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How to Document an ISO Financing

By Adam Atlas

If you're an ISO that has never borrowed money against your residuals, but you are considering this option, keep reading. This column will give you a general introduction to the kinds of documents you will likely be asked to review and sign prior to receiving funding.

Most ISO financings that I work on involve at least $1 million, and the lender usually advances this money in sums varying between $100,000 and $500,000 at a time.

I always feel uncomfortable promoting legal services in this column, but this is a case where I really have to advise readers to consult an independent attorney before signing any financing deal. The consequences of not being properly advised can be catastrophic for your business.

Now that I have your attention, following are the key documents to most ISO financings. (Please note that each financing is unique and all of these documents might not appear in every deal.) Let's assume, for the purpose of this column, that you are an ISO borrowing $1 million from your processor.

ISO Agreement

The cornerstone of any ISO business, whether financed or not, is the ISO agreement. In this document, the ISO agrees to promote the processing services of the processor or bank and, in return, will be paid residuals, commissions or other fees.

The ISO agreement is also the "golden goose" of any ISO business. When an ISO receives financing from its processor, the ISO agreement takes on greater significance because: 1) residuals payable under the ISO agreement become the means by which the loan to the ISO is paid off; and 2) a default under the ISO agreement often causes a cross default under the loan agreement.

To put it simply: If you default on the ISO agreement, the loan is likely to become immediately due and payable, and this will be at a time when you can least afford to repay the loan: when you have no residuals with which to pay it.

Because of the common cross-default feature of ISO agreements with loan documents, pay particular attention to the default clauses in the ISO agreement to make sure you do not collapse the financing for some relatively minor breach of the agreement.

Loan Agreement

The loan agreement defines the basic conditions under which the lender (in this case the processor) will advance funds to the ISO. For example, there will be a raft of standard clauses, such as: the ISO is not bankrupt; the ISO has not breached any rules; and the ISO is not in default under the ISO agreement.

These conditions for the advancement of funds are usually satisfied on the first advance, but they still might not be satisfied when the time comes for the second advance. The ISO that takes financing from its processor should carefully monitor its operations to make sure that it remains in compliance with the conditions for lending described in the loan agreement.

The loan agreement also details the interest rate applicable to the loan and the term of the loan. These are negotiable points. Depending on the size of your residual stream and your monthly deal count, you might be able to negotiate these and other key provisions.

Promissory Notes

Advances under the loan agreement are usually evidenced by promissory notes. In a promissory, the borrower (ISO) promises to pay the lender (processor) funds that have been advanced to it under the loan agreement, in addition to the applicable interest on a fixed schedule (or sooner under certain circumstances).

There is usually very little to negotiate in a promissory note because it should reflect exactly the terms negotiated under the loan agreement.

Read the promissory note carefully to see if it is a "demand note" or not. In a demand promissory note, the lender can demand immediate (i.e. prior to term) repayment for no reason at all. Many lenders will ask borrowers to sign this kind of promissory note; however, a demand note might be too onerous for some borrowers because of the uncertainty that it introduces into their finances.

Security Agreement

More often than not, lenders will ask borrowers to sign a security agreement to accompany the loan agreement. In a security agreement, the borrower grants a security interest to the lender in certain property of the borrower. A security interest is the lender's right to acquire some of the borrower's collateral property in the event of a default by the borrower.

The most important part of a security agreement is the definition of collateral, which can range widely in an ISO financing, from only rights in residuals to rights in shares of the borrowing ISO. Other important clauses in a security agreement include the conditions under which the lender can exercise its security (i.e. seize the collateral). A security agreement is like the mortgage on your house, except it covers your business instead.

Bank Agreement

Depending on how free the processor is to allocate residual and acquiring rights, an ISO financing might require a direct contractual relationship with the bank sponsoring the lending processor. The bank (usually the financier of the processor) will often want to have some direct connection with the ISO. This connection can actually be positive for the ISO as it might help secure residuals and portfolio rights that the processor might not be in a position to fully secure for the ISO.

One very important idea to remember in an ISO financing is to think of each document as part of the ISO agreement. With this perspective, you will see how all of the documents come together to, hopefully, create a mutually beneficial relationship between all the parties involved.

Don't forget to plan on portability rights and non-competition and non-solicitation rights for both parties during the term and after termination of the ISO agreement and in the related loan documentation. When a loan is fully paid back make sure the lender signs a full release and discharge, which is a simple one-page document that your attorney can easily draft. This document can then serve as evidence that the lender no longer has any rights under the loan documents or in any of the collateral.

Taking out an ISO loan is a business decision with important legal ramifications for the borrower. I always advise clients not to borrow unless they really have to. Once the decision is made to borrow, then you owe it to your business to carefully consider the terms of your borrowing.

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, Attorney at Law by e-mail at or by phone at 514-842-0886.

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