The past four years have been challenging for small-business owners, including ISOs and their clients. As banks tightened credit standards, even the strongest companies were forced to seek new funding alternatives or risk going out of business. The result has been an onslaught of new companies and financing tools geared specifically to the merchant acquiring space. This article's primary focus is financing options ISOs and merchant level salespeople (MLSs) can offer their clients. A subsequent article will explore resources for ISOs seeking to expand their businesses.
Data collected in March 2012 by Thomson Reuters Corp. and the financial research firm PayNet Inc. indicate that although the pace of small-business lending has picked up this year over 2011, it continues to lag.
The Thomson Reuters/PayNet Small Business Lending Index tracks new loans and leases provided each month to small businesses. The index uses as its baseline January 2005, which is indexed at 100 points. It fluctuates based on a monthly survey of lenders. In March 2012, the index came in at 98.2 points, a slight drop from 98.3 points in February and a significant decline from December 2011, when the index stood at 110.5 points. PayNet, which claims the largest data base of loan and lease payment information in the United States, said small-business credit applications as of March 2011 were about equal to the number reported for June 2009.
"Access to operating capital is an ongoing challenge for smaller businesses, as it has become extremely difficult to secure a reasonable loan," American Express Co. said when launching its new merchant loan program, Express Merchant Financing, in September 2011. The program offers loan amounts of up to $750,000 in a matter of days. To qualify, merchants must generate at least $100,000 in annual AmEx charges, have at least two years tenure with AmEx and have no account delinquencies.
Express Merchant Funding features two lending and repayment options: a one-year term with 12 monthly disbursements based on projected AmEx volume, or lump sum distributions equal to 25 percent of annual AmEx charge volume. Both carry fixed financing fees; repayments are deducted from AmEx settlement amounts. The idea of deducting loan repayments from merchant settlement streams isn't new. However, AmEx is the first card brand to offer cash advances to its merchants.
Merchant cash advance (MCA) is a popular service ISOs and MLSs offer to merchants. MCAs tied to monthly credit and debit card receipts offer advantages over traditional bank loans. Because MCAs are deemed to be advances against future sales, not loans, MCA agreements aren't reported to credit rating agencies. Additionally, small-business owners with bad credit can qualify for advances provided they have monthly credit card receipts that meet the MCA company's criteria. MCAs also feature easy application and collection procedures and high approval rates. Any business generating credit and debit card sales in the range of $5,000 a month is a potential MCA candidate. The downside is that the interest rates can run high when calculated as annual percentage rates.
Merchant Processing Resource, an organization that tracks MCA companies and trends, estimated nearly 21,000 MCA transactions totaling over $500 million took place in 2010. States with the most MCAs were California (with over 2,700 transactions), Texas (1,634) and New York (1,273), the MPR website reported.
Small to midsize businesses (SMBs) are "the engine of every economy and need capital to grow and expand," said Glenn Goldman, Chief Executive Officer of Capital Access Network Inc., which operates the merchant cash advance business AdvanceMe Inc. in addition to NewLogic Business Loans Inc. "Even in a difficult economy, at a time when banks and big financial firms are pulling back from the SMB market, we continue to grow - funding thousands of entrepreneurs every year from medical practices, shoe stores and auto repair shops on Main Street to clothing, accessory and home product retailers, collectables sellers and other e-commerce players," Goldman added
Evidencing the strength of its business model, CAN revealed in February 2012 it had received a $30 million investment from Accel Partners, a firm that has invested in over 300 successful companies, including Facebook Inc., Groupon Inc. and MetroPCS Wireless Inc. Goldman said the investment would be used to enhance the reach and capabilities of CAN's products.
In 2010, CAN introduced a new spin on MCAs, launching its NewLogic subsidiary which offers repayment plans that more closely resemble traditional bank loans. Repayment schedules incorporate fixed daily remittance amounts deducted from a company's daily card receipts, rather than variable amounts based on card receipt totals, as is the case with traditional MCA products. Today dozens of companies compete in the MCA space. Many of them private-label the technology originally developed by CAN. That technology uses sophisticated mathematical models to determine the financial health of an applicant as well as likely future card sales, instead of the traditional credit scores that banks use.
