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Table of Contents

Lead Story

Learning the ISO lingo

News

GS Online: 4.2 million and climbing ...

MWAA 2007: Security, depth and rock-and-roll

VeriFone corners NYC taxi business

Who's minding the small-business store, Visa wants to know

TMS, AMS settle their grudge

Congress grills warring parties on interchange

Features

AgenTalkSM:
David E. Hanlin Jr.

Dark cloud shrouds ATM ISOs in Sunshine State

Missy Baxter
ATMmarketplace.com

ISOMetrics:
Prepaid cards: An obsolescent evolution?

Views

On queue: Self-service card payments come of age

Paul Rasori
VeriFone

Breached security: The buck stops where?

Grant Drummond
Ingenico

Education

Street SmartsSM:
Demand defrays doubts about costly cash advance

Dee Karawadra
Impact PaySystem

Perfect storm of acquirer liability averted

Theodore F. Monroe and Bradley Cebeci
Attorneys at Law

Size up your sales pitch

Marcelo Paladini
Cynergy Data

P-cards: The payoff is palpable

Aaron Bills
3Delta Systems Inc.

Small shops under the PCI gun

Michael Petitti
AmbironTrustWave

Company Profile

Money Movers of America Inc.

New Products

It's hues to you

POS Supply Solutions Inc.
Colored paper rolls

Outsource the chargeback confusion

ChargebackAudit LLC
Chargeback Dispute Management System

Inspiration

You are the sunshine of your life

Departments

Forum

Industry Update

Resource Guide

Datebook

Skyscraper Ad

The Green Sheet Online Edition

August 13, 2007  •  Issue 07:08:01

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Street SmartsSM

Demand defrays doubts about costly cash advance

By Dee Karawadra

Many articles have been written about advancing merchants cash against their future bankcard processing receipts, a service aptly called cash advance. It is also a hot discussion topic among industry professionals.

Generally speaking, a cash advance company will advance up to 110% of a merchant's monthly processing volume. The amount loaned is normally based on the merchant's most recent processing statements, going back three to six months.

After disbursement of funds, from 18% to 25% of the merchant's daily processing volume is then deducted to repay the advance. The payback time frame is generally six months.

Before choosing a cash advance company, consider the following questions:

The commission on cash advances for merchant level salespeople (MLSs) ranges from 3% to 6%. The key factor to keep in mind is whether commissions are based on the advanced amount or the payback amount, which is, of course, always larger than the advanced amount.

Let us say the advance is $10,000. At 35% interest, the payback amount would be $13,500. You would make more at the same percentage on the payback amount: Commission on $10,000 at 6% would be $600. The same 6% on $13,500 would be $810. The difference can add up.

Are MLSs rewarded for renewals?

A high percentage of merchants who take cash advances, ante up again. This is often overlooked by ISOs and MLSs when choosing a cash advance provider. I have seen programs that offer no commission for renewals or a much lower commission than the original percentage paid.

You should receive a commission every time one of your merchants renews a cash advance. Commission structures are usually negotiable, so expect to bargain with the provider of your choice. But if a company does not offer commission on renewals, move on.

Does the lender play fair?

MLSs have told me horror stories of cash advance companies soliciting their merchants and switching credit card processors after the merchants' initial loans were repaid. This is not only unethical, but it is also a bad business practice.

Find out if an advance company you are considering is also in the credit card processing business. If the firm seems a little hesitant to answer this question, run. Credit card processing is your core business. The value-added products are just that: value added.

We work way too hard to get these merchant accounts. An entity we entrust to provide cash advance services should not compete for our merchants' bankcard processing business.

What happens if merchants default?

Often merchants cannot obtain a traditional business loan, but they are on solid financial footing and have valid reasons for wanting an influx of cash. However, some merchants may have poor credit and be on the verge of going out of business. In such cases, an advance may not help pull them out of a desperate situation. Such merchants could go out of business, change processors or checking accounts, and default on their loans.

To limit their liability, some advance companies ask merchants for personal guarantees. But many do not. Not requiring a personal guarantee can be a great selling tool; it gives merchants a little peace of mind.

Cash advance companies may rescind your commission if a merchant defaults. Read the terms of your agreement carefully before signing it.

How much interest is too much?

I have always told my team we will abide by our pledge. One item on our pledge is to be ethical, not only to our agents, but also to our merchants. Charging 35% interest did not seem ethical to me until I started using a processor that offers cash advance. Then I asked some of my merchant clients for their thoughts about the product.

They all said an advance would help them drive in more business because they could use it for advertising, building up inventory and opening new locations.

Based on that feedback, I decided to test the market and inform our customer base that Impact PaySystem offers cash advance. We hired 15 telemarketers who called different types of businesses for two consecutive months. The results were not favorable.

What do MLS Forum members think?

When a GS Online MLS Forum member suggested I write an article on cash advance, I explained my research and said, "I think that boat has come and gone, and I missed it."

To my surprise, many see this product thriving. Mike Maxxon wrote:

"Dee, that boat will sail for a long time as these products morph into respectable products and [are] not sold at a last resort, pay-day advance mentality.

It may very well become a way that a large amount of merchants are paid with rates that reflect much lower risk."

Mike is not alone. Bankcard111 posted a thread on the forum titled "Cash Advance Marketing." He wrote, "I'm looking to get into the cash advance game." And rbelcher responded: "Ditto, we, too, are looking to open a marketing room for cash advances."

Marketing must be the key to success in the cash advance world. Mike Daily (aka Approved) noted that not many have come to the aid of bankcard111 and rbelcher. "The reason you are having trouble finding anyone that can assist you is the fact so many simply don't know how," he wrote.

Is cash advance here to stay?

The evolution of cash advance may have just begun, and the boat may be just loading. The moral issue is hard to overcome. But, we have to learn to adapt to the market. And if the market calls for such a product, we have to offer it.

If you are not offering value-added products such as cash advance, you will eventually lose merchants to a competitor who does. The bottom line: If a merchant is willing to pay 35% interest, and the borrowed money helps the retailer thrive, it is a win-win deal for all of us.

Paul Ficalora, Vice President of Marketing at Credit Cash, had an interesting perspective. In an e-mail he wrote: "Many ISOs and MLSs today cold call merchants, offering cash as opposed to processing as a door opener. You could probably make a case that processing has become a value-added product to merchant cash advances."

The day cash advance companies start paying residuals, I will be the first on the street to market the service. As for now, my company has a great partnership with cash advance provider F1rst Funds. The relationship is in place to offer cash advance to our agents and merchants who are looking for such product.

Safari njema (safe journey).

Dee Karawadra is the founder, Chief Executive Officer and President of Impact PaySystem, based in Memphis, Tenn. He and his team have a wealth of knowledge on the merchant services industry, with a niche in the petroleum market. Dee's experience on the street as an agent has guided him in laying a foundation for an agent program that is both straightforward and lucrative for his agents. Contact him at 877-251-0778 or dee@impactpaysystem.com.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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