit sales, via their card processor, to the cash advance provider until their obligation is complete.
That percentage and the period over which the advance is retrieved vary from merchant to merchant, based on sophisticated algorithms that take into account a broad spectrum of factors, according to Goldman, who noted that with CAN's advanced technology the scoring models are constantly updated.
"When we underwrite businesses for cash advance, there is a vetting process, and the goal is to make it as easy as possible for a business owner to complete their obligation," Goldman said. He added that, as a rule, AdvanceMe's retrieval ceiling is typically 9 percent of a merchant's total sales, but rates even that high are generally relegated to businesses with high-volume receivables. The number can also be as low as 2 or 3 percent.
Advances are generally retrieved within 12 months, and loans range from $50,000 to $500,000. Goldman said the aim is to allow merchants to grow their businesses without straining them.
"Often, small businesses will look for more capital than their business can support," Goldman said. "Others will be able to support those higher levels. For example, pizza restaurants have significant margins and their costs tend to be low. In this case, we might be willing to provide more capital."
Indeed, doing the delicate balancing act of helping merchants in the short term without harming them in the long term is the cornerstone of CAN's capital infusion platform. Among other things, that goal is driven and realized by the interconnectedness of its various divisions.
In particular the storing, sharing and analysis of an ever-evolving cache of data forms the bedrock for the company's product suite. According to Goldman, the company has compiled and stored data from every merchant it has ever boarded, and continues to do so. At the end of each day, the computerized algorithm used to evaluate the eligibility and proper parameters of each and every merchant customer is updated, based on transaction data from that day's credit and debit card processing batches.
Among other things, the algorithm takes into account a given merchant's transaction history, trends or fluctuations in that history, trends in the industry to which a given merchant belongs, trends driven by location and other geographic information, and how long the merchant's business has been in operation.
The predictive analytics provided by CAN's Data Services Division help ISOs and merchants stay abreast of industry trends. The company's quarterly Small Business Credit Sales Report examines same store trends related to credit and debit card sales among SMBs, as opposed to most other reports that focus on big-box and national retail chains.
CAN's Small Business Barometer captures and reports data on topics that reflect SMB perceptions and experiences that support the growth of Main Street businesses. Its Merchant Credit Sales Monitor analyzes merchants' year-over-year monthly credit and debit transactions and provides a comparative analysis of competing businesses for monitoring trends and making informed decisions.
CAN offers white papers on a range of topics. Recent topics have included the growth of merchant cash advance in South America, the correlation between scarce credit opportunities and an increased reliance among small businesses on alternative capital sources, and how to conduct small business advances without putting an undue burden on the recipient.
"There's a lot of good information there," Victory Capital's Gibb said. "They'll say, 'We're now lending in this industry,' or 'we're rolling out this promotional program for seasonal merchants.' A big white paper just came out putting some [unofficial] rules on an industry that needed some. ... It sent [a message] to the rest of the industry not too take too much money [from a merchant] or stack one deal on top of another."
According to Goldman, one bonus of merchant cash advance is that it's rarely a self-contained, one-off product, but rather a driver of long-term growth that can deliver compounding benefits. Seventy percent of merchants who receive advances from AdvanceMe take out a second one at some point, he said.
The infusion of capital trickles out to merchant providers, who also benefit from merchant growth and increased sales. Goldman said, "In providing capital to small business, it drives value because they use that to expand their business, which increases their processing value to acquiring and processing partners."
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