Practice makes profit

Stephen Sheinbaum, founder and Chief Executive Officer of New York-based cash advance firm Merchant Cash and Capital, was a litigation and general business attorney when he discovered the payments industry. Sheinbaum was representing credit card processors and ISOs, as well as owners of large restaurants, and he noticed a niche that needed filling. "The two worlds sort of came together," Sheinbaum said. "I had restaurateurs who were asking me to raise … money [for them], and because of my familiarity with the credit card side, I understood how the dollars flowed in on the transaction side. I saw that they had a great ability to generate top-line revenue, but they needed some help managing their day-to-day operations and general cost containment.

"Consequently, I told these merchants that I would raise money for them from investors that I was close with and represented on the condition that they had their card processing done by another client of mine. The investors loaned the money to the restaurants and got paid back out of gross credit card settlement revenues – and after this capital venture succeeded, those investors ultimately provided MCC with the money we needed to get started." Merchant cash advance companies assist merchants looking for alternatives to bank loans by purchasing a percentage of future credit card receivables and advancing that money to merchants. Each processing day, the company deducts a small, fixed percentage from enrolled merchants' daily credit card sales until the advance is repaid.

In 2005, Sheinbaum started MCC and partnered initially with Cynergy Data LLC, which helped him get distribution through Cynergy's ISO channels. Sheinbaum saw a cottage industry with great potential in disarray due to undercapitalization that prevented business owners with good models from getting off the ground or from weathering slow seasons.

He believes MCC stands out among other cash advance organizations because of its financial stability and solid underwriting, which creatively targets those very merchants.

The merchant's tale

"From when we started in 2005 until now, we have never experienced and don't envision any funding liquidity issues," Sheinbaum said. "We will try to find a way to fund every deal that gets submitted to us. We pride ourselves on our ingenuity and the unique approach we bring to analyzing our prospective merchants. We don't believe in employing a strict scoring system where a bunch of criteria is spit into a computer to determine funding eligibility."

To best assist merchants, MCC uses what it calls "story underwriting." MCC spends a great deal of time listening to merchants and vendors to gather additional information that gives the company a broader picture of the merchants' circumstances, their pain points and what they can do to continue thriving in a difficult economy without the stressors that accompany more traditional funding avenues. That personal attention is vital to MCC.

"Main Street has less money to access than they ever did," Sheinbaum said. "The mortgage crisis has led to a lack of liquidity in the entire economic system and is causing merchants that never would have turned to cash advance to seek us out for solutions.

"People running small and mid-sized businesses with 700 Fair Isaac Corp. scores who previously had no trouble getting personal lines of credit, either from lending institutions or home equity loans, can no longer do so. Consequently, we're seeing a higher number – and quality – of applicants than ever before."

The ISO channel

MCC has no direct sales force and works strictly with an ISO reseller channel. "Our brand reputation is one of the strongest in the industry even though we do no marketing," said Nicholas Gregory, MCC's Director of Operations.

"And I believe that comes from the fact that we are still very grass-roots driven, that we stay in touch with our merchants, help them solve their problems and build their business base. We have a vested self-interest in doing so. You can get our CEO or any one of our executives on the phone, and I think that kind of culture adds to the strength of our ISO development and portfolio growth," Gregory added.

To improve communication between MCC's ISOs, merchant level salespeople (MLSs) and merchants, the company launched a customer relationship management (CRM) system on its Web site that provides live updates on deals submitted to MCC's underwriting department.

"It's an interface that we're putting in internally to make things more efficient on our end, from tracking a deal to application submission to funding report handling," Gregory said.

"Our ISOs have access to merchant information, their current status and what additional funds they may qualify for. And because all that information can be accessed on one interface, it will help cut administrative costs since the process through our CRM is so much faster."

The revenue streams

MCC offers three sources of revenue streams for its ISO resellers. There is an upfront commission based on the payback amount of the advance, which is paid at the time of the advance, a percentage of the residual payments MCC collects from its merchants, as well as renewal commissions when the merchant comes back for more money.

"Additionally, one of the real standout features we have that other cash advance companies don't is that we can actually allow our resellers or ISOs to participate in the cash advance with us to the merchant," Gregory said. "They can put up their own money and be partners with us, and that's extremely attractive for many of them. Many of the ISOs we currently work with participate, whether that's 5, 10, or 15 percent of every deal.

"And we love it because we can have another smart set of eyes looking at the account and can better align our interests with the merchants. Subsequently, we have a lot more faith in those resellers. If we have a troubled patch or problem with the merchant, we know that the ISO who has their own money in the deal is going to fight long and hard to solve that problem," he added.

The safest system

In January 2009, MCC rolled out its newest lockbox system to help minimize the company's venture capital risk as well as enable merchants to qualify for higher advance amounts.

Sheinbaum said the lockbox has performed well since its rollout and that merchants have experienced no difficulty with it. "It's been great and working seamlessly," he said. "Internally the reporting has been going as advertised, and this is a tremendous alternative for merchants that are unable, for any number of reasons, to change their credit card processor.

"Traditional split funding is still our preferred method, but when we can't, this is certainly far superior to ACH [automated clearing house]. And I think the merchants are more comfortable with a lockbox approach than an ACH program because we're not taking the money out of their account, and the merchants are not saddled with having to do complicated reconciliations in their checking account."

The expanding footprint

MCC has also been expanding its vertical footprint over the past few years, doing business with third-party vendors and ACH service resellers. "Our B2B [business-to-business] space is growing," Sheinbaum said. "People who are reselling ACH services can now offer those customers cash advances because of our ability to have the ACH transactions deposited directly into the lockbox. "And we're also looking at manufacturers or equipment distributors who might want to use our product not necessarily as a revenue stream for themselves, but as a way to get their customers money to buy those goods and services, especially with industries that are tied to the housing market like home refurbishing.

We know that flooring, furniture and appliance vendors, for example, are down in this market until it stabilizes again. And that's where we come in."

As banks tighten credit restrictions and raise eligibility requirements, MCC offers merchants a way to help them stay afloat so they can focus on what is most important – the bottom line.

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