The Green Sheet Online Edition
September 22, 2008 • Issue 08:09:02
Cash advance reaches new vertical
Traditional cash advance is a straightforward proposition - lenders advance funds to businesses for a percentage of its future credit card receivables. But in the present economy, with many businesses struggling to stay afloat, cash advance can be a risky venture for ISOs, as well as merchants.
But Professional Merchant Advance Capital LLC (ProMAC), in partnership with Destin, Fla.-based Global eTelecom Inc., has launched a cash advance service that reduces the risk for ISOs by targeting its product to a more stable vertical market.
That market is business to business (B2B). And the reason ProMAC and GETI chose that market is because the new advance solution is tied to check - and not credit - receivables.
For a "typical merchant that's going to be processing checks, credit cards are going to represent 75 to 80 percent of what they bring in," said Christian Murray, Director of Business Development, Global eTelecom Inc. Typically those merchants are processing very few checks, he added.
But in the B2B realm, the opposite is true. "Those environments are processing an amazing amount of check volume," Murray said.
Check processing is only on the decline in regard to retail environments where consumers are writing increasingly fewer checks and using more debit cards at the POS, he noted. "But the corporate and business world is just blowing up," he said. "We are seeing huge spikes in check business on the other side, part of the B2B."
B2B companies are considered nontraditional because they don't operate out of storefronts. B2B merchants are more likely "back office" businesses that contract with corporate or government entities. Thus, they handle corporate and government checks.
"There's a huge amount of check volume that pumps through those networks, as well as ACH [automated clearing house]," Murray said. "So that's where the volume is quite considerable from an opportunity standpoint. And also from ProMAC's perspective, their clients are going to be more high profile."
And stable. Businesses that deal on a contract basis with corporate and government entities are more likely to be well-established companies - not struggling startups with cash flow problems. Therefore, the business sector that would utilize cash advance based on future check receivables is, by default, a less risky opportunity for ISOs.
"I mean, everything is risk in underwriting," Murray said. "You've got merchants who have been online in a retail store for a couple years; they may barely just be making it. Or you've got a well-known back office environment, nontraditional type client that is established. It's just night and day.
"Since all their transactions are done on corporate accounts, government accounts, [B2B companies] are very stable, very solid. So their business models are a lot cleaner."
Additionally, the margins are significantly higher for ISOs with B2B merchant accounts. "There's going to be more opportunity to advance these types of customers a lot more money," Murray said. "That is the trend because these ISOs are going to be processing many more checks.
"With bankcards the margins are so slim these days. But with check processing, like with the Check 21 program, an ISO can really make some money on it, especially being able now to do funding outside of the normal mainstream retail merchant environment."
Check 21, short for the Check Clearing for the 21st Century Act, was implemented in October 2004. It allows banks to clear checks using images (reproductions) rather than the original items, eliminating the need to physically transport paper checks.
GETI provides the back-end check processing while Hauppauge, N.Y.-based ProMAC does the merchant boarding and maintains the merchant relationships.
"We see electronic payment advance as a lead product, as well as an important value add for our agents in
marketing check processing and working capital solutions," said David Petry, Director of Sales and Marketing at ProMAC.
"For existing merchants or merchants who are not currently seeking working capital, GETI's partnership with ProMAC will ensure that, if and when the merchant does need capital, GETI can accommodate them without any disruption to their business or processing," Petry added.
Petry said ProMAC's compensation model for its ISO partners selling check-based cash advance is similar to credit-based cash advance. The largest portion of the commission is paid upfront upon funding of the advance to the merchant. The balance of the commission is paid as a semimonthly residual as ProMAC receives repayment from the merchant.
"What is critical for agents to understand about this program is that, due to the fact that our advance amounts are calculated based on all electronic payments, including check processing volumes - as opposed to just Visa or MasterCard - our merchants qualify for larger advances off of the same volumes compared to other advance companies, resulting in substantially larger commissions for our agents," Petry said.
The product is sold exclusively through ISOs and merchant level salespeople (MLSs), Petry said. Since merchants are not required to switch credit card processors when they sign up for check-based cash advance, ProMAC's program allows ISOs and MLSs to place the advance as a standalone product.
Murray recognizes risk exists even in advances for the B2B sector. But the market is wide open for expansion, making the potential hazards worth it. "This product takes us in a different market altogether," Murray said. "We feel strongly there is a huge void there for these other nontraditional type businesses to get funding to help their businesses grow. I think the opportunities far outweigh the disadvantages."
The service will help MLSs "get in the door," Murray said. "It takes cash advance away from the ma-and-pa retail world, your typical storefront merchant, and allows us to now go into a lot of the nontraditional type businesses, which is where a lot more of the volume is, a lot more profit is."
As an added enticement to help ISOs and MLSs board merchants on check-based cash advance, ProMAC is offering a free terminal or imager to qualifying merchants.
The offer expires Oct. 31, 2008. Visit the Web address below for more details.
Professional Merchant Advance Capital LLC and Global eTelecom Inc. (631) 901-1050
or go to http://www.promerchantadvance.com
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