The Green Sheet Online Edition
August 13, 2007 • Issue 07:08:01
Demand defrays doubts about costly cash advance
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
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
Before choosing a cash advance company, consider the
- Does the company pay commissions on advanced
amounts or payback amounts?
- Does it pay commissions on renewals?
- Is the company going to solicit your merchants for credit
- Do merchants have to sign personal guarantees?
- How will you be affected if a merchant defaults?
Is the commission comely?
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
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
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
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
They all said an advance would help
them drive in more business because
they could use it for advertising,
building up inventory and opening
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
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
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