American Microloan LLC offers a product with a slightly different approach: businesses can choose to pay fixed daily amounts or a fixed percentage of card sales. The company also takes a unique approach to fee accrual. Instead of assessing charges on the full cash advance amount, a typical MCA practice, interest accrues daily on each customer's outstanding balance, said Jack Miller, Director of Business Development at American Microloan.
The typical customer pays about 12 percent interest over a period of six months. Miller said the company sees a lot of repeat customers. "Our oldest customer is on their sixteenth loan," he noted.
On Deck Capital Inc. developed what it calls the On Deck Score, a special type of business credit score the credit agency Equifax helped create. It looks at over 300 data points, including how many customers a business has, cash flow, sales and registered complaints. The company said it has delivered over $200 million to SMBs that typically can't meet the strict lending standards of traditional lenders.
In April 2012, On Deck rolled out a new "split funding" option featuring payments deducted from business credit and debit card receipts. Otherwise, On Deck deducts daily payments directly from a business's primary bank account, using the automated clearing house (ACH) network. "Technology clearly is driving this business," said Brad Kime, President of On Deck.
The company partnered with ISO Integrity Payment Systems to launch its new split funding option at the 2012 ETA Annual Meeting and Expo held in April. On Deck's typical borrowers are Main Street businesses - restaurants, salons, florists - that have been open for more than a year and have annual revenues of between $300,000 and $3 million. Loan amounts range from $5,000 to $50,000; the typical term is six to nine months. Kime said ISOs are a major source of referrals for On Deck. Other partners include payroll firms, accountants and web-based business application providers. On Deck now has agreements with 1,000 such distribution providers that, combined, reach more than 1 million businesses across the United States, the company said.
Citi Wide Merchant Funding offers the Express Small Business Loan, which relies on a sophisticated algorithmic underwriting process that slashes the time it takes to approve an application. "What used to take several weeks now only takes hours," said Kris Sands, Senior Vice President for Business Development. The company also boasts a projected payback period of 18 months.
Merchant Cash and Capital LLC targets franchises, in particular restaurants, and has developed cash advance products that meet their unique needs. "Hospitality and restaurant concepts are the largest growth area," the company said in a recent press release. Since its opening in 2005, MCC has provided over $400 million in the form of 20,000 advances to 11,000 customers, the company said.
The need for offerings like these has never been more obvious as banks continue to tamp down on credit offerings. According to Biz2Credit, which acts as a small-business loan clearing house, loan approvals by big banks fell 6.8 percent between February and March 2012, while approvals by "alternative lenders" rose 0.5 percent during that same period.
In addition to MCA companies, alternative lenders include community development financial institutions, microfinance institutions and industry-specific factoring organizations. Biz2Credit also reported that alternative lenders were approving more than two-thirds of applications from potential borrowers as of January 2012, compared with about 47 percent for community banks. Meanwhile, large commercial banks approved just 11.7 percent of loan applications during the same month.
"It's no surprise that small businesses are suffering from an extreme lack of available financing from traditional lenders and their tight qualifications, but the depth to which the problem has gone should be of great concern," said Stephen Sheinbaum, President and CEO of MCC. MCC surveyed its clients in April 2012 and found 57 percent had applied for small business bank loans previously, but a whopping 80 percent either were declined or had withdrawn their loan applications. The MCC survey also revealed merchants seek cash advances for a variety of reasons. Thirty-two percent said they had used the money for expansion and growth products, while 15 percent purchased inventory. Far fewer used the funds to make payroll, pay taxes or other bills, or for marketing.
"In today's economy, our alternative working capital is needed more than ever by businesses," said David Goldin, President and CEO of AmeriMerchant Inc., a 10-year-old firm that offers MCAs and other working capital programs. ProMAC Financing specializes in financing professional practices (especially clinics and hospitals) and transportation companies, based on their electronic accounts receivables programs. Remittances are collected daily via the ACH network.
"Ninety percent of the time our clients are looking for opportunity capital," said ProMAC CEO Stephen McDermott. And the sums involved are larger than cash advances: the average ProMAC transaction is about $100,000 and is repaid in a year or less. ProMAC partners with ISOs, professional associations and software companies to solicit business, and the company sees a great number of repeat customers. "We have a unique product that can provide for a lot of [merchant] stickiness," McDermott said. With innovative funding options ever more capable of filling the void left by traditional lenders, it seems an ideal time to become fully informed on these types of products. Timely funding could make the difference between a thriving merchant business and one that has to close its doors.
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