Loans, residual purchases for ISO capitalization

While the merchant cash advance business has mushroomed in recent years, capital infusions for ISOs are considerably less widespread. Kentucky-based Stream Cash LLC is one of a handful of companies that focuses on capitalizing ISOs, both through loans and portfolio purchases.

Three friends founded Stream Cash in 2008. Two of them, David Edelen and Jay Rice, worked together for more than a decade at National Processing Co., where Edelen was the Senior Vice President in charge of managing the ISO channel, and Rice was the company's National Recruiter for ISOs. The third founder, Chris Pruitt, is a high school friend of Edelen's who has long worked in the finance realm, including as Chief Financial Officer of General Electric Co.'s Plastics Division.

The company's leadership combines Edelen and Rice's familiarity with the payments industry and Pruitt's financial expertise. The three remain intimately involved in acquiring loan partners, providing consultation and establishing contractual terms.

The problem with banks

Edelen said ISOs commonly turn to providers like Stream Cash for the same reason merchants procure cash advances: banks don't understand the payments industry and are reluctant to approve loans to ISOs that do not have top-notch credit or upfront collateral.

"When I was managing ISO relationships [with NPC], our partners had a difficult time finding lines of credit because banks don't understand the merchant processing business," Edelen said. "They'd say to the bank, 'Hey, I've got a $50,000-a-month check, can you loan me $200,000?'

"Well, [bank loan officers] don't understand that ISO's contract and how the money works, and they want to find a house or a car to put a lien on. They don't have the experience or wherewithal to deal with the ISO. All residual payers and merchant portfolios are not equal. Banks will never grasp that risk, nor credit an ISO for the true value of that residual annuity."

An informed approach to lending

By contrast, Stream Cash vets potential borrowers with a more rounded outlook, according to the founders, who said the portfolio strength and reputation of a company are much more closely considered than its credit or borrowing history. In line with that practice, the collateral for any loan is not an existing asset but the ISO's future residuals. "A bank, at the end of the day, will not collateralize annuity," Pruitt said. "It has to be a tangible asset [that the borrower] is putting up." Regarding Stream Cash's screening process, Edelen said: "We look at the portfolio history, the ISO contract, the merchant contract and the financial situation of the ISO. That means more to us than the guy's credit bureau."

Repayment is secured by redirecting a specified amount of the ISO's residuals each month from its processor. Unlike merchant cash advance providers, which take a percentage of the client's receivables until the debt is repaid, Stream Cash's loans are amortized, or paid back in fixed amounts over a predetermined time. Hence, the use of the term "loan," as opposed to "advance."

"In our world, it is clearly a loan, just like a personal line of credit," Pruitt said. "It's a fixed [payback] period, and we amortize payments - so, for example, they're going to pay $7,000 a month for 36 months."

Loans and residual purchases

Stream Cash lends money to ISOs. It also does straight purchases of residual portfolios. Whether ISOs choose to sell their residuals completely or just put them up for a loan depends on the ISO's individual circumstances.

"We're not going to loan somebody $100,000 if they're bringing in $20,000 in residuals a month," Rice said. "We'll loan less, or we'll buy. It just depends on what the ISO is looking for.

It may be looking to add salespeople or a [technology upgrade], or they may be in a situation where they have separate residual streams and want to sell some of them, or maybe want to sell their own business. We buy those, in all of those cases. At the end of the day, the ISO is gonna get a check."

Edelen provided further detail. "Our loans and purchases have helped buy out the equity position of a partner who wishes to exit, helped increase sales force or invest in new offices, or even develop new products - all positive things that help the ISO take his residual check to the next level," he said, adding that the company's multiple varies anywhere from less than a year to more than 40 months. (A multiple is the amount of money the company will pay to acquire merchant portfolios, measured as a multiple of an ISO's monthly revenue.)

On the loan side, the company noted that the payback period is three years; loan amounts range from $100,000 to $5 million; interest rates are in the teens; and Stream Cash lends only to ISOs with monthly residuals of at least $20,000. "It doesn't make sense to go too far out there," Edelen said. "If we gave someone making $5,000 a $100,000 check, we wouldn't be in business very long."

Pruitt pointed out that growth-oriented ISOs, including those that are highly successful, may seek extra capital to streamline that growth or, conversely, to ensure sufficient money is on hand after they have poured most or all of their usual profits into expansions and upgrades.

Consultation along with funding

"Every loan and every purchase is made under unique circumstances, but at the end of the day with any capitalization you need to do, you need leveraging to take that next step," Pruitt said. "Opening an office has a lot of cost outlays, and it's nice to have some financial cushion."

The company's founders stressed that Stream Cash is not only a loan provider, but also often a consultant to the recipients of funding. It works with its clients to ensure each business receives a loan that is helpful but not burdensome, and that fits the client's specific needs. "Stream Cash is an honest company that provides you with straightforward information without hidden agendas," said Sasha Dharani, Chief Executive Officer of Houston-based Transnet Payment Systems. "That's why I love doing business with them."

According to Pruitt, Stream Cash will often suggest modifying the size and terms of a loan request after consultation. "We did a loan last year where we realized they were asking far more than they needed," he said. "It made more sense to do the [capitalization] in pieces and not start the clock on their interest."

Pruitt added that the ISO in question was trying to add a gateway to its business, a months-long process that, in this case, was better suited to incremental infusions of capital.

"We give an honest assessment to the ISO and work only with processors and ISOs we feel comfortable will be there to make that residual payment years down the road," Edelen said. "The last thing we want is to burden someone with incremental debt they can't manage. We are in the business of growth - as their check grows, our collateral gets stronger."

Inside industry information

Edelen noted that his and Rice's familiarity with the industry - including the reputations of its ISOs - is a unique intangible in the company's arsenal. No deal carries a safety guarantee, but knowing what companies have what kind of history, policies and reputation can be crucial in dealing with them as a loan provider, helping to shape their decisions about whom to work with, and accelerating the process of devising a contract and delivering the loan.

"That's where reputation comes in," Edelen said. "Some ISOs have a good reputation, some not so good, and some of them Dave and I will vouch for because we know them, and we know they treat their people right. ... We don't know everyone that calls us, but we know someone that knows them."

Pruitt added that it's a combination of subjectivity and hard analytics. "There's definitely some degree of [reputational consideration], but there's also the financials and the balance sheets," he said.

According to Stream Cash, loan turnaround times are as short as a week or two for new clients and as little as 48 hours for returning ones - and that is due to the company's industry knowledge and the fact that it is an efficient, lean enterprise working with a targeted market segment. "The bureaucracy is taken out of it," Pruitt said. "We're the sales, underwriting and management all in one. As long as the deal isn't hairy, that can really speed up the process."

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