After he built a successful group of ISO startups and acquired multiple merchant portfolios, Darrin Ginsberg determined that loaning funds to ISOs and merchant level salespeople (MLSs) was the natural next step for him.
What started as a solo business gradually became three separate ISO enterprises, Ginsberg recalled. "I've been in the merchant services business for the last 23 years," he said. "I've had everything from a small shop all the way up to a very large shop. After I sold my ISOs, I started buying portfolios in the business as opposed to organically writing the business."
It was when the economic downturn began to negatively impact the value of merchant portfolios that Ginsberg took a different approach. "There was a lot more attrition than I'd ever seen in portfolios, and I was having a very hard time coming up with a multiple that would work for both the buyer and seller," he said.
To help ISOs and MLSs overcome the attrition fallout without being forced to sell short on hard-earned portfolio income, Ginsberg developed a strategy. "Rather than an ISO selling their portfolio, I said, 'Hey, what about if I loan you money against your portfolio? I'll still get your residuals temporarily, take out my loan payment and send you the balance, but at the end of it you'll still own your portfolio.'"
Response to his concept was favorable, and in 2008 Ginsberg founded Super G Funding LLC and assumed the helm as the new venture's Chief Executive Officer. A number of ISOs and MLSs have since embraced the concept, he stated, noting that one reason for this is that a typical portfolio sale will require a two-year attrition guarantee.
For example, on a $100,000 portfolio with a 15 percent attrition guarantee, the ISO would need to guarantee to the buyer that the portfolio would retain $85,000 in value the first year, and $70,000 at the end of year two.
"So, if you're guaranteeing that to a third party, why not guarantee that to yourself?" Ginsberg said. "But at the end of two years, instead of me owning your portfolio, you still own it." This formula appears to be working. As of mid-2012, Super G had approximately 75 active loans, and was averaging five to 10 new loans per month. The company was also forming strategic partner alliances.
In June 2012, Harbortouch and Super G signed an agreement that permits Super G to provide business loans to the POS system provider's ISO partners. "Putting capital into the hands of our ISO partners will help them produce more accounts and, in turn, help Harbortouch grow its business as well," said Brian Jones, Harbortouch Executive Vice President of Sales and Marketing, at the time. "This is a great way for ISOs to obtain access to capital without having to sell their portfolios."
In July 2012, Cynergy Data LLC entered into a similar agreement through which Super G provides funding as a service to Cynergy's ISO and MLS partners.
Super G generally requires a minimum of $5,000 in monthly residual income to qualify for a loan, with loans amounting to five times the monthly residual, Ginsberg said. He added that ISO loan amounts typically range from $25,000 to $1 million, but other amounts can be negotiated.
Ginsberg noted that unlike traditional lenders, which can take up to six months to approve loans and require audited financials and a pledge of assets, Super G can arrange funding in as few as five business days with a personal guaranty and residual stream as the only collateral required.
In addition, Super G does not restrict business use of its loans. "ISOs can use the money for whatever purpose they want, whether it's money to expand their sales force, increase marketing, open a new office, buy equipment in bulk, upgrade their technology or buy out a partner," Ginsberg said.
However, ISOs should be discerning when considering loans, Ginsberg advised. "If you're using it to increase your sales and to make more money and you make more than what I'm going to charge you in interest, then I suggest you do it," he said. "If you're going to pay off bills or do something that is not going to add to your business, it's not a good use of funds."
Victor Gerber, CEO of the Georgia-based ISO Atlas Merchant Services LLC, has worked with Super G to expand his business. "At the end of the day, it's truly a business decision someone has to make, whether they want to do it or not," Gerber stated. "I was buying a portfolio of another company that we eventually took over. It gave me the additional capital [needed] and I was able to turn it quickly and close the transaction."
Obtaining a loan from Super G is a straightforward process. ISOs and MLSs who work through an approved processor must sign a temporary assignment of residuals before loan funding. Once the loan is funded, pay back includes 12-, 24- and 36-month options.
Fixed monthly payments are deducted from residuals and transmitted to a designated bank account via automated clearing house payment. "They only get paid once a month," Ginsberg said. "When they get paid, we get paid." ISOs and MLSs can track loan payment progress both online and through their monthly statements.
According to Ginsberg, there are three primary benefits to obtaining a loan through Super G. First, the loan is not a taxable event. Second, the interest paid on the loan is considered a tax deductible business expense. Third, and perhaps most important, the financial leverage of a loan can potentially add value to a portfolio, which in the long-term could result in a higher multiple being paid once the portfolio is sold. "When a portfolio is large, it's worth a higher multiple," Ginsberg said. "So, for example, a $20,000-a-month portfolio might get you an 18 times multiple for your portfolio. But if you wait two years and build that up to $40,000, that might be worth 20 or 22 times multiple. The bigger the portfolio, the more it is worth. So the longer you can hang onto it and sell it all at one time, the more money you're going to make."
Ginsberg advises ISOs and MLSs to retain their portfolios until they are certain they want to exit the business. He said once a portfolio sells, the seller then must determine where to invest funds received through the sale. At that point, many ISOs and MLSs find it difficult to locate an investment that matches the rate of return they are accustomed to earning through their residual streams.
One alternative to selling a merchant portfolio is to turn the business over to the next generation. According to Ginsberg, Super G has funded several father and son teams with thriving ISO businesses who aren't planning to exit the business anytime soon. For Ginsberg, it all comes down to asking what is in the long-term best interests of each potential client in need of funds.
Victor Gerber of Atlas Merchant Services concurred, adding, "I think the biggest thing in the case of Darrin's group was the fact that it was very professional, very quick. They back up everything that they've said they're going to do. In this industry that doesn't always happen. It was a clean transaction all the way down the line. I never once had to look over my shoulder. It was literally fair sailing the entire time with this project."
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