By Mark Dunn
Field Guide Enterprises LLC
So you've grown yourself a nice little portfolio of merchant accounts. You've worked your buns off calling on merchants, learned your market, fought off competitors, found a successful sales model, hired several sales reps (half of whom didn't stay long enough for you to get a payback on your investment) and you now enjoy a respectable monthly residual.
Where's your next move, and how do you come up with enough cash to finance it?
You know of two or three opportunities that could pay big returns, but you need cash to make them happen. Where can you get the cash? Can you find an investor to go in on your ISO? Can you convince someone to loan you the money, or do you need to sell some of your portfolio?
That's a tangle of questions. Let's sort them out.
My assumption is you need more money than you could finance with a credit card. Also, it's not a good time to go to family or friends for funding. And if you've checked with bankers or the Small Business Administration, you know they're not going to help an ISO because ISOs have few tangible assets.
Your options are to find:
Everyone I talked to for this article said debt financing is tough to find right now. In the first place, few nonbank lenders will deal with ISOs, and it is difficult for lenders in this business to see where the merchant services market is trending. Without clear direction for the market, some are reluctant to take on new clients.
Ginsberg has been purchasing portfolios for many years and has recently begun to provide debt financing for ISOs. Super G will loan up to $1 million to ISOs based on a 50 percent loan-to-value ratio relative to the portfolio. That means you can only get up to about 10 times your monthly residual. The loan term can be one, two or three years.
RFC has been in the business of providing working capital debt financing to ISOs for over a decade. The company's Web site contains valuable information on debt funding and basic finance. Asked about what RFC is doing today, Putnam said the company is "in the lending business," and for the present, continues to service its existing clients.
What do you have to do to qualify and receive debt funding? Typically, you will need to:
There may be other criteria and covenants the lender will require.
You certainly have the option to find a partner. But the fact is there are few, if any, sources of equity investment in small ISOs today. And I would suggest that most small ISOs don't want to consider an equity partner for the following reasons:
The remaining option is to sell part of your merchant accounts. Most small ISOs actually own their residual streams rather than the merchant accounts. That's OK because buyers of small ISO residual streams usually don't want to move the accounts. They want the accounts to stay where they are, continue processing and grow in processing volume.
The buyer will now get the residual check for the part of the portfolio you sell; you will assign the residual to the buyer. Again, check with the buyer to see what his objectives and requirements are.
A number of companies are buying small portfolios today. The buyers I checked with are Harold Montgomery, founder of ART Holdings, parent company of Calpian Inc., www.calpian.com; David Daily, President and Chief Executive Officer of Cutter Inc., www.cutterfinancial.com; and Dean Caso, Principal of Velocity Funding Inc.,www.velocityfunding.com. As mentioned previously, Ginsberg buys portfolios through Super G.
The experts say portfolio values are down because of financial uncertainty, erratic processing volumes and the unpredictable merchant attrition outlook. Most say the range for valuations is from 12 to 18 times the monthly residual.
Of course, the valuation depends on multiple factors such as the mix of merchant types, whether most of the volume comes from a small number of merchants, age of the accounts, record of merchant attrition and so forth.
The following are advantages of debt financing:
Disadvantages of debt financing include:
Advantages of selling are as follows:
Disadvantages of selling include:
So weigh the pros and cons. Do the math on the options, or get a consultant to help you. Confer with other small ISOs. Whichever option you choose, I wish you good luck in your new venture.
Mark Dunn is an executive consultant in the merchant bankcard industry and heads up Field Guide Enterprises LLC, a bankcard consulting and training firm. For more information, please e-mail Mark at firstname.lastname@example.org or visit www.gofieldguide.com.
